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Universal Credit: making work pay in the UK?

Universal Credit: making work pay in the UK?. Paola De Agostini and Mike Brewer Lisbon – October 2 nd , 2013. Research overview. To improve understanding of

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Universal Credit: making work pay in the UK?

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  1. Universal Credit: making work pay in the UK? Paola De Agostini and Mike Brewer Lisbon – October 2nd, 2013

  2. Research overview • To improve understanding of • How the introduction of Universal Credit will affect work incentives in the UK across various groups in the population (i.e. low paid workers, single parents, etc.) • how changes to universal credit will affect: • The likely position of vulnerable families along the income distribution in future years and • Their work incentives • Use microsimulation methods to simulate household incomes under future tax and benefit systems • In part, updating Brewer, May and Phillips (2009)

  3. Why are we doing this? • Very dramatic changes in personal taxes and benefits since election (2010), and many more in pipeline • Large rise in income tax personal allowance • Substantial cuts in welfare benefits, including through uprating rules • Major reform of working-age benefits and tax credits to start from 2013-17 (Universal Credit)

  4. Universal Credit: key features • Will replace: • Income support, income-based jobseeker’s allowance, income-related employment and support allowance, housing benefit, child tax credit, working tax credit • NB: Non-means-tested benefits not affected. Council Tax Benefit not included in UC but also being reformed. Pension Credit unaffected. • Combined means-tested benefit for those out-of-work and those in-work with low family income • Should increase awareness and take-up • Should reduce hassle & uncertainty for claimants, administration costs for government • No “hours rules”. Instead, UC withdrawn gradually as earnings rise • Conditionality regime to be made tougher, and extended to both partners in some working families • In reality, complicated phase-in from Oct 2013 through 2017, with some transitional protection for those who lose when transferred; here, we show impact as if UC fully implemented in April 2014

  5. Universal Credit Example: Couple with children Same entitlement to benefits if do not work Earnings disregard Single system: no horrible interactions, less churn between programmes, and less chance of non-take-up Slower withdrawal Assumes: couple with 2 children, 1 earner @ £10/hr, £100/wk LHA or eligible rent. Ignores Council Tax Benefit. Source: ISER-EUROMOD

  6. Universal Credit Example: Couple with children Faster withdrawal, so weaker incentives to earn more Same out of work income Slower withdrawal, so stronger incentives to earn more Slower withdrawal, so much stronger work incentives No “notch” at 24 hrs/wk Better off under Universal Credit regardless of hours worked Assumes: £10/hr, £100/wk LHA or rent Source: ISER-EUROMOD

  7. EUROMOD is static tax and benefit microsimulation model designed to facilitate cross-national research within the EU Base data from Family Resources Survey 2009-10, with information on household demographics labour market characteristics gross market income tax and benefit instruments not simulated by EUROMOD (Same underlying dataset as equivalent models at IFS, HMT, DWP, etc...) We adjust data to represent 2013/14/15 (see later) EUROMOD-UK

  8. But… • No single household dataset records accurately who receives NMW (LFS) and full household characteristics and income sources (FRS) • Solution • For all workers in FRS, we impute a “true hourly rate” given observed relationship observed in the LFS between true hourly rate and characteristics of the worker • including weekly earnings; weekly hours; job, person and household characteristics • Method follows Skinner et al. (2003)’s suggestion for imputing accurate hourly wage for those paid by the hour (as also implemented in Brewer et al., 2008)

  9. Projecting 2009-10 FRS forward to future years (2013/14 and 2014/15) • Uprating financial variables to their projected level in 2014 • Using actual uprating factors from 2009-10 to the present (2012) from ONS • Using forecast of average earnings and consumer price index (CPI) from ONS and nominal GDP from OBR for projection beyond 2012 • We do not account for demographic changes • Use EUROMOD to account for announced changes in the UK T&B system that are due to take place by April 2014. • Tax liabilities and benefit and tax credit receipts; taper rate changes and hours requirements; total household benefit cap; withdrawal of child benefit from families earnings more than £50,000 • More difficult reforms ad hoc sophisticated approach: LHA, transfer of recipients from IB to ESA, rise of SPA for women.

  10. Main outcome measures • Income of vulnerable (i.e. low paid, single parents) households, and position in the income distribution • Impact of UC on vulnerable families’ income • Impact of UC on measures of financial work incentives • Marginal effective tax rate (METR): amount of additional earnings taken by personal tax and benefit system • Participation tax rate (PTR): measures incentive to work at all • How many workers are subject to in-work conditionality?

  11. Changes in mean weekly net equivalised income by employment status, earnings and family type, under universal credit compared to the current system [working age households only] Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighted

  12. Changes in mean weekly equivalised disposable income by employment and NMW status and family type

  13. Average METRs under current system compared to universal credit, for single parents and for all households [working age only] Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighted a Proportion of working-age households facing METRs within a given interval (0-60%, 60%-80% and more than 80%) b Excluding consideration of council tax support, the number of people facing very high METRs is reduced. c In this report we use households to mean tax units or benefit units.

