Poverty and household spending in Britain Mike Brewer Alissa Goodman Andrew Leicester Institute for Fiscal Studies 17 th May 2006

The effect of increased benefit entitlements on pensioners spending Mike Brewer

Motivation State benefits for 60+ risen under Labour, yet spending poverty of pensioners little changed Have extra benefits improved pensioners living standards? Related work Meyer and Sullivan (2004) [US data, lone parents] Gregg, Waldfogel and Washbrook (2004, 2006) [UK data, families with children] Blow, Walker and Zhu (2005), [UK data, families with children] Munro, Walker and Zhu (ongoing) [UK data, winter fuel allowance]

Outline Policy changes affecting pensioners Method and data Results Conclusions

Main benefit changes affecting pensioners since 1997 Rise in basic state pension (April 2001 & 2002) Increases in means-tested benefits (from April 1999) and introduction of pension credit (from 2003) Equalisation of pensioner premia in means- tested benefits (by 2001) Winter fuel allowance (from 1999)

Changes to benefit entitlement for single pensioners (1996=1) Graph shows maximum entitlement to IS or BSP for single pensioner

Overview of method Compare (changes in) spending of pensioners affected by rise in benefits to pensioners not affected Attribute difference to policy. Called conditional difference-in-differences.

Difference-in-differences: data FES/EFS from 1996/7 to 2002/3 Single adults born before April 1936 Aged 60+ in 1996, 66+ in 2002 (pseudo-panel) 3,056 poor pensioners (entitled to a means- tested benefit under 1996/7 system) 1,281 young & 1,775 old 1,778 rich pensioners (not entitled to a means- tested benefit under 2002/3 system) Some pensioners omitted entirely (neither poor nor rich)

Changes in benefit entitlements, income and spending, 1996/7-2002/3

Difference-in-differences: overview Compare spending before and after rise in means-tested benefits (April 1999) Rich pensioners tell us about general trends affecting pensioners: B-A Poor pensioners tell us about general trends and impact of policy: D-C. Difference tells us about impact of policy: (D-C) – (B-A) Assumes common trends Control for various factors (regression-adjusted DiD) Also compare young and old poor pensioners Mean spend 4/96 to 3/99 4/99 to 3/03 RichAB PoorCD

Impact of benefit changes on pensioners Impact of policy on log(. ) April 1999 MIG (Poor vs Rich) April 2001 eqn (Young vs Old) Income0.112 ***0.016 Spending (non- housing) ***0.097 * Spending on basics0.030 *** Spending on non- basics ***0.184 *** * = 10% *** 1%

Impact of benefit changes on pensioners Impact of policy on log(. ) April 1999 MIG (Poor vs Rich) April 2001 eqn (Young vs Old) Income0.112 ***0.016 Spending (non- housing) ***0.097 * Spending on basics0.030 *** Spending on non- basics ***0.184 *** * = 10% *** 1%

Impact of benefit changes on pensioners Impact of policy on log(. ) April 1999 MIG (Poor vs Rich) April 2001 eqn (Young vs Old) Income0.112 ***0.016 Spending (non- housing) ***0.097 * Spending on basics0.030 *** Spending on non- basics ***0.184 *** * = 10% *** 1%

Conclusions Pensioners look poorer when assessed using spending than income Recent rises in means-tested benefit for pensioners were translated into higher spending Results rely on untested common trends assumption: evidence stronger for introduction of MIG than equalisation of age- related premia

Summing up Living standards have risen whether measured by income or spending Increased expenditure poverty rate since 1997 even as income poverty declined Reasons for different trends not yet clear Recent rises in means-tested benefit for pensioners were translated into higher spending