Lecture 7 - Social security

Question 1

Types of benefits (3)

Answer 1

1) Contingent: old age, sickness, disability -> pretty uncontroversial and limited labour market impact
2) insurance-type: unemployment insurance
3) social assistance (welfare): final safety net

Question 2

Means-tested welfare is…

Answer 2

based on an assessment of household ‘means’ (eg. income or wealth), paid only if they fall below a threshold

Question 3

Universal benefits are…

Answer 3

normally contingent on some characteristic, eg. child benefit only to mothers of children under 16 (or 18 in full-time ed), REGARDLESS of income, i.e. not means-tested
-> proposal for a Citizens’ outcome, which wouldn’t be contingent on anything, except being an adult

Question 4

Benefits policy - economic issues

Answer 4

1) Info asymmetries
- > MH and incentive to work: distringuishing b/n poor and shirkers
- > how to gather info for targeting most efficiently
2) Equity/efficiency tradeoff
- > poverty trap : some people may be better off not working
- > efficiency cost of taxes required to finance these policies

Question 5

What is an income taper?

Answer 5

When a means-tested benefit is reduced gradually once a threshold is passed, instead of stopping straightaway.

Question 6

Universal benefits - pros and cons (5)

Answer 6

• advocated as a way to ensure broad support for them
• higher public expenditure than means-tested
• admin costs reduced bc no means-test but increased because more recipients
• avoids low take-up of some means-tested benefits due to possible stigma and/or hassle of claiming
• avoids errors and frauds (saves admin costs to detect them)

Question 7

Design of means-tested benefits

Answer 7

No taper means possible poverty trap, reduced by taper but not eliminated.
-> taper rate must be carefully thought through

Question 8

Marginal tax rate =

Answer 8

Taper rate + income tax rate

Question 9

The participation tax rate is…

Answer 9

the total change in taxes and benefits when someone starts work

Question 10

Negative income tax/Citizens’ income

Answer 10

Taxpayers with income below a certain threshold would receive income-related payments at the same rate as the tax applied to additional income above the threshold.

• > equivalent to a guaranteed minimum citizens’ income, which everyone would receive
• > both costly, require a high income tax rate to break even

Question 11

How do in-kind transfers affect recipients’ behaviour? (+ examples)

Answer 11

They constrain it.

• vouchers (eg. food stamps in the US)
• direct payment (eg. housing benefit)
• direct provision of g&s (eg. health care, education, etc.)

Question 12

Reasons for in-kind transfers (3) and issue (1)

Answer 12

• paternalism
• specific egalitarianism: people would like to see that everyone receives adequate food, housing, etc.
• info asymmetry and better targeting: they allow targeting of recipients despite limited info (self-selection)
• it may constrain people, reducing their utility relative to receiving a cash transfer (eg. they want less food than stamps offer)