  14. Average PTR of non-working single parents compared to all non-working adults in any household type under the current system and under universal credit at different hours worked [assuming minimum wage earned, working age households only] Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighted a In this report we use households to mean tax units or benefit units

  15. Changes to Universal Credit We consider various changes to UC compare to the system as it is currently planned, to see which (if any) would achieve improvements for single parent families under UC. We consider the following four alternative scenarios: 1 – Reducing the UC taper from 65% to 55%, 2 – Increasing the basic allowance for everyone within UC by £39 per year, 3 –Increasing the amount of income disregards for everyone on UC by £39 a year, 4 –increasing income tax threshold for the basic tax rate by £300. For each scenario, we estimate its impact on the disposable income distribution and work incentives of single parents.

  16. Changes to UC: impact on single parent families income

  17. Changes to UC: impact on income distribution Source and Notes: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. FRS 2009/10, weighted

  18. Changes to UC: Effects on financial incentives to progress in work (METRs)

  19. Changes to UC: impact on financial incentives to progress in work (METRs) [all workers] Source and Notes: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. FRS 2009/10, weighted

  20. Changes to UC: impact on financial incentives to progress in work (METRs) [single parents] Source and Notes: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. FRS 2009/10, weighted

  21. Changes to UC: effects on non-workers’ PTRsif working at minimum wage 40 hours per week

  22. Changes to UC: The effect of the four changes outlined on PTRs among single parents working 20 hours per week at the national minimum wage, compared to the baseline [currently planned] universal credit scenario

  23. Changes to UC: The effect of the four changes outlined on PTRs among all (non-working) adults working 40 hours per week at the national minimum wage, compared to the baseline [currently planned] universal credit scenario

  24. Estimated annual costs for each policy reform proposal compare to currently proposed UC (in millions) Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighted aBase UC estimated annual extra costs compared to the current system.

  25. Summary • Clear differences between families for whom NMW is main source of earnings, and other NMW families • Both type of families lose slightly from UC, but families for whom NMW jobs are secondary source of income lose more • But great variation within these changes some related to family type • UC has complicated impacts on incomes and incentives, partly reflecting inconsistencies in current system, and partly reflecting that UC taper is on "net income", not "gross income" • On average METRs fall slightly (increasing incentive to work more or seek better paid jobs). • UC reduces the number facing very high (80+) METRs but increases the number facing high METRs (60% to 80%) • More changes when broken down by family type • On average UC increase PTRs of potential second earners especially for families where the main earner is paid at the NMW • Incentive to work for non-working partner of NMW workers weakened considerably by UC, especially at 20 hours • Reforms to UC: None of the reforms to Universal Credit achieves both substantial redistribution of income to poor and a substantial strengthening of average work incentives. The best option depends on the government’s priorities given the available budget. • Other results not included in this presentation: • number of NMW families subject to in-work conditionality"

  26. Extra Slides

  27. Current system of means-tested social security benefits for working-age adults Currently, the UK welfare system for working-age families includes: • Income replacement to non-working families, or income top-ups to working families (JSA, ESA, IS, WTC); separate and mutually exclusive • Help with family’s extra costs (HB, CTB, CTC); separate, not mutually exclusive • Faults: inefficient for the government, confusing for claimants, administratively costly, reduces incentives to move into work

  28. Universal Credit: the amount • General eligibility: low income working-age families The maximum UC is the total of: • Standard/Personal allowance • An amount for each child • An amount for each disabled child (at a lower or higher rate) • An amount for an ill or disabled adult (at a lower or higher rate) • An amount for a carer • An amount for housing costs • An amount for childcare • Earnings disregards vary with family circumstances and housing element • Taper (65% on earned income; unearned income reduces UC entitlement pound-by-pound)

  29. Universal Credit Example: Lone Parent Same entitlement to benefits if do not work Earnings disregard Single system: no horrible interactions, less churn between programmes, and less chance of non-take-up Slower withdrawal Assumes: lone parent with 2 children, earns £6.5/hr, no housing costs. Ignores Council Tax Benefit. Source: ISER-EUROMOD

  30. Universal Credit Example: Lone Parent Faster withdrawal, so weaker incentives to earn more Same out of work income Slower withdrawal, so stronger work incentives No “notch” at 16 hrs/wk Slower withdrawal, so stronger incentives to earn more Not much change in income for those in work either Assumes: Lone parent with 2 children, earns £6.5/hr, no housing costs. Ignores Council Tax Benefit. Source: ISER-EUROMOD

  31. Impact of Universal Credit on income of NMW families

  32. Cumulative distribution of PTRs comparing couples with and without children

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