26 October 2009

Strengthening the Poverty Trap

The think tank Reform has published a report which has called for "middle class benefits" such as maternity pay, child benefit, the winter fuel allowance and free TV licences for the elderly, to be scrapped and replaced with benefits focused on the poorest.

I think the concerns that they put forward are reasonable, such as the idea that some people are effectively being bribed with their own tax money. I've also got some concerns about some of the individual benefits mentioned, but, in general, I think a shift from universal benefits to means tested benefits is a bad idea, for a number of reasons.

The belief that some people are being bribed with their own money can be looked at from another angle; universal benefits create less discontent, as people are less likely to feel that they are paying to subsidise others. If everybody pays something to fund a benefit and everybody gets something back, there's likely to be less ill-feeling than if only some are feeling the benefits.

Another, more material, advantage is the cost of administration. Means tested benefits, while they may target the money more effectively, also tend to have higher costs, as carrying out the means testing, amending systems as people's circumstances change and carrying out investigations to ensure people are not mis-reporting their circumstances, will almost always require more bureaucracy than a universal benefit, which doesn't require the same extensive monitoring. A related benefit is the greater privacy associated with universal benefits, which don't require the same extensive reporting of the recipients’ circumstances to the state.

The real advantage to be gain from universal benefits, though, is the way in which they can help people to lift themselves out of poverty. To many, the idea that you can help the poorest by giving state payments to those who are better off sounds counter-intuitive, but it's relatively obvious when you look at what happens at the cross over point between being in the poorest group and the next poorest group. With means testing, there can be a poverty trap; as somebody works their way out of poverty, they can find that the withdrawal of benefits results in them making little gain, or worse, actually makes them poorer. That the poverty trap exists has been acknowledged by the actions of various governments, but usually in a hugely ineffective way. The clearest example is probably the use of tax credits. In order to reflect the fact that the complete withdrawal of benefits when somebody starts working can often leave them worse off, as the costs associated with working eat up the gains, tax credit are used. The problem is that the cost of administering them and the burden placed on the recipients to report any change in their circumstances undo a lot of the potential positive effects. With universal benefits, that is not an issue. People don't have to worry about the costs or paperwork involved with child benefit when their circumstances change, because there aren’t any and when there's less cost associated with making yourself better off, there's less keeping you poor.

As I hinted at the start, I don't think all the benefits mentioned are a good thing or perfect as they are. A particular issue I have is with maternity benefit, which is in effect a reverse means tested benefit, as the more you earn, the more you get. At most, I think such a benefit should be at a fixed rate. However, even with those concerns acknowledged, I think that, given a choice between a means tested benefit and a universal benefit, the latter should be the preferred option unless there are overwhelming reasons to choose the former.


Mark Wadsworth said...

Agreed, I said the same myself.

Dan Hill said...

I'm also in agreement. The problem this welfare state has not been able to deal with is the cross-over that exists between benefits and low income work.

Universal benefits that don't penalise working is one way to steer clear from it.