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«September 2007 International Longevity Centre - UK The International Longevity Centre - UK (ILCUK) is an independent, non-partisan ...»

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• Ensure a proper evidence base of research about how variations in asset accumulation are impacting family formation, and related decisions New families are experiencing a volume of debt exceeding anything experienced by preceding cohorts. Although fertility rates have increased slightly since a low in 2001, and net household illiquid wealth for this age-group has increased, this does not mean that the burden of debt is not acting as a disincentive to family formation currently. A large household debt-burden on younger cohorts also increases the risk that in the event of an economic downturn, with resulting lower expectations of future income and ability to cope with debt, the actual and expected debt-burden on younger cohorts may have a critical effect on decisions around family formation, and the fertility rate. Reliable evidence is needed on these issues to better prepare public policy against these risks.

In addition to evidence on family formation, the Government must monitor the effect that larger actual and expected debt levels have on decisions around the raising of children. Although low interest rates in the period up to 2005 have allowed the proportion of household income consumed by mortgage repayments to remain relatively low, over the medium to long-term this may change.

Household income that is consumed by debt repayment may be at the expense of consumption for the purposes of child-rearing, such as the purchase of clothing, books and toys. Analysis by economists of household ‘discretionary income’ after housing costs can sometimes lead policymakers and commentators to overlook the fact that parental discretionary income directly influences the ‘life-chances’ of children and their outcomes across the entire life course.

More generally, larger actual and expected debt may determine how much time parents can dedicate to parenting versus earning income. For example, two-parent households with an actual or expected large mortgage debt may find it necessary for both parents to be in full-time paid employment.

• Private sector lenders to extend the availability of payment-holidays The private sector potentially has a role to play in reducing the financial stress associated with family formation. The Government could encourage lenders to provide automatic penalty-free payment-holidays for mortgages and personal loans for families after child-birth. In this way, the financial industry could collectively be more confident that the usage of debt products from which it benefits are not having a negative effect on UK demographic trends. In addition, the Government could work with the private sector to offer interest-free loans to cover the costs of new children.

• Reduce the financial stress associated with family formation The Government must go further in efforts to minimise the deterrent effect of financial pressures associated with starting a family, and must target the perception that family formation can be prohibitively expensive. At present, families on low incomes (i.e., income support) are entitled to a Sure Start Maternity Grant. However, many of the costs of child-rearing, such as nappies, are relatively constant for families across the income and wealth scale, and it is not always the case that families with higher incomes and wealth have more discretionary income to cover such costs. The Government must review the case for extending the scope of benefits associated with child-rearing beyond those on low incomes. There may be a case for raising the threshold used in means-testing up the income and asset scale among younger families. Indeed changes in patterns of asset accumulation create a need to reevaluate the use of means-testing across the life course.

Means-testing among Older People Means-testing remains a controversial part of the Government’s welfare programme for older people. What do trends in asset-accumulation mean for this debate? What is the way forward for the policy of means-testing?

Background Pensioner poverty in the UK is a problem. In 2005/06, there were 1.8 million pensioners living in households with incomes below 60% of median income, on an ‘after housing costs’ basis 20.

This represents 17% of the pensioner population. However, the long-term trend for pensioner income poverty is positive. In 1996-7, there were 2.9 million pensions in poverty on this measure, representing 29% of the pensioner population 21.

Means-testing is the evaluation of an individual’s or household’s assets and income to determine their eligibility for a benefit or welfare payment. Policymakers opt for means-testing mechanisms in the context of limited welfare budgets, to ensure resources are targeted on those that most need help. Since 1997, the Labour Government has become associated with the use of means-testing as a key lever in the distribution of benefit payments. Pension Credit Guarantee, housing benefit (for rental costs) and Council Tax benefit are all important benefit payments for low-income pensioners, and are all means-tested.

Means-testing of older people is controversial. Older people’s charities argue that meanstesting can be intrusive and embarrassing and that, as a result, some older people deliberately forgo the welfare payments they need and are entitled to 22. Others have argued that the complexity of the means-testing process is such that some pensioners do not claim their full entitlement.

Whatever the causes, it can be reasonably argued that there are problems with the current system of welfare payments for pensioners using means-testing. For example, the Government itself estimates that around £2 billion in Pension Credit goes unclaimed each year 23.

Others have argued that means-testing of pensioners functions as a disincentive to saving among younger groups. The Pensions Commission argued against the Government’s policy of using means-testing in relieving poverty among pensioners, because this could act as a deterrent to saving for retirement 24. The Commission argued that individuals would not bother to save if this could result in disqualification from entitlement to pension credits.

