A new IFS report released today finds that a major recent
revision by the Office for National Statistics (ONS) to official
estimates of household wealth is fundamentally flawed. It leaves
policymakers with no reliable guide to how wealth is distributed
amongst British households.
The ONS has made two clear improvements to previous estimates
(one correcting a serious mistake in the previous methodology).
But it has also introduced another change to its methodology
which subtracts £2.3 trillion from estimates of household wealth
in 2018 to 2020. That change is fundamentally flawed.
The report finds:
- The ONS revision concerns the method used for valuing private
pensions when estimating household wealth. The scale of the
change is enormous, implying that the total wealth of
Britain's households in 2018 to 2020 was approximately £2.2
trillion less than was previously believed – a 14%
reduction.
- Two of the three changes made by the ONS are welcome – most
notably correcting a serious error in accounting for
inflation which had been distorting official wealth statistics
for a decade. This one adds around £500 billion (£0.5
trillion) to total measured household wealth, while the other
subtracts around £300 billion.
- However, by far the largest change made – by itself
subtracting a breathtaking £2.3 trillion from recorded wealth
– relates to how the value of future pension income is
converted to today's terms. This change is a mistake,
making an already flawed methodology substantially
worse. It is quite possible that the ONS's revised
estimates of household wealth are actually further from the truth
than those it started with. The result is that
policymakers lack a reliable set of household wealth
statistics on which to base policy.
- The mistake is to move away from the use of market interest
rates to convert future pension income into today's terms and
towards greater use of a rate based on forecast GDP growth. That
is faulty economics. The rate used was, in 2018 to 2020, much
higher than market interest rates, and hence the value assigned
to pensions was much lower. While the change mostly affects
defined benefit pensions, its absurdity is well illustrated by
the fact that, under the new methodology, someone with a defined
contribution pension pot who chooses to buy an annuity would be
deemed suddenly to have become much poorer as a result.
Isaac Delestre, a Senior Research Economist at IFS and an
author of the report, said:
‘Statistics aren't a sexy topic, but they play a crucial role in
painting policymakers a picture of the world they're seeking to
influence. Unfortunately, the economics underpinning this £2
trillion change is fundamentally unsound. If we want our
policymakers to be able to make good decisions, we need to
provide them with an accurate view of the basic economic facts on
the ground. When it comes to household wealth, the ONS isn't
currently doing that.'
ENDS
Notes to Editor
£2 trillion poorer than previously thought? Assessing changes
to household wealth statistics is an IFS report by Stuart
Adam, Isaac Delestre, Carl Emmerson and David Sturrock.
