Eurosystem Household Finance Research Articles

The shape of the wealth distribution and differences in wealth inequality across Euro area countries

AbstractBased on data from the Eurosystem Household Finance and Consumption Survey (HFCS), we revisit the question of how differences in household characteristics can account for cross-country differences in wealth inequality. We first show that commonly used RIF-decompositions are typically tested positive for specification error due to the large differences in household characteristics between countries. We then present an alternative analysis for which we introduce a convenient graphical representation of the wealth distribution. Our results show that not only differences in wealth inequality but also differences in distributional shape can be largely accounted for by differences in homeownership across countries, but that, for some country comparisons, differences in household incomes also matter.

Association of Income and Wealth with Self-reported Health Status: Analysis of European Countries during the Financial Crisis

In this paper, we evaluate the association of changes in income and wealth with self-perceived health for the European Union (EU) countries, using a longitudinal sample of individuals. We estimated generalized linear mixed models for three waves of the Eurosystem Household Finance and Consumption Survey (2011, 2015, 2017), adjusting for family and individual heterogeneity and for temporal trends. Results show that variations in income have a positive and significant impact on changes in self-perceived health during the financial crisis, but not after 2015. In conclusion, we find that income, rather than wealth, played an important role in protecting health.

The impact of income inequality on household indebtedness in euro area countries

This paper explores the impact of income inequality on household indebtedness at the household level. Using the first wave of the Eurosystem Household Finance and Consumption Survey data, the analysis sheds light on heterogeneous effects across euro area countries. The results suggest that there is weak evidence that income inequality has affected households’ indebtedness in continental European countries. The countries that show an impact are characterised by positive effects that operate across the income distribution and tend to be robust for consumption-related and housing-related debts. The effects, however, vary much less across the distribution for consumption-related debts as compared to housing-related debts. Households at the top of the income distribution seem to react more than lower-income households when it comes to housing-related debts.

Vertical and horizontal equity of wealth taxes: An assessment from a joint income-wealth perspective

Despite an established theoretical literature on (optimal) wealth taxation, the empirical literature is still scarce. Previous studies usually focus on country case studies and a specific type of wealth tax in isolation. This paper analyses from a cross-country perspective the distributional effects of the mix of taxes on wealth, on capital income and on transfers of wealth. Moreover, we use the joint distribution of income and annuitised wealth as our analytical framework. To this end we combine data of the Eurosystem Household Finance and Consumption Survey with the tax-benefit microsimulation model EUROMOD, covering six countries: Belgium, Germany, France, Finland, Italy and Spain. Results indicate that existing wealth taxes do not contribute to vertical and horizontal equity: they are often progressive but do not achieve any significant redistribution due to the low revenues they generate and they imply a much lower burden on those deriving their living standard predominantly from wealth than on those who derive it mainly from income.

The impact of social security wealth on the distribution of wealth in the European Union

The ageing of society means that public pension systems are becoming increasingly important. This study evaluates the influence of public pension entitlements on wealth inequality among pensioners. A novel data source - the Eurosystem Household Finance and Consumption Survey – is used to compare the impact of the public pension system on wealth inequality in 19 European countries. Findings indicate that in all investigated countries, social security wealth reduces wealth inequality. Augmented wealth inequality is ca. 30% lower than private wealth inequality. This estimate refers to the population of pensioners, while in the whole population the equalizing impact of public pension systems may be weaker. Social security wealth mitigates not only wealth inequality measured at the country level, but also wealth inequality in the whole European Union.

Lockdown, Earnings Losses and Household Asset Buffers in Europe.

Measures taken to contain the spread of COVID‐19 affected some workers' capability to work and hence earning more than others. The initial impact may have been mitigated, for instance by relying on savings and assets, but access to these buffers likely varied within and across countries. In this article we estimate COVID‐19 potential earnings losses using the Lockdown Working Ability Index and relate this to households' savings and assets observed in the Eurosystem Household Finance and Consumption Survey. We find that, without government support, households in the Euro Area could only offset on average half of their losses by relying on liquid assets and almost half would deplete their savings in doing so, although there is significant cross‐country variation. When considering the effect of income support policies, liquid assets cover on average 65 percent of the remaining losses and still 20 percent would exhaust their liquid assets on average in the Euro Area.

