Benefits: efficiency vs legitimacy

The suggestion that wealthy pensioners should hand back benefits such as the winter fuel payment poses another question: why do pensioners get hypothecated benefits such as free TV licences, free bus travel or fuel payments? Wouldn't it be simpler to just raise pensions generally? And if some pensioners are too rich, just tax 'em.

The issue here is not simply one of administrative efficiency, but of basic welfare economics.

To see the point, take free bus travel. For those who uses buses, this equivalent to a cash handout equal to the cost of their bus tickets. But for those pensioners who don't use buses much a cash payment would be better. Net, the cash payment is better than free bus tickets. And free bus travel incurs another cost, as it can encourage pensioners who wouldn't otherwise use buses to do so, thus adding to congestion and fuel costs.

Econ 101, then, tells us that cash transfers are better than benefits in kind. So, why are pensioners paid ear-marked benefits instead?

One possibility is paternalistic. Winter fuel payments and free bus travel nudges pensioners to keep warm or to visit their family in a way that higher pensions alone would not. 

But I want to suggest another possibility. It arises from a tension in the very concept of government.

On the one hand, the function of government is to be impersonal - to lay down general laws that apply to everyone; this was emphasised by Hayek and is captured by old saws such as "justice is blind" and "the law is no respecter of persons." But on the other hand, this isn't sufficient to generate popular support - as its very impersonality creates a distance between government and citizens. Politicians who want to "connect" with voters will thus want to appear human and caring. And they do so more by making hypothecated payments, such as winter fuel payments, than by raising pensions generally.

There's an analogy here with the economics of Christmas. Joel Waldfogel has shown that giving gifts is less efficient (pdf) than giving cash, for much the same reason that benefits in kind are inferior to cash payments; at best, the gift gives us what we would have bought anyway, and at worst, we'd spend the £10 on something we'd like better than socks.

So, why do we give gifts rather than cash? It's because doing so seems more human, more thoughtful, more caring. In like fashion, winter fuel payments seem more caring than raising the basic pension.

If I'm right, we have a conflict between legitimacy and efficiency. Efficiency requires simple cash benefits, but these are cold-hearted compared to benefits in kind. I suspect this trade-off occurs in other fields. One reason why governments make interventions which libertarians (often rightly) think are inefficient - such as minimum wage laws or drug prohibitions - is that a government which concerned itself only with freedom and efficiency would be too cold and distant from voters to command much support.

And this in turn implies that a government of Hayekian classical liberalism, whatever its other merits, is just infeasible.

A complication: Winter fuel payments and free TV licences are fungible, in the sense that their recipients can use the extra income to spend on other things. This is why I call them hypothecated benefits rather than benefits in kind. I don't think this much affects my argument. 

Comments

[Bob E]

It is pretty damn obvious that, to take the standard £200 Winter Fuel payments as an example, it could just as easily be paid in cash as a £4 a week addition to the pension. However, if that were done, one of the "hidden benefits to the centre" of the otherwise presented as "human and caring" hypothecated big sum payments, such as winter fuel payments, is that once they are subsumed within the basic pension that, as they say, is it, but for so long as they remain hypothecated than can be, however unlikely a scenario anyone might consider it, turned off by cancelling the concession of Winter Fuel payments. They can obviously be halved or quarted, turned into a means tested benefit, much more easily for so long as they remain hypothecated.

[Julijuxtaposed]

"Wouldn't it be simpler to just raise pensions generally? And if some pensioners are too rich, just tax 'em." - No-brainer really, isn't it? Just pay pensioners a decent basic pension in the first place and the extras wouldn't be necessary. Much cheaper than means testing; more efficient implementation; no one gets missed out; keeps it universal and friendly - Both efficient and legitimate.

[Ralph Musgrave]

Free bus passes are particularly farcical because roughly a quarter of pensioners do not have a reasonable bus service available to them. At least in the case of Winter fuel payments, every pensioner actually gets the payment. I looked into this in some detail here:

http://mpra.ub.uni-muenchen.de/726/

[Luke]

Contra Ralph on free bus passes - at the risk of being slightly rude to pensioners, is there not some advantage in encouraging them onto buses and out of their cars? I don't know what the accident stats are, but it seems to be more difficult to get insurance after about 70/75. And, for better or worse, it's slightly means tested - it is a better benefit for the (generally) poorer carless than those with cars.

