The Take-Up of Means-Tested Benefits by Working Families with Children

RICHARD DORSETT* and CHRISTOPHER HEADY?

1. INTRODUCTION

The purpose of this paper is to analyse the take-up of the two major means-tested benefits that are available for working families with children in the UK: family income supplement (HS) and housing benefit (HB). As eligibility for FIS depended on at least one member of the household working 30 hours per week (24 hours for single parents), we are concentrating on benefits to working families. The take-up of these benefits has become a particularly important issue because of the Government’s policy of switching resources from child benefit, which is a universal benefit, to the means-tested family credit (FC) that replaced FIS in the 1988 social security reforms. Family credit has been in operation for too short a time to analyse the take-up behaviour of its potential recipients. However, its method of assessment is sufficiently similar to that of FIS for us to believe that the experience of FIS take-up will be a reasonable guide to the take-up of family credit.

Although most of the discussion of targeting benefits for families with children has concentrated on the switch from child benefit to FIS / FC, it is also necessary to take account of housing benefit in assessing the likely success of targeted benefits reaching families with children. There are several reasons for this. First, housing benefit is a means-tested benefit that is available to a wide variety of groups in the

* Economic Development Department of Kent County Council. t School of Social Sciences, University of Bath.

An earlier version of this paper was presented at the Royal Economic Society conference in April 1991. The research was supported by a grant from the Leverhulme Trust and was mainly carried out when both authors were at University College London. The authors would like to thank the Institute for Fiscal Studies for providing access to the data and allowing them to use their Tax-Benefit Model. The authors have benefited from discussions with Richard Blundell, Andrew Dilnot, John Hudson, Stephen Jenkins, Steve Machin, Costas Meghir, Jane Millar, Graham Stark and Steven Webb.

Take-Up of Benefits

population, including families with children. Second, a large majority of households eligible for FIS / FC are also eligible for housing benefit. Third, benefit receipts under FIS / FC are taken into account in calculating entitlement to housing benefit. Fourth, the experience of claiming one means-tested benefit can be expected to alter a family's attitude to claiming another one. This paper therefore makes a first attempt at analysing the interdependence between take-up decisions on the two benefits.

The best-known econometric study of the take-up of means-tested benefits is the study of housing benefit by Blundell, Fry and Walker (1988). The approach taken in the current paper is similar, but with modifications to take account of the interdependence noted above.

We are not aware of any previous attempts to model the take-up of FIS. One of the main reasons for the absence of such studies is that only a small proportion of families were entitled to FIS, so that surveys such as the Family Expenditure Survey (FES) do not include many eligible families in their samples. This means that it is difficult to obtain statistically significant estimates of behavioural models, based on one year's data.

One solution to this problem is to pool data from a number of years and therefore increase the number of eligible families in the sample. This is the approach taken in the present paper. However, there is a limit to the number of years that can be pooled because of the need to observe families responding to essentially similar benefit systems and the tendency for governments to change benefit systems fairly often. Thus, if we are looking for recent data, we must note the change to the housing benefit system in 1983 and the social security reforms of 1988. This means that the longest reasonably stable recent period consists of the four years from 1984 to 1987. This does not allow us as large a sample of eligible families as we would like but it is the best that can be done and, as the results will show, it is large enough to provide useful insights into the determinants of take-up.

The rest of the paper is organised as follows. Section I1 describes the data, including the patterns of eligibility and take-up of FIS and HB. Section I11 discusses the way in which this observed behaviour can be modelled. Section IV presents the results of estimating these models. Finally, Section V draws together the main conclusions of the study.

11. THE DATA

The data are taken from the Family Expenditure Survey for the years 1984, 1985, 1986 and 1987. For the purposes of this study, families are taken to be the same as the FES-defined tax units because the assessment for FIS entitlement is based on tax units. However, it should be noted that housing benefit is based on households, which may include more than one tax unit.' We have followed Blundell, Fry and

' A tax unit consists of a single person or manied couple together with their dependent children. A household will therefore include more than one tax unit if, for example, grandparents, parents and children all live together.

