Think tank reveals Universal Credit at risk of backfiring and proposes opt-in payment solution

17 September 2012


Without significant improvements, new "laissez-faire" benefit reforms risk pushing families into debt and undermining the Government's own aims to boost individuals' personal responsibility and financial resilience, a think tank has said today (Monday 17 September).

In a comprehensive new report entitled Sink or Swim: the Impact of the Universal Credit, the Social Market Foundation interviewed low income families on how they would adjust to six specific reforms under the new Universal Credit, due to come into force next year, and conducted an analysis of existing evidence on the impact of these reforms. The SMF found that particular changes to the payment system of the Universal Credit could cause significant hardship for families on the lowest incomes.

Based on the research, the SMF recommends that families should be able to opt into an online budgeting tool under the new Universal Credit, which allows them to determine the frequency of payments, as well as earmark money for specific purposes like saving and housing costs.

The report found that:

  • Most households opposed the move from weekly or fortnightly payments to a monthly benefits payment, citing fears that they would run out of money at the end of the month.
  • Most households were against the proposal that social tenants manage their rental payments, instead of the money going direct to their social landlord, with concerns that it would land households in even more debt, and increase the risk of rental arrears and eviction.
  • People who lose their jobs could go for over a month with no income at all under the move to fixed monthly assessments, and this could be even longer if employers struggle to meet the new reporting requirements. This increases their chance of going into debt and could act as a deterrent for people to take temporary work.

The report also cites secondary evidence showing that four in ten claimants would find it harder to budget under a monthly payment and only half of those earning under £10,000 receive a monthly pay packet. The SMF says this shows that there is little evidence that moving to a monthly payment would help prepare claimants for going into work.

"The Government's laudable aim that Universal Credit should prepare families for work, boost their resilience to financial shocks, and simplify the system is at risk of backfiring," said Dr Nigel Keohane, SMF Deputy Director and co-author of the report.

"By moving to a single monthly payment for all benefits, the Government is removing the markers and aids that families currently rely on to budget effectively.  Our research shows that this will throw people in at the deep end leaving them either to sink or swim.

"This laissez-faire approach will create real problems not only for families themselves, but also for public service organisations, such as social landlords and childcare providers, that families will end up owing money to."

The SMF says that the Government's "exceptions policy", under which vulnerable individuals would be identified and channelled into special arrangements for benefits payments, is unlikely to solve the problem. Instead the think tank recommends that Universal Credit recipients should be able to opt into an online budgeting tool, which will allow them to determine the frequency of their payments.

"Instead of mandating monthly payments and centrally planning which families to exempt, the Government should allow low income families to take the decision themselves through an online budgeting tool," continued Dr Keohane. "This would allow the reforms to work with the grain of wider government objectives like personal responsibility and increased financial capability rather than working against them as the current system seems set to do."

Notes to Editors

  • The SMF's report, Sink or Swim: The impact of the Universal Credit is by Dr Nigel Keohane and Ryan Shorthouse
  • Ipsos MORI carried out the qualitative fieldwork on behalf of SMF between March and April 2012. This included:
    • Thirty in-depth interviews with low income families in three locations (Oldham, Brighton and London)
    • Follow-up group discussions with five participants at each location. Participants had all taken part in the interviews
  • Sink or Swim will be launched at an event in Westminster on 19 September. Speakers will include Shadow Minister for Employment Stephen Timms MP, The Guardian's Tom Clark, a representative from the DWP and Dr Nigel Keohane.
  • The reforms to the benefits system, Universal Credit, will be rolled out across the UK from 2013.
  • The Social Market Foundation (SMF) is a leading UK think tank, recently named UK Think Tank of The Year. The SMF develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach.  www.smf.co.uk

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