ISER Working Paper Series 2006-21
Estimating the impact of a policy reform on welfare participation: the 2001 extension to the minimum income guarantee for UK pensioners
01 Jun 2006
Evidence suggests that a substantial portion of individuals entitled to receive welfare benefits do not claim them, thus compromising the effectiveness of government programmes designed to reduce poverty. Take-up is particularly low for means-tested benefits requiring an evaluation of income and assets of the claimant. Existing qualitative research on welfare participation emphasises claim costs arising from the difficulty and hassle of making a claim and other intangible costs such as distaste for welfare participation and social stigma associated with dependence on benefits. The phenomenon seems to be particularly severe for British pensioners. Official estimates report that, although approximately 2 million pensioners were living in low income households in 2000-01, between a third and a quarter of them did not claim the Minimum Income Guarantee payments to which they were entitled. It has been suggested that pensioners experience more difficulties than others in acquiring information and pursuing a claim.
Most economic analyses of take-up behaviour have considered claiming as a rational choice based on a comparison of the expected benefits from welfare participation with the tangible and intangible costs of applying, so that the individual chooses to search for information and make a claim if the expected benefit adequately compensates for the costs. Typical research studies use individual-level survey data on income and asset holdings to simulate benefit entitlements and, for those believed to have positive entitlements, a statistical model is estimated for the probability of take-up of the entitlement. A well established result in the literature has been the positive impact of the benefit entitlement level on the claiming decision. In other words, sufficiently large levels of entitlements work as an incentive for more people to overcome the claim barriers.
This standard approach, involving modelling of the takeup probability, has some drawbacks: particularly the risk of misspecifying the statistical model and of measurement error in simulated entitlements, arising from the unreliable nature of survey responses on income and assets. The main aim of this paper is to test directly whether there is a response of takeup behaviour to incentives, using an approach that is less vulnerable to specification and measurement error. We examine a 2001 policy reform, which substantially increased the Minimum Income Guarantee entitlements levels and relaxed eligibility criteria. We try to identify the effect of this increase in entitlement on the take-up behaviour of older British pensioners by comparing the benefit receipt of otherwise similar pensioners from the pre and post-reform periods.
We find that the take-up of the Minimum Income Guarantee was significantly increased by the 2001 reform for those with the largest potential gains from claiming. These results support the idea that higher entitlement levels do provide an effective incentive for welfare participation and they are reassuringly close to results previously obtained using the conventional statistical modelling approach.