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Fiscal Studies

Walker in assuming that all housing costs are borne by the first tax unit in the household, and therefore that it is the first tax unit that is entitled to any HB. This means that second (and subsequent) tax units are regarded as ineligible for HB.

Families containing self-employed workers were removed from the sample because their FIS and HB entitlements are determined by the authorities using different criteria from those applied to employed workers. Moreover, these criteria are not known with sufficient accuracy to model with any confidence.

The entitlements to FIS and HB were calculated using the Tax-Benefit Model developed at the Institute for Fiscal Studies (IFS) and described in Johnson, Stark and Webb (1990). In fact, the FES collects data on benefit receipts but these cannot be used in a consistent manner to predict take-up because, by definition, they do not apply to eligible families that do not claim the benefit.

Because FIS receipts are counted as income for the purposes of calculating HB entitlement, these calculations were made under two alternative assumptions: (1) that FIS was taken up and was paid at a rate equal to the calculated entitlement, and (2) that FIS was not taken up. In what follows, a family is regarded as eligible for HB if its entitlement under assumption (2) is positive.

For the interpretation of the results, it is important to realise that these calculations are subject to error. In addition to the standard problems of inaccuracies in survey data, there is the problem that the FES collects income data for a period immediately preceding the interview while the calculation of benefit entitlement will have been made at the time the claim was made, which might have been several months earlier. HB recipients are supposed to report changes in their circumstances but this may not always happen immediately. Also, FIS entitlement is meant to be constant for a period of a year even if income does change. Thus, in some caseR we will be calculating benefit on the basis of an income that is different from the one the authorities used when the claim was made. We may also be using benefit rates that relate to a later period than the one in force at the time a claim was made.

The calculations of entitlement were made in current values using the benefit rates that were in force at the time of the FES interview. The resultant entitlements were then converted to 1984 prices, using the Consumer Price Index. Similar deflations were applied to all the explanatory variables expressed in monetary terms. All explanatory variables also came from the FES.

The IFS Tax-Benefit Model also calculates entitlement to supplementary benefit, and it turns out that some families are entitled to both, although they cannot both be claimed. In order to simplify the analysis, these families were dropped from the sample, as were families who were in receipt of supplementary benefit but did not have a calculated entitlement.

The remaining sample consists of families with a calculated entitlement to either FIS or HB or both. The pattern of this entitlement is given in Table 1. It is clear that almost all families entitled to FIS are also entitled to HB, while the reverse is definitely not true. In fact, the families entitled to FIS but not to HB are often secondary tax units (for example, single parents living with their parents) that might

24

Take-Up of Benefits

Yes ENTITLEDTOFIS No

Total

be expected to behave differently from primary tax units in their take-up of FIS, and this is confirmed in the statistical analysis of Section IV. We will mainly concentrate, therefore, on those families that are entitled to both FIS and HB.

ENTITLED TO HB Yes No Total

134 38 172 634 - 634 768 38 806

TABLE 1

Entitlements to FIS and HB

Table 2 presents the pattern of take-up by tax units with a calculated entitlement to either benefit. A comparison of these figures with those in Table 1 reveals a take-up rate for HB of 50 per cent and a take-up rate for FIS of 59 per cent.

TABLE 2

Take-Up of FIS and HB by Whole Sample __ ~~

TAKE UP HB Yes No Total

Yes TAKE UP FIS No

Total

71 31 102 316 388 704 387 419 806

The take-up by families entitled to both benefits is shown in Table 3. Here, the HB take-up rate is 69 per cent and the FIS take-up rate is 65 per cent. If the take-up of the two benefits were independent, we would expect the proportion taking up both benefits to be 45 per cent (= 0.69~0.65~100). In fact, the proportion taking up both is 53 per cent. This provides some support for the suggestion that the two take-up decisions are interrelated. However, it could simply be due to families with high FIS entitlements (and therefore high take-up probabilities) having high HB entitlements. This can only be resolved by the econometric results presented below.