Poverty in the EU using augmented measures of financial resources: The role of assets and debt

Despite clear limitations, poverty research in the rich world overwhelmingly relies on income-based measures. Households may have significant savings and assets that they can draw on to boost their living standards, but may also have debts that depress the living standard they can actually achieve with their disposable income. Using data from the Eurosystem Household Finance and Consumption Survey (HFCS), this article offers a picture of poverty in 17 EU countries that takes into account assets and debt, using various approaches. While earlier studies have found that poverty rates tend to be lower when wealth is accounted for, this study highlights the situation of those who become or remain poor even when savings and assets are included. It focuses both on within-country patterns of joint income–wealth poverty and on cross-country differences. It is shown that the elderly are generally less prone to being poor once assets are accounted for. However, for renter households with a young, female, low educated, unemployed or inactive and single head, the risk of being poor when assets and debt are accounted for remains high and in some cases even increases. That is generally the case because they have few assets, rather than because of high debts. The substantial variation in poverty rates observed across countries can to some extent be accounted for by socio-demographic factors, but a lot of variation still remains unaccounted for.

Risk-Intolerant but Risk-Taking—Towards a Better Understanding of Inconsistent Survey Responses of the Euro Area Households

The sustainable development of the EU internal market for retail financial services is based on the rules of ‘suitability’, ‘know your client’, and ‘know your product’. The rules ensure that financial institutions (including banks) offer retail clients only products and services that are adequate to their purposes and preferences, including risk tolerance. Our study, however, concerns households for which the above rules are not valid, since they declare risk aversion and possess risky assets. According to the European Union Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR), the inconsistent information they provide within survey questions should classify them to more compound suitability assessment procedures. In the study, we use nationally representative data for 16 euro area countries from the second wave of the Eurosystem Household Finance and Consumption Survey. Using logit regression, we identify sets of socio-demographic and socio-economic characteristics conducive to the possession of risky assets by risk-averse households in individual countries. To assess their similarity, we use the hierarchical taxonomic method with Ward’s formula. The results of the study showed that risky assets were primarily possessed by risk-averse households that were characterised by high income, including from self-employment, and reference persons having a university degree and at least 55 years of age. The significance of their other characteristics was mainly shaped at the national level. The clear similarity of sets of the characteristics was confirmed only for a few pairs of countries. The information inconsistency that may result from erroneous self-assessments of being risk-averse was recognised in all countries and most often concerned high-income households with reference persons being males with a university degree. In 11 countries, the reason for this inconsistency could also be the inadequacy of assets held, also among senior households. The results provide insights for practitioners and policy. Identification of households providing inconsistent information to financial institutions, with the recognition of its reasons based on easily verifiable characteristics, may prove helpful in suitability assessments. The results confirming the similarity of household profiles requiring special attention between countries may be useful for entities operating cross-border. Due to the collection of information on risk aversion based on the single question self-classification method, conclusions regarding the restrictions of its use should also be considered relevant. In turn, policy implications may relate to consumer protection, since significant fractions of risk-averse households indeed participate in risky assets. Moreover, in selected countries, the risk-averse senior households were recognised as susceptible to making wrong investment decisions.

Helicopter money in Europe: New evidence on the marginal propensity to consume across European households

The recent spread of COVID-19 has led to the worst economic crisis since the 1930s. To boost demand after the crisis, direct monetary transfers to households are being discussed. Using novel microdata from the Eurosystem Household Finance and Consumption Survey (HFCS), we study how much of such a transfer households would actually spend. We do so by exploiting the unique opportunity that the new wave of the survey included an experimental question to calculate the marginal propensity to consume from hypothetical windfall gains. Our results show that households on average spend between about 33% (the Netherlands) and 57% (Lithuania) of such a transfer. In all countries, answers are clustered at spending nothing, spending 50% and spending everything. Marginal propensities to consume decrease with income but are not as clearly related to wealth.