Critics of means-testing of pensioners therefore have two arguments: means-testing is wrong in principle and wrong in practice. What do changes in patterns of life course asset accumulation mean for the debate on means-testing of pensioners?

Asset Accumulation across the Life Course Means-testing involves the evaluation of income and wealth. In relation to income, those aged 55 and over in 2005 saw no real increase in their weekly household income in the decade See Brewer M et al. (2007a).

However, previous reductions in the prevalence of poverty among pensioners does not guarantee continued reductions. For example, see Brewer M et al. (2007b) For example, a survey undertaken by Help the Aged (Spotlight: 2007) suggested that as many as 47% of pensioners failed to claim the Council Tax benefit to which they were entitled.

See DWP (2006).

See Pensions Commission (2005).

after 1995. By contrast, all younger cohorts typically saw real increases in weekly household income.

However, despite failing to see improvements in their real income, a central finding of the Asset Accumulation across the Life Course research is the wealth accumulated by older generations during 1995-2005, particularly through housing ownership. Among those before

or at retirement in 2005:

• The average 55-year old in 2005 had seen an increase in their net non-pension household assets from £57,000 to £178,000 during the previous decade.

• The average 60-year old in 2005 had seen an increase in their net non-pension household assets from £76,000 in 1995 to £204,000 during the previous decade.

• The average 65-year old in 2005 had seen an increase in their net non-pension household assets from £87,000 in 1995 to around £209,000 during the previous decade.

Among those in retirement, across the period 1995-2005, there have also been increases in net non-pension household wealth, despite most in this age range not participating in the

labour market:

• The average 70-year old in 2005 had seen an increase in their net non-pension household assets from £95,000 in 1995 to £203,000 in 2005.

• The average 75-year old in 2005 had seen their net non-pension household assets increase from £98,000 in 1995 to £185,000 in 2005.

These results are particularly significant because they run counter to general expectations of retirement as being a period in which net wealth is significantly run down. If the findings are limited to those households owning a property, these trends are even more pronounced.

The Challenge In the context of the dramatic changes in net-wealth among different older age groups, the challenge for policymakers is to develop the right policy on means-testing and welfare payments to pensioners that is effective and fair across all age groups.


• Improve the mechanism of means-testing Critics of means-testing of pensioners argue that the mechanism of means-testing fails in practice, because of the complexity involved, and the associated embarrassment, and indeed, shame, which may cause some older people not to claim their entitlements. For as long as these behavioural effects occur, the policy of means-testing can be fairly described as failing. However, this is a problem of policy design and implementation rather than principle. Policymakers must therefore look urgently to improve the mechanisms used in means-testing, whether through changes in data-collection procedures, greater computerisation of personal records, simplification of evaluation processes, or the use of tax-credits.

• Defend the principle of means-testing Although it is argued that means-testing provides a disincentive to saving, it can be seen that over the last decade, the ‘wealth-multiplier’ effect of property ownership has greatly increased the net assets of the average household that is now around retirement age. Growth in the average net property assets of older cohorts has exceeded any saving that could be undertaken by these cohorts, with or without the disincentive effect of means-testing 25. Thus, this objection to the principle of meanstesting has limited validity when means-testing incorporates measurement of property wealth. More generally, in light of the growth in wealth among older cohorts, and the limited resources available for welfare transfers toward older people, the Government must continue to defend the principle of means-testing.

• Review the case for extending the role of means-testing in welfare transfers to older people Given changing patterns of asset accumulation among older cohorts, it could be argued that the use of means-testing in welfare payments to older cohorts should be extended further to other universal transfers. Despite the fact that, unlike younger cohorts, older cohorts have not seen increases in their weekly household income, some universal welfare entitlements aimed at pensioners appear anachronistic when set against growth in net household assets. For example, free TV licenses currently worth up to £135 are available for those aged over 75. Winter fuel payments of around £200-£300 are available for those over 60. Older people living in London are entitled to ‘Freedom Passes’ providing unlimited free transport. Set against the unchanging real incomes of older cohorts, these welfare payments appear consistent.

But when set against the real increases in assets of older cohorts, such universal welfare entitlements seem incongruent.

Question marks already hang over some universal welfare entitlements for older people. For example, winter fuel payments - as the policy is currently implemented have been shown to be an ineffective policy solution to the ongoing and shocking problem in the UK of winter deaths among older people 26. Conversely, welfare payments to older people often have public expenditure benefits that may not be immediately apparent. For example, ‘Freedom Passes’ for older London residents encourage ‘active ageing’ and social contact, which over the long-term reduce the costly incidence of problems requiring services from the health and social care sector. More generally, they are a vital life-line for many low-income pensioner households in London.

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