It should be noted that these take-up proportions are based on those households with a calculated entitlement. Table 4 shows that 77 households without a calculated entitlement to FIS and 154 households without a calculated entitlement to HB took up these benefits. These cases most probably arise from the difficulties in calculating entitlements noted above (difficulties that can also account for the differences between entitlements and receipts for those recipients who we have recognised as entitled).

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Fiscal Studies

Entitlements Non-recipients Recipients

TABLE 3

Take-Up of FIS and HB by Families Entitled to Both

Receipts Entitled Non-entitled

TAKE UP HB No Total

FIS

HB

Yes TAKE UP FIS No

Total

flO.O f11.7 f13.2 f 10.4

f5.2 f12.0 f8.9 €4.2 (70) ( 102) ( 102) (77)

(38 1) (387) (387) (154)

71 16 87 21 26 41 92 42 134

It is interesting that the recipients of FIS without a calculated entitlement receive an average benefit that is almost as large as that of recipients with a calculated entitlement. This contrasts with the case of HB, where recipients without acalculated entitlement receive a relatively low benefit, so that the failure to identify entitlement could easily arise from measurement error (of income or housing costs). This difference presumably arises from the fact that the size of FIS is fixed for a year. Thus we are observing people who may have experienced substantial changes in hours of work (19 of the 77 reported hours that were too low to qualify for FIS) and / or income.

TABLE 4

111. THE MODELLING OF TAKE-UP

We follow Blundell, Fry and Walker by modelling take-up in terms of a balance between the (expected) financial value of the benefit and the costs (including stigma and ‘hassle’) of take-up. The complication here is that we are looking at the take-up of two benefits.

26

Take-Up of Benefits

This would not be much of a problem if the value of taking up one benefit were independent of the value of the other, and if the costs of taking up one benefit were independent of whether the other was being taken up. However, the values of the benefits are hardly ever independent of each other because FIS receipts are counted as income for the purposes of calculating entitlement to HB. Also, the costs of taking up a second benefit may well be less than those of taking up the first: the stigma might well be less and the family will be more experienced in dealing with the authorities. This means that instead of looking separately at the costs and benefits of the two take-up decisions, they must be modelled simultaneously.

We suppose that the attractiveness of receiving benefits is given by U(FIS, HB, z), where FIS is the amount of FIS received, HB is the amount of HB received, and z is a vector of family characteristics (including income).

The values of the two benefits have not been summed because the family may not regard them as equally attractive. For example, local authority tenants receive their housing benefit as a credit against their rent rather than in cash. This could be less attractive because they cannot spend it on other items while allowing their rent payments to fall into arrears.

It is assumed that the cost of claiming benefits is independent of the size of benefit expected. Therefore it can be represented by a function C(DF, DH, z), where DF has the value 1 if FIS is taken up and 0 otherwise, and DH has the value 1 if HB is taken up and 0 otherwise.

The net benefit will be given by the difference between these two functions:

V(FIS, HB, DF, DH, Z) = U(FIS, HB, Z) - C(DF, DH, z).

Note that, by definition, V(0, 0, 0, 0, z) = 0. We suppose a family will choose the take-up combination which gives the highest

net benefit. Thus, the family will choose to take up both benefits if

V(FISENT, HBENT1, 1, 1, z) > 0 and V(FISENT, HBENT1, 1, 1, z) > V(FISENT, 0, l,O, z) and V(FISENT, HBENT1, 1, 1, z) > V(0, HBENT2,O. 1, z)

where FISENT is the size of FIS entitlement; HBENTl is the size of HB entitlement under assumption (1) above (that FIS is received); and HBENT2 is the size of HB entitlement under assumption (2) above (that FIS is not taken up).

Similar conditions can be written down for the family to choose FIS only or to choose HB only. In each case, three inequalities have to be satisfied: ensuring that the net benefit is positive and that it is higher than the other two benefit-receiving possibilities.

