Determining the underlying factors of perceived income adequacy

As the average age of the world population is increasing and incomes tend to decline in late life, it is essential for policymakers to have a good view of an elderly person’s financial capacity. An increasingly important measure of financial capacity is someone’s perceived income adequacy (PIA), i.e., the manner in which a person subjectively evaluates the sufficiency of his or her income to meet household expenses. This paper examines which factors determine perceived income adequacy and whether those factors suffice to validate PIA as a measure of economic status. This is done by replicating and extending the study of Litwin and Sapir (2009), using data from the Survey of Health, Ageing and Retirement in Europe (SHARE). For the extension, parameters of a simultaneous equation model (SEM) are estimated using a generalized estimation equation (GEE). As the results indicate that economic variables were the most important factors to determine PIA, this measure can be validated as a measure of economic status. However, other variables are also of importance when evaluating perceived income adequacy: the older people get, the more they perceive their income as adequate and the less healthy people are, the more they perceive their income as inadequate.