Uprating Benefits – lessons from the 80s
The September inflation figures were published yesterday. These are the ones used for the annual uprating, so several of us at the TUC have been thinking about the implications for people who have to rely on benefits. We’ve been making a fuss about switching to the Consumer Price Index from the Retail Price Index ever since it was announced in the June Budget, and that’s why today Brendan denounced it as an “insidious switch”. Everyone who relies on Jobseeker’s Allowance or Carers’ Allowance, or who gets a civil service pension is going to find themselves worse off as a result of a change that slipped through with hardly any media coverage.
There’s a very useful DWP explanation of the current policy on uprating at the end of their Abstract of Statistics for Benefits, National Insurance Contributions, and Indices of Prices and Earnings. When I was looking it up, I was reminded that the new policy is a change for the worse, but the existing policy was hardly the gold standard.
The existence of inflation and the gradual increase in the real value of wages means there has to be some process for uprating benefits. Without uprating to take account of inflation, people who have to get by on benefits would find that they could afford less and less as time goes on.
What is sometimes less appreciated is that, without a policy to take account of real increases in wages, people who have to live on benefits find themselves falling further and further behind the rest of society. If we want all our citizens to share in the growth of the economy, we need to increase benefits to take account of this as well.
Last year, Peter Kenway of the New Policy Institute wrote a really interesting paper that asked Should adult benefit for unemployment now be raised? One of the issues he looked at was the history of uprating. For the first quarter century after the creation of the modern welfare state there wasn’t any established policy, but, with increases in fits and starts, benefits roughly kept pace with earnings. From 1974 to 1980, with inflation high, we needed a more formal policy, and the one that was adopted was that benefits (and tax allowances, as I recall) had to rise in line with inflation or earnings, whichever was higher.
But, in 1980, Mrs Thatcher introduced a new policy – since then (with the exception of the freezing of Child Benefit in the late 80s and early 90s and a handful of increases in children’s benefits in the past decade) benefits have only been increased in line with inflation. The implications of this policy have been profound – most years earnings rise by more than inflation so, each year, pensions and other benefits have fallen a little bit further behind average incomes.
The parallels with the RPI/CPI switch are worrying. For any given year, the loss to claimants has seemed small; and the policy is technical – it is always hard to win support for any reform that has to be explained before people can understand why it’s needed. But the effects have been terrible – the Abstract of Statistics for Benefits etc shows that:
- Retirement Pension, for someone under 80 with their own National Insurance contribution was worth 26 per cent of average earnings in 1979, by 2009 that had slipped to 16.2 per cent. (Widow’s Pension has seen the same decline.)
- For a couple under 80, it has slipped from 41.6 per cent to 25.9 per cent.
- In 1979, Widowed Mother’s Allowance was worth 33.9 per cent of average earnings; in 2009 Widowed Parent’s Allowance was worth 18.2 per cent.
- In 1979, a single person’s Unemployment Benefit was worth 20.6 per cent of average earnings; in 2009, a single person could expect Jobseeker’s Allowance equivalent to just 10.9 per cent – not much more than half the figure thirty years earlier.
- For a couple, the equivalent decline was from 33.9 per cent to 17.2 per cent.
- Child Benefit for the first child has declined from 4.5 per cent of average earnings to 3.4 per cent; for additional children from 4.5 per cent to 2.2 per cent.
Equivalent figures aren’t available in this report for the Supplementary Benefit system that operated up till 1988, but we do have figures from that date for Income Support and Pension Credit. Excluding the early 80s makes sure that the decline is less dramatic, and the effect of recent increases in benefits for children and pensioners shows up more clearly:
- In 1988, IS for a single person aged 18 – 24 was worth 11.9 per cent of average earnings; by 2009, this had slipped to 8.7 per cent.
- For someone over 25 the decline was from 15.3 per cent to 10.9 per cent.
- For a couple it was from 23.6 per cent to 17.2 per cent.
- For a lone parent with a child under 11 the decline was from 24.7 per cent to 23.4 per cent – but note that, in 1998, it stood at 20.1 per cent, the increase since then reflects the last government’s real increases in the value of benefits for children.
- A couple with two children under 11 has actually seen the relative value of their IS rise, from 36.2 per cent in 1988, to 39.2 per cent in 2009. Again, the last government’s policies have made a difference – in 1998 this figure stood at 31.8 per cent.
- There is a similar story for pensioners. In 1988, a single person aged 60 – 74 was entitled to IS worth 20.2 per cent of average earnings; by 1998 this had reach 17.9 per cent but by 2009 it their Pension Credit was worth 22.1 per cent of average earnings.
- For a couple, the progression from 31.0 per cent in 1988, to 27.9 per cent in 1998 and 33.8 per cent in 2009.
It took twenty years for the Conservatives to decide that, at least in relation to pensioners, Mrs Thatcher’s policy had been a mistake. How badly will benefits have to be hit for politicians to reach the same conclusion about the RPI – CPI switcharoo?