Universal Credit: making work pay in the UK?

Paola De Agostini and Mike Brewer

Lisbon – October 2nd, 2013

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)

Research overview

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)

Why are we doing this?

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 Instead, UC withdrawn gradually as earnings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

Universal Credit: key features

Universal Credit Example: Couple with children

Assumes: couple with 2 children, 1 earner @ £10/hr, £100/wk LHA or eligible rent. Ignores Council Tax Benefit.Source: ISER-EUROMOD

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 500

50

100

150

200

250

300

350

400

ctb_pwis_pwwtc_pwbho_pwctc_pwcb_pwUC

Hours worked per week at £10/hr

Inco

me

from

ben

efits

, £/w

k

Same entitlement to benefits if do not work Earnings

disregard Slower withdrawal

Single system: no horrible interactions, less churn between programmes, and less chance of non-take-up

Universal Credit Example: Couple with children

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60300

350

400

450

500

550

600

Existing systemUniversal Credit

Hours worked per week at £10/hr

Wee

kly

net

inco

me

Source: ISER-EUROMOD

Assumes: £10/hr, £100/wk LHA or rent

Same out of work income Slower

withdrawal, so much stronger work incentives

No “notch” at 24 hrs/wk

Slower withdrawal, so stronger incentives to earn more

Faster withdrawal, so weaker incentives to earn more

Better off under Universal Credit regardless of hours worked

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

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)

But…

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.

Projecting 2009-10 FRS forward to future years (2013/14 and 2014/15)

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?

Main outcome measures

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

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]

-50

510

Wee

kly

% c

hang

e in

net

eq

fam

ily in

com

e

not working working at NMW working above NMW

single adults couples without children

couples with children single parent

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

Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighteda 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.

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, weighteda In this report we use households to mean tax units or benefit units

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]

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.

Changes to Universal Credit

Changes to UC: impact on single parent families income

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

Changes to UC: impact on income distribution

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

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

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

Changes to UC: impact on financial incentives to progress in work (METRs) [single parents]

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

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

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

Source: Authors’ calculation based on FRS, 2009-10, using EUROMOD and assumptions specified in the text to simulate 2014-15. Notes: FRS 2009/10, weighteda Base UC estimated annual extra costs compared to the current system.

Estimated annual costs for each policy reform proposal compare to currently proposed UC (in millions)

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"

Summary

Extra Slides

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

Current system of means-tested social security benefits for working-age adults

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)

Universal Credit: the amount

Universal Credit Example: Lone Parent

Assumes: lone parent with 2 children, earns £6.5/hr, no housing costs. Ignores Council Tax Benefit.Source: ISER-EUROMOD

Same entitlement to benefits if do not work

Earnings disregard Slower

withdrawalSingle system: no horrible interactions, less churn between programmes, and less chance of non-take-up

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 500

50

100

150

200

250

ctb_pwbho_pwwtc_pwis_pwctc_pwcb_pwUC

Hours worked per week at £6.5/hr

Inco

me

from

ben

efits

, £/w

k

Universal Credit Example: Lone Parent

Source: ISER-EUROMODAssumes: Lone parent with 2 children, earns £6.5/hr, no housing costs. Ignores Council Tax Benefit.

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

Faster withdrawal, so weaker incentives to earn more

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 600

50

100

150

200

250

300

350

400

450

500

Current systemUniversal Credit

Hours worked per week at £6.5/hr

Wee

kly

net

inco

me

Not much change in income for those in work either

Average weekly change (%) in equivalised family net income over the working-age income distribution, by employment and NMW status

Impact of Universal Credit on income of NMW families

-50

510

1520

Net

equ

ival

ent i

ncom

e ch

ange

(%)

1 2 3 4 5 6 7 8 9 10

Min Wage Above NMW

Average weekly change (%) in equivalised net family income over the working-age income distribution, by employment and detailed NMW status

-10

-50

510

1520

Net

equ

ival

ent i

ncom

e ch

ange

(%)

1 2 3 4 5 6 7 8 9 10

NMW main job NMW 2nd job or 2nd earner Above NMW

Cumulative distribution of PTRs comparing couples with and without

childrenNon-working adults in couples before and after UC, assuming they work 10 hours/wk at the NMW

Non-working adults in couples before and after UC, assuming they work 20 hours/wk at the NMW

020

4060

8010

0P

artic

ipat

ion

Tax

Rat

e (P

TR) -

%

20 40 60 80 100Cumulative frequency (%)

Couples with children - base Couples with children - UC

Couples without children - base Couples without children - UC

020

4060

8010

0P

artic

ipat

ion

Tax

Rat

e (P

TR) -

%

0 20 40 60 80 100Cumulative frequency (%)

Couples with children - base Couples with children - UC

Couples without children - base Couples without children - UC