Of course, the safety point applies more strongly to 17-22 year old males.

[Nick Gray]

You’re talking a load of Durkheim... Institutional symbols of social solidarity and all that.

[PoachedWonk]

Its also a hidden progressive distributional effect, by favouring pensioners who use the bus, all those who do not, effectively forego this benefit of the pension system. Those who dont take the bus tend to own cars, which would mean they lose out. So the support cost of bus travel for the elderly is lower than a general rise in the pensions, while discriminating against those who are wealthier.

[Richard]

Here in Stafford most of the local bus service would disappear without the subsidy for pensioner usage. Another factor to include in the cost-benefit equation.

[Jon Lansman]

I think you are wrong here, Chris. The valiidity welfare economic argument against "hypothecated benefits" may well depend on how much they cost.

Concessionary travel is purchased by local authorities on the principle enshrined in law of "revenue foregone". In other words, it only costs what the beneficiaries would have spent anyway. All extra trips are free, except where there are additional costs to the operators. If the concessionary travel scheme is restricted to off-peak times, there may be operating savings rather than extra costs as passengers switch from peaks to off-peak times, when operating costs are lower (since many costs are determined by peak loadings). And if not, they may well cost less than the "value" of the free trips to users (which are normally greater than zero).

Winter fuel payments aren't really hypothecated anyway - they are just a cash payment. And free TV liceenses also cost only the revenue foregone by the government. If everyone would buy one of these, this amount to a progressive (i.e. redistributive from poor to rich) transfer payment since it is funded out of taxes of which the rich pay more.

[droog]

Arguing solely on the economic aspects of this topic ignores the issue of fraud and theft committed against the elderly. There's a security and crime component to this topic. More ring-fenced benefits reduces the risk of cash going to abusive relatives and/or dodgy tradespeople.

Taking care of the elderly almost implicitly means reducing the risk of them being targeted. Reducing their cash reduces the chance that people will take their pension money "because it's not theirs anyway; I'm only taking it from the tax man".

[Anonymous]

Yes, pensioners need protection from sharks, unscrupulous relatives, and classical liberal economists with their un-worldly theories.

Hypothecated benefits are to be preferred to cash

[droog]

I find that if your starting point is something Iain Duncan-Smith said you can travel for miles in the right direction and still find yourself deep in the Kingdom of Wronglandia.

(Contrary to popular opinion IDS is not the King of Wronglandia, but rather its most decorated Court Fool)

[Ralph Musgrave]

Jon Lansman, Isn’t your “off peak period” point is an argument for cut price fares in off peak periods, rather than for concessionary travel for pensioners?

The London Underground has an “off peak / on peak” differential doesn’t it?

[Lord]

There is another cause. While it is more efficient to monetize the benefit, doing so then decouples the value from the cost of the benefit and would generally only be adjusted by some index. Often this is used to reduce coverage over time by only partially accommodating price changes. Selecting out a specific benefit implies this will be covered regardless of changes in costs. This is important if it rises by more than average or is volatile.

[Mark Wadsworth]

"Wouldn't it be simpler to just raise pensions generally? And if some pensioners are too rich, just tax 'em."

Yes agreed of course.

"Winter fuel payments and free TV licences are fungible, in the sense that their recipients can use the extra income to spend on other things."

Also quite true, which is why they are not as daft as people make out. The really rich pensioners are paying as much in income tax etc as they receive in state pension and "fungible benefits", so that's that sorted.

The really terrible earmarked benefit is Housing Benefit paid to private landlords which merely serves to drive up house prices and rents. Far better to give unemployed people a higher dole.

[Chunter]

'It is pretty damn obvious that, to take the standard £200 Winter Fuel payments as an example, it could just as easily be paid in cash as a £4 a week addition to the pension.'

Except that the former is tax-free and the latter isn't.

[Bob E]

Chunter - fair point - a £4 a week addition in the context of "well we want to tax it now" or £5 if we want to ensure the majority still receive £200 "extra".

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