In principle, it should be possible to estimate the net benefit function V(.) from observing the choices made by different families. However, this is difficult to do

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Fiscal Studies

because there are three conditions that have to be satisfied for any outcome to be chosen, and each condition could be subject to random error. We have therefore chosen a simpler approach which reflects the main features of the choice criteria outlined above. For example, we report below on the take-up of FIS whether or not HB is taken up. We could not write down a statistical model that captured all the inequalities discussed above and that could be estimated simply, but the analysis above suggests that the probability of a family taking up FIS depends on FISENT, HBENT1, HBENT2 and z. We have therefore included these variables in a single equation as the best practicable method of estimating FIS take-up behaviour. This equation expresses the probability of take-up as a linear function of these variables plus a normally distributed error term, and is known as a probit equation.

In addition to telling us which variables should be included in the probit equation, the theory outlined above gives us some guidance as to the likely signs of the coefficients. Considering the FIS take-up equation, an increase in FISENT will clearly increase the probability of take-up, but the effects of HBENTl and HBENT2 are more complex. The difference between HBENTl and HBENT2 represents the loss in HB that would result from the family claiming FIS. The larger this difference (HBENT2-HBENTl), other things being equal, the less likely is the family to claim FIS. Finally, a larger value of HBENT2 has an ambiguous effect: it increases the attractiveness of claiming HB only, but the claiming of HB will probably reduce the costs of claiming FIS as well. This suggests that the equation should be estimated in terms of FISENT, HBENT2, (HBENT2 - HBENTl) as well as household characteristics, with expected signs +, ?, -.

Turning to HB take-up, the argument is similar with (HBENT2 -HBENTl) again representing the loss of taking up both benefits, while FISENT has an ambiguous effect. The expected signs are ?, +, -.

Finally, we estimate a probit for the decision to take up both benefits. In this case, FISENT and HBENT2 would be expected to have positive signs, while (HBENT2 - HBENTl) would be expected to have a negative sign.

IV. EMPIRICAL RESULTS

This section reports the results of estimating probit take-up equations for both FIS and HB. The family characteristic variables used in these estimates are similar to those used by Blundell, Fry and Walker: take-home pay (pounds per week), age of the head of household (years), education of the head of household (years), number of adults in the household, number of children aged &5, number of children aged above 5, private tenant (dummy), no rent (dummy),* owner-occupier (dummy), and single adult (dummy).

The benefit variables are measured in pounds per week. In contrast to Blundell,

This dummy variable is included to capture the possibly different behaviour of tenants who pay no rent, perhaps because the accommodation comes with their job.

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Take-Up of Benefits

Fry and Walker, we found that these variables usually performed better when measured linearly rather than logarithmically, although we do use the logarithm of HB in the HB take-up equation.

We started by using the three benefit variables suggested in Section 111: FISENT, HBENT2 and (HBENT2 - HBENTI). However, the last variable performed very poorly, suggesting either that it was subject to excessive measurement error or that families themselves were unable to estimate it properly. In view of this, it was necessary to find another variable that would reflect the loss in HB that follows from claiming FIS and that would be measured more accurately by the families and ourselves. Families that would lose a great deal of HB would be those with a large FIS entitlement and large rent and rates payments, both of which are probably easier to observe than (HBENT2 - HBENTI). This combination can be represented by multiplying FISENT by (rent + rates) to produce a new variable: FISRENT. This variable performed well, entering the equations with the expected negative sign and with a reasonable level of statistical significance.

Table 5 presents the estimation results. The first three columns refer to the take-up of FIS for three different groups: all those entitled to FIS (172 families); all those entitled to FIS and HB (134); all those entitled to FIS and HB who are not owner-occupiers (103). The reason for looking at successively narrow groups is the possibility that their take-up behaviour is different. The possible different behaviour of those not entitled to HB has already been mentioned, and it is also possible that owner-occupiers will behave differently because of differences in their perceptions of eligibility. Statistical testing did indeed show significant difference^.^

We therefore concentrate on the narrowest group: those entitled to both FIS and HB who are not owner-occupiers. The results for this group are given in the third column of Table 5. As expected, FISENT has a positive coefficient and FISRENT a negative coefficient. However, the relative size of the two coefficients indicates that when the value of (rent + rates) exceeds f24 per week, the overall effect of an increase in FISENT is to reduce the probability of take-up. This is of particular concern because the average value of (rent + rates) in the sample is about f23 per week. Thus, the overall gradient of the take-up equation with respect to FISENT (0.36-0.015~23 = 0.015) is not significantly different from zero at the sample mean. The conclusion must therefore be that, overall, the size of FIS entitlement has no significant effect on FIS take-up.