Redistribution in a joint income–wealth perspective: A cross-country comparison

Abstract Redistribution is usually understood in terms of income, as a resource used to rank individuals as well as determine tax liabilities or benefit entitlements. Yet, it is increasingly argued that more prominence should be given to the joint distribution of income and wealth and interest into the taxation of wealth for redistributive purposes has largely increased. By including income and wealth data from the Eurosystem Household Finance and Consumption Survey into the tax–benefit microsimulation model EUROMOD, we add two novel aspects to the literature. First, we include the analysis of taxes on wealth and wealth transfers. Second, we evaluate redistributive effects of tax–benefit systems against the joint income–wealth distribution instead of income only. We show that expressing living standards in terms of both income and wealth results in considerable reranking of individuals, which in turn leads to a lower redistributive impact of tax–benefit systems than is traditionally considered.

Making Use of Home Equity: The Potential of Housing Wealth to Enhance Retirement Security

The demographic change underway, declining adequacy levels from traditional pay-as-you-go old-age social security systems, structural reforms in pension schemes and the reduction in the traditional family support have increased the need for additional private savings to cover the old age income gap. In this paper we discuss the necessity, the role and the viability of home equity release schemes in supplementing public and private pensions in an integrated way. We use the latest European data from the Eurosystem Household Finance and Consumption Survey (HFCS) to analyse the household's wealth composition and accumulation process in the euro area. To quantify the size of the housing wealth and its potential to enhance existing and future retirement income, we compute the equity-to-value ratio (ETV) for all countries, estimate the time to loan payoff and compute the amount of home equity that is expected to be released over a 10-year period through regular monthly mortgage payments. We then catalogue and discuss the many alternative options for managing and accessing housing wealth over the life cycle, and highlight the main characteristics, risks, advantages and drawbacks of the two most important market products (home reversion plans and reverse mortgages). Finally, we discuss the main demand-side and supply-side obstacles and challenges to the development of equity release markets and extract some policy implications.

Estimation of Joint Income-Wealth Poverty: A Sensitivity Analysis

Most poverty studies build on measures that take account of recurring incomes from sources such as labour or social transfers. However, other financial resources such as savings and assets also affect living standards, often in very significant ways. Previous studies that have sought to incorporate assets into poverty measures agree that (1) poverty estimates including wealth are considerably lower than the traditional income-based measures; (2) poverty rates of the elderly are more affected than those of the non-elderly and (3) poverty rates are especially affected by the household’s main residence. This paper assesses the sensitivity of these conclusions to various plausible alternative assumptions, such as the poverty line calculation, the types of assets included in the wealth concept and choices with respect to the equivalence scale. Moreover, we check whether the impact of alternative assumptions is consistent across age and institutional settings. To that effect we compare Belgium and Germany, two countries with similar living standards and income poverty rates, but very different levels and distributions of wealth. Using data from the Eurosystem Household Finance and Consumption Survey we show that accounting for wealth affects the incidence and age structure of poverty in a very substantial way. However, we also illustrate that results strongly depend on all kinds of measurement choices. We show that poverty rates may increase as well as decrease depending on how wealth is accounted for. Cross-country rankings may also change, overall or for specific groups. Second, current measures are not representative for young households such that any conclusion on the age ratio of poverty is highly sensitive to the assumptions made.

Household wealth in the euro area: The importance of intergenerational transfers, homeownership and house price dynamics

Results from the Eurosystem Household Finance and Consumption Survey reveal substantial variation in household net wealth across euro area countries that await explanation. This paper focuses on three main factors: (i) homeownership, (ii) housing value appreciation and (iii) intergenerational transfers. We show that these three factors, in addition to the common household and demographic factors, are relevant for the net wealth accumulation process in all euro area countries, and that, using various decomposition techniques, differences in homeownership rates and house price dynamics are important for explaining wealth differences across euro area countries.

Drivers of wealth inequality in euro area countries: the effect of inheritance and gifts on household gross and net wealth distribution analysed by applying the Shapley value approach to decomposition

This paper investigates the sources of inequality in household gross and net wealth across eight euro area countries applying the Shapley value approach to decomposition. The research draws on micro data from the Eurosystem Household Finance and Consumption Survey 2010. Dispersion in bequests and inter vivos transfers obtained by households are found to have a remarkable effect on wealth inequality that is stronger than that of income differences. In Austria, Germany and Cyprus the contribution of real and financial assets inherited or received as gifts to gross and net wealth inequality attains about 40 per cent. Nevertheless, the distribution of household characteristics (age, education, size, number of adults and children in the household, marital status) within countries also shapes the observed wealth dispersion.

