The welfare cost of means-testing: pensioner participation in income support
Means-testing is an obvious way of focusing welfare spending on those most in need whilst controlling the burden on public finances. The drawback of means-testing is that people who are entitled to receive welfare benefit may not come forward to claim it. There is evidence that this is an important feature of welfare programmes in many countries. Our focus is on older British pensioners (at least 5 years beyond official retirement age), over the period 1997-2002. This is a group with heavy reliance on means-tested benefits, through the Income Support (IS) (also known as Minimum Income Guarantee) programme. During this period, official estimates suggest that around a third of pensioners who appeared to be entitled to IS did not receive it.
Possible reasons include the social stigma that may be associated with welfare receipt, the effort or unpleasantness entailed in the claim process, the difficulty of acquiring and dealing with information about the benefit system, and fears associated with the unpredictability of the claim outcome. These barriers to benefit claiming can be thought of as potential (tangible or intangible) costs and the take-up decision is then seen as weighing expected benefits against these potential costs. Economic models of take-up are often criticised by non-economists as assuming implausible degrees of rationality and knowledge. However, this ignores the fact that it may be efficient to remain in ignorance of the details of welfare programmes if the costs of discovering and understanding their rules are very high and the potential benefits are moderate. It is hard to believe that, if welfare payments were raised to arbitrarily large amounts, a large number of the uninformed would not take some action to become better informed.
There are few specific estimates of the magnitude of laim costs in the research literature and no agreed principle for translating estimates of the takeupentitlement relation into an estimate of the implied level of underlying claim costs. One of our aims is to develop a way of doing this and to estimate the cashequivalent values of the tangible and intangible claim costs faced by different individuals. If the process of take-up gives rise to some form of disutility, then it is possible to construct an equivalent weekly cash amount which should be deducted from the observed net income of benefit claimants to give a true income-metric welfare measure. However, in making this income adjustment, we have to take account of the fact that there is self-selection into participation, so that claimants will tend to be those who experience lower than average levels of stigma and other claim costs and non-claimants tend to be those with high levels of claim cost. A further aim is to assess the potential impact of implicit claim costs on the measurement of poverty.
Implicit costs are found to be moderate for most IS recipients, typically around £3-4 per week (or about 13-15% of entitlement) for the average benefit recipient, and consequently the degree of measured poverty among pensioners increases by a modest but non-negligible amount - of up to 13% - when these claim costs are taken into account.
Journal of Applied Econometrics
Volume and page numbers
22 (3):581-598 , 581 -1179
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