In view of this, it is worth noting that HBENT2 has a positive sign, indicating that entitlement to HB increases the probability of FIS take-up. As discussed above, this could be due to a reduction in take-up costs for FIS that follows from the family’s

’ To test for these possible differences. likelihood ratio tests were performed on the hypotheses that each of the wider samples was governed by the same take-up behaviour as the narrowest sample. In testing the largest sample (all FIS-eligible families), the likelihood ratio test gave a chi-squared value of 104 with 68 degrees of freedom. In testing the sample eligible for both FIS and HB, the likelihood ratio test gave a chi-squared of 48 with 30 degrees of freedom. Both of these chi-squared values are significant at the 2.5 per cent level, confuming the idea of differential behaviour.

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Fiscal Studies

experience of claiming HB. It appears, therefore, that HB entitlement has a more significant effect on FIS take-up than FIS entitlement itself.

TABLE 5

Probit Take-Up Estimates

Benefit Sample size

Constant

FISENT

HBENT2

FISRENT

Take-home pay

Age of head of house h o 1 d Education of household head Number of adults

Children 0-5

Children over 5

Private tenant

No rent

Single adult

Owner-occupier

Log likelihood

(1) FIS 172

4.07 (2.3) 0.03 (1.37) 0.02 (1.05) -0.002 (1.65) -0.02 (2.49) -0.009 (0.63) -0.18 (2.16) 0.017 (0.10) 0.21

(1.22) 0.21

(1.60) -0.26 (0.57) -0.74 (2.04) 0.45

(1.39) 4.04 (0.10)

-94.69

(2) FIS 134

4.80 (2.0 ) 0.13 (2.92) 0.05

(1.27) -0.006 (2.58) -0.01 (1.01) 0.016

(0.80) -0.2 1 ( 1 .w -0.905 (2.67) 0.22

(0.97) 0.1 1

(0.59) -0.33 (0.67) -1.51 (3.08) -0.58 (1.25) 0.05

(0.12) 46.57

Note: Figures in parentheses are t-ratios.

(3) FIS 103

0.48 (0.2) 0.36 (3.71) 0.12

(2.36) -0.015 (3.67) -0.007 (0.33) -0.01 1 (0.43) -0.072 (0.63) 4.648 (1.67) 0.17 (0.58) 0.3 1

(1.27) -0.52 (0.9 1 ) 4 .48 (2.24) -0.35 (0.67) -

42.39

(4) (5) (6) Both HB HB 103 103 768

-3.80 (1.0) 0.33 (3.31) 0.13 (2.53) -0.014 (3.21) 0.001

(0.04) 0.028

0.132 (0.74) -0.735 (1.90) -0.06 (0.22) 0.1 1

(0.52) -1.14 (2.09)

(0.03) -0.32 (0.60)

(1.09)

-10.13

-

45.89

4 .72

0.18

0.07 (1.33) -0.006 (1.28) 0.019

(0.91) 0.054

(1.66) 0.147

(0.92) -0.854 (1.97) 0.37 ( 1.02) 0.07

(0.29) -1.02 (1.87) -8.82 (0.03) 0.23

(0.37)

(1.4)

(1.64)

-

-32.66

0.53 (0.83) 0.09 (1.49) 0.04

(3.47) -0.002 (0.85) -0.009 (4.19) -0.006 (0.80) 0.036 (1.25) -0.303 (2.61) 0.002

(0.02) 0.18

(2.25) -0.75 (3.65)

-14.14 (0.02) -0.0 1 (0.03) 6.38

(0.01) -266.59

The fourth column of Table 5 reports the results of estimating a probit equation for the decision to take up both benefits. Here, the signs on the benefit variables are as expected, although the effect of the FISRENT coefficient again counteracts the positive FISENT coefficient.