WEALTH INEQUALITY: A SURVEY

AbstractWe survey the issues involved in comparing wealth distributions and measuring wealth inequality with illustrations from the Eurosystem Household Finance and Consumption Survey.

Factor decomposition of the wealth distribution in the euro area

Economic policy often targets specific components of the household balance sheet such as policies supporting the financing of real estate or setting the interest rate. To understand the potential impact of these policy measures on the overall distribution of wealth, this paper investigates the link between components of wealth and the overall distribution of wealth, using factor decomposition methods. Applying methods from the literature and a new decomposition approach based on the recentered influence function, it uses the newly published data provided by the Eurosystem Household Finance and Consumption Survey. Specifically, the paper studies the (marginal) contributions of and the elasticity with respect to components of the household’s balance sheet for the euro area as a whole as well as for 15 euro area countries. We find some factors (such as wealth held in households’ main residence) to contribute a higher proportion to inequality while others (such as risky financial assets) display only a relatively weak contribution. In addition, elasticities reveal a diverging impact of different components on the wealth distribution. Furthermore, the relative contribution and the point elasticities of the components of total wealth differ across euro area countries, indicating regionally distinctive impacts of policy measures.

The Eurosystem Household Finance and Consumption Survey: A New Underlying Database for EUROMOD

We explore the prospects for using the Eurosystem Household Finance and Consumption Survey (HFCS) dataset as an underlying micro-database for the EU tax-benefit model, EUROMOD. This will allow expanding the policy domains currently covered in EUROMOD with dimensions like wealth taxation, incentives for wealth accumulation and asset tests determining benefit eligibility. As the HFCS only contains gross income amounts which are not suitable for distributive analysis, the purpose of this paper is to derive net incomes by simulating the gross-to-net transition with EUROMOD taking into account all important details of the social security and personal income tax system. In order to identify the issues and illustrate their importance a trial database for Belgium and Italy is constructed

How May Consumption be Affected by Housing and Financial Assets in China and the Euro Countries?

This paper uses samples of household data from Chinese Family Panel Studies (CFPS) and Eurosystem Household Finance and Consumption Survey (HFCS) to estimate the consumption effects of both housing and financial assets. Our results show that components of household wealth have different impacts on consumption. The estimated housing asset elasticity of consumption is larger than financial asset elasticity of consumption both in China and Euro countries. By analyzing the wealth effect of housing in different age groups, we found that the wealth effect of housing and financial assets on consumption is larger for elderly families than for younger families in the Eurozone, but opposite result is obtained in China.

How Do Households Allocate Their Assets? Stylised Facts from the Eurosystem Household Finance and Consumption Survey

Using the first wave of the Eurosystem Household Finance and Consumption Survey (HFCS), a large micro-level dataset on households’ balance sheets in 15 euro area countries, this paper explores how households allocate their assets. We derive stylised facts on asset participation as well as levels of asset holdings and investigate the systematic relationships between household characteristics and asset holding patterns. Real assets make up the bulk of total assets. Whereas ownership of the main residence varies strongly between countries, the value of the main residence tends to be the major asset for homeowners and represents a significant part of total assets in all countries. While almost all households hold safe financial assets, a low share of households holds risky assets. The ownership rates of all asset categories generally increase with wealth (and income). The significance of inheritances for home ownership and holding of other real estate is remarkable. We tentatively link differences in asset holding patterns across countries to differences in institutions, such as mortgage market institutions and house price-to-rent ratios.

Household Wealth in the Euro Area: The Importance of Intergenerational Transfers, Homeownership and House Price Dynamics

Results from the Eurosystem Household Finance and Consumption Survey reveal substantial variation in household net wealth across euro area countries that await explanation. This paper focuses on three main factors for the wealth accumulation process, i) homeownership, ii) housing value appreciation and iii) intergenerational transfers. We show that these three factors, in addition to the common household and demographic factors, are relevant for the net wealth accumulation process in all euro area countries, and moreover that, using various decomposition techniques, differences therein, in particular in homeownership rates and house price dynamics, are important for explaining wealth differences across euro area countries.