Fair for the future

Regardless of the cash you have in your pocket, as the price of a loaf of bread or pint of milk rises, and as rents or fuel bills go up, the same amount of money will fail to stretch as far. If benefits do not increase to take account of this, then households increasingly find the money they have available to live on is squeezed more tightly.

However, despite the crucial importance of reflecting rises in costs of living through the social security system, there is very little consistency or coherence in how benefits increase (or do not) over time.

In recent years, many benefits have been rising well below inflation. Such cuts are hidden because they do not result in a reduction to the amount of cash people have in their pocket. Instead, the impact is felt through the gradual drip, drip, drip of an extra few pence on a packet of cereal, the phone bill or the utilities.

When extended over lengthy periods of time, this can have a profound effect. For example, whilst costs of living are expected to rise by 23 per cent over the course of the current decade, child benefit will have risen by just 2 per cent.

At the same time provision through other parts of the social security system has been protected. Most notably the ‘triple lock’ on the state pension has ensured that rates of support have risen above cost of living increases.

A fair social security system needs to address how social security provision rises over time, called “uprating”. This shouldn’t be done on an ad hoc basis, but put on a fixed, sustainable footing for the long term. I argue that three key changes are needed.

1. Standardising benefit uprating

It is surely strange that some benefits have been frozen whilst others are “triple locked” – without any clear end-goal for where these different rules are intended to take different benefits’ value over time. Such an approach is no way to establish a long-term vision for social security – where possible we should standardise approaches to benefit uprating, and put them on a long-term footing.

It is important to note that standardising approaches to uprating benefits, is not the same as setting levels of entitlement at the same rate. Different people (such as job-seekers, or the elderly) receive different benefits in part because they have different kinds of needs.

However, even if levels of entitlement are different, this does not mean that they cannot rise at the same rate. The two distinct issues of levels of entitlement and approaches to uprating need to be more clearly delineated.

2. Addressing costs which do not rise in line with general living costs

Whilst in general it is desirable to standardise approaches to benefit uprating, some costs do not rise in line with general costs of living. A classic example of this is housing costs, which fluctuate greatly over time, and between different parts of the country.

In order to reflect this – until recently – for those renting privately, the maximum amount of support which could be received was based on average local rents. This ensured that as local rents rose, people were still able to afford to live and work in their own community.

This is no longer the case – instead, from 2013 uprating of maximum housing benefit rates for those in the private rental sector (known as local housing allowance – or “LHA” rates) were linked to inflation rather than local rents. Since then, further decisions have been made to limit rises in maximum rates of support – including most notably freezing rates altogether from 2016 through to 2020.

The consequence of this is that LHA rates no longer bear any relation to local rents. Those privately renting a typical property in their local area may expect to face a considerable shortfall in the housing support they receive. This has been associated with rent arrears and evictions.

The link between LHA rates and average local rents urgently needs to be re-established, in order to provide the housing stability people need – an argument also supported by Jasmine Basran in this series.

3. Reflecting changes in living standards – not just costs of living

At present, with most working-age benefit rates frozen for a number of years – including most support for children – the priority has to be to re-establish inflationary uprating for all social security benefits. However, over time, as the economy grows in real terms – simple inflationary increases are not enough. As society becomes wealthier, if they are uprated by inflation alone, benefit rates will increasingly lag behind typical living standards.

As average living standards rise in real terms, even if benefits receive inflationary protection, those on a low income will become increasingly socially excluded –less able to afford a normal standard of living in contemporary society.

As a result, in the long term, we need to move beyond uprating with inflation. One possibility would be to uprate benefits with an alternative indicator which reflects changes in contemporary living standards – such as earnings growth.

One key challenge to this is that when earnings growth is sluggish (or in decline), benefit rates would then decrease, or increase well below inflation.  This might happen at a time when people need an effective safety net the most. In such years, a potential response to this would be to uprate benefits by inflation as a ‘backstop’, but in following years uprate only by inflation, until earnings growth ‘catches up’ again.

An alternative approach to uprating with earnings would be uprating by nominal GDP growth – ensuring that as the economy grows, the benefits of this are reinvested in social security provision for the poorest.

Conclusion

In the long term, few questions in the social security system matter more than how benefits rise to take account of changes in living costs and living standards. At the moment, approaches to addressing this challenge are chaotic at best – more based on short-term economic savings, than ensuring that people have stability in living standards.

A better aligned and sustained approach to increasing benefit rates is needed. This should be one which reflects not simply changes in costs of living, but changes to living standards more broadly.

This blog is part of our Poverty and social security: where next? series. Read more about the project here.

Photo credit: Duncan Toms