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Take-Up of Benefits

The fifth column of Table 5 reports the results for the take-up of HB by those in the narrowest group, while the final column reports the corresponding results for all HB-entitled families. Here there is no evidence that the take-up behaviour of the wider group is different.4 We see that the coefficient on HBENT2 is positive and that the FISENT and FISRENT coefficients again cancel each other out.

The results in Table 5 point to an interrelationship between the two take-up decisions. However, it appears to be a one-way relationship with HB entitlement influencing FIS take-up but not the reverse. Another aspect of the interrelationship is in the correlation between the error terms in the FIS and HB take-up equations, for the sample of 103. The correlation coefficient was 0.38, and statistically significant? This provides additional evidence for the interrelationship between the take-up of the two benefits.

Finally, it is interesting to compare our results for HB take-up with those obtained by Blundell, Fry and Walker (1988). The most interesting coefficient is that on the benefit entitlement. Our coefficient of 0.04 cannot be directly compared with theirs because they used a logarithmic specification.6 However, if we take their coefficient of ‘Log B’ (=0.388 for employed / unemployed) and evaluate the effect of a small change in benefit entitlement at the average value of our sample, we also obtain a

This approximate agreement in coefficients extends to many of the demographic variables: take-home pay, age of head of household, number of adults, number of children aged over five, and private tenant all have coefficients which differ by no more than a factor of 2 between the studies. The variables with more widely differing coefficients are: education of head of household (our 0.036 compared with their -0.089), number of children aged under five (0.002 compared with 0.074), no rent (-14.14 compared with -0.759), single adult (-0.01 compared with 0.442), and owner-occupier (6.38 compared with -0.063). However, the cases of wide differences correspond to those coefficients which we have estimated with very large standard errors, reflecting the small number of observations. In general, the results are very similar.

. result of approximately 0.04.

V. CONCLUSIONS

This paper has made a first attempt at estimating the take-up decisions of families entitled to both family income supplement and housing benefit. The problem of small sample size was overcome by pooling data from four years (198487) during which the benefit regimes were fairly stable.

The empirical results show that HB entitlements make a significant contribution

The likelihood ratio test does not reject the hypothesis that the two equations are the same.

A linear form was used in the current study because it fitted the data more accurately. ’ At the 10 per cent level.

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to the explanation of the take-up of both benefits, while the FIS entitlement has no overall effect. The results also show that families which are more likely than average to take up one benefit will also be more likely to take up the other benefit.

It is possible that this one-way relationship between HB entitlement and FIS take-up is due to the difficulties of calculating FIS entitlements. However, it also fits into the view that HB is an easier benefit to claim and that it is during the process of making the HB claim that many families discover that they are also entitled to FIS.

An alternative explanation is that HB entitlement is a better indicator of poverty than FIS entitlement, as it includes an element of housing costs. Thus it is the ‘push’ of poverty rather than the ‘pull’ of the size of the entitlement that determines take-up. This interpretation has important implications for predicting future take-up of family credit, because it suggests that higher entitlements might not increase take-up.

These results show that the targeting of means-tested benefits works to a certain extent for HB, although the difference in this sample between the average HB entitlement of those who take up (f19 per week) and those who do not (€14 per week) is not all that great.7 However, there should be concern that the actual targeting of FIS appears to take place through HB entitlements rather than FIS entitlements. None the less, the average entitlement of a FIS recipient (El2 per week) is higher than the average entitlement of non-claimants (f9 per week).

Finally, it must be remembered that this is a first attempt at estimating models of FIS take-up and that there is room for improvement. The most important requirement for improving the results is a larger sample of families eligible for FIS or FC.

REFERENCES

Blundell, R.. Fly, V. and Walker, I. (1988). ‘Modelling the take-up of means-tested benefits: the case of housing benefit in the United Kingdom’, Economic Journal, Supplement, vol. 98, pp. 58-74.

Johnson, P., Stark, G. and Webb, S. (1990). ‘TAXBEN2: the new IFS tax benefit model’, Institute for Fiscal Studies Working Paper no. W90/5.

’ The figures given in this paragraph relate to the narrow sample of 103, and so differ from those given in Table 4.

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