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Debate: Means testing for benefits

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Should government benefit programmes be subject to means testing?

Background and context

"Means Testing" is assessing a person's income to decide whether they are poor enough to receive government benefit programmes. Most welfare programmes are means tested; you can only receive a benefit if your income is below a particular level. Sometimes a banding system is used so that the amount of benefit you receive is more closely related to the level of income you have. Some benefits, however, are universal benefits paid to individuals regardless of their income or wealth. Examples of universal benefits often include unemployment benefit or social security. The mix of universal and means tested benefits varies from country to country, and is often politically sensitive. Examples of recent changes in the UK are the move from universal grants for student living costs to a system of means-tested payments, and the development of means-tested tax credits and benefits aimed at reducing both child poverty and hardship among the elderly. Among developed countries, Australia probably leads the way in the use of means testing, while continental European countries such as France and Germany still tend to provide universal benefits with little or no means testing.

Contents

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Redistribution: Is means testing the most effective way of redistributing wealth to the poor?

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Yes

  • Means testing allows redistribution of money to where it is most needed. Because there is inevitably a limited amount of money available for social spending, it is best that it is targeted at those in most need. Means testing does this by setting an income level (or several levels in a banded system) below which government benefits may be claimed. By contrast universal benefits are poorly targeted, giving government money to many families who do need it (e.g. by paying the university fees of the children of well-off professionals, or by providing pensions, unemployment benefits or free medical care to those who could afford private pensions and insurance schemes). In this way the government has less to spend on those who truly need it and inequality is perpetuated.
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No

  • Means testing is humiliating, turning many poor people away. It forces people to declare themselves in poverty and to record in painful detail their possessions and income for an inquisitive and suspicious government employee. Not only is this demeaning, it also discourages those in most need from claiming benefits that are rightfully theirs. This is particularly likely to happen with older people, who are often too proud to reveal how poor they are. A further obstacle to claiming means tested benefits is the very complicated application forms that the government requires - again, this tends to affect the elderly poor and the illiterate (i.e. two of the most vulnerable groups in society) most harshly. An example of such problems is the introduction of more means testing for benefits in the UK in recent years. The National Pensioners Convention estimates that more than 700 000 retirees have been put off claiming benefits because the process is so confusing.
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Efficiency: Is means testing more efficient approach than universal programs?

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Yes

  • Means testing helps eliminate wasteful universal programs. Governments pay out benefits to those who do not need them. The United States federal government pays out $15 billion a year in social security to households with over $100 000 annual income. The opportunity cost of this money is very high because it could be put to much more productive use in other ways. The waste is particularly outrageous given the long-term threat to social security programs in developed countries from changing demographics. Means testing could make current payments to those in need viable in the long term, and the savings could fund other social programs or even reduce taxes to aid the economy. Paying money to wealthy retirees is the least effective use.
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No

  • Universal benefits very efficient to deliver. This is because a large number of people receive the same payment without any qualifying test. Once a means test is introduced, it has to be administered and policed to detect the inevitable attempts at fraud, which is very expensive. A banded system is even worse, requiring a separate calculation to be made for every claimant, and for this to be redone every time their financial circumstances change. Furthermore, means testing will create perverse disincentives to work. When one's benefits end at a certain wage level, your tax rate on the extra dollar that pushes you into the next means-testing band can be more than 100%. This is because you can lose money on working when the cost of losing benefits outweighs the extra income received. In these situations, rational people will not work as much, leading to unemployment, loss of job skill development and a lack of confidence in the job seeker. Means testing can also lead to disincentives for saving and reduce income. In 2002, British Liberal Democrats and Conservatives joined to oppose the Labour government's move to expand means testing for pensioners on the grounds that poor people would lose any reason to save for their retirement. Means tested programmes have a special disincentive for those who can expect the most benefits because they feel they will be penalised for any savings they can scrape together. Means testing therefore provides no additional benefit to the poor but encourages irresponsible financial behaviour and a dependency culture.


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Corruption: Can means testing help reduce corruption and fraud?

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Yes

  • Means testing requires better collection of income information. This is especially in middle income countries with social safety nets, like Central and Eastern Europe. Means testing would be another way of reporting income and triangulating accurate economic data for those countries. While the short term temptation to cheat may increase, the more extensive, detailed and demanding reporting methods needed for means testing will make fraud more difficult. The systems developed for means testing will reduce corruption, encourage efficiency in the civil service and ultimately reduce fraud.
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No

  • Means testing for benefits will encourage fraud. People will seek to "game" the system, maximizing their benefits. This has an economic impact in inefficiency and waste. It will also create cynicism about the benefit system and cause a loss of faith in the usefulness of public benefit programmes, which threatens not only those particular programmes, but also the welfare system in general. In addition to public loss of faith in social programmes, stories of fraud will also encourage hostility towards those on benefits. An example is the US Reagan Administration's famous "welfare queen" myth. Ronald Reagan simply made up a story about a woman who stole $150000 from welfare programmes. This myth was then used to justify many benefit cuts.
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Dependence culture: Can means testing avoid creating a dependency culture?

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Yes

  • Disincentives to work are avoidable: For example, in the United States, the Earned Income Tax Credit provides a "negative tax" - a payment for those in work. This graduated payment takes effect over the period in which the marginal tax rate would be a serious deterrent to additional work. This is more distributive and solves a major problem of means testing.
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No

  • Means testing can hurt the poor. The only practical way to means test is to measure annual income, rather than general wealth (in terms of material possessions, savings, investments, property ownership, etc). Because poor people, with less wealth, will be more likely to have to work part-time after the official retirement age to survive, they will lose benefits in a means tested system.


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Sustainability: Is means testing better than universal access?

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Yes

  • Current universal entitlements are simply impossible to sustain: Many countries are suffering from an ageing population. This demographic shift constantly reduces the ratio of workers to beneficiaries, making the same universal benefits much more costly over time. For example, in France, persons aged 65 or older are 10% of the population. By 2050 that same group will be close to 30% of the population. Currently, four workers support one retiree. By 2050, just two workers will have to support that same retiree. Means testing will ensure that those who really need benefits will be able to receive them over the next fifty years.


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No

  • Means testing will not receive the critical public support that universal access wields: At present, universal access gives the middle classes a stake in a social system and makes them more willing to pay the taxes that are needed to support it. Means testing will shift most of the benefits to the poorest segments of society, who are often the least politically active and even more unable to represent themselves effectively in politics. Whenever a government feels the urge to cut spending, it will be much easier to reduce means tested benefits than universal entitlements. Means testing will result in fewer benefits for the poor.


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