Outcomes and effects of social monetary benefits and benefits in kind

Wirkungsweisen und Effekte von Geldleistungen und Sachleistungen im Sozialbereich

PROJECT CO-ORDINATOR

Michael Fuchs

PROJECT TEAM AT THE EUROPEAN CENTRE

Kai Leichsenring, Bernd Marin, Georg Ruppe, Pieter Vanhuysse

BACKGROUND

The comparative social policy literature has traditionally argued that the continental European welfare states tend to be rather transfer(cash)-heavy whereas Nordic Europe is typically more service-oriented. However, in the last three decades there has been a clear and steady, if slow-moving, shift in social spending approaches everywhere in the OECD, whereby in-kind spending has gained ground in the expenditure mix of welfare states. Population aging, the move towards active rather than passive welfare measures, increased labour force participation among women and calls for gender equality have all contributed to this shift towards service spending.

While the literature in welfare economics generally suggests that social cash transfers are preferable for efficiency reasons in normal market settings, it also specifies a wide range of specific exceptions to this rule. Moreover, once considerations of social justice (equity) and political economy come into play, in-kind transfers may sometimes be the preferred mechanisms.Thus, there are a number of theoretical justifications for in-kind approaches. Below we review what we consider to be the most plausible theories.

The Samaritan’s dilemma was further developed with the example of poverty traps and similar welfare traps.When cash transfer recipients are entitled to receive cash benefits (such as poverty assistance, unemployment assistance, different kinds of subsidies, and so on) only if and when they are poor, this inherently undermines recipients’ incentives to work and raise their income: since they bear the costs of such efforts but not the benefits, they will implicitly face very high marginal tax rates. Since the city or state often cannot credibly commit to end benefits for the poor altogether, or does not want to do so for solidarity or charity reasons, this can lead to an undesirable “no-work, continuous-transfers” equilibrium. One solution to this Samaritan’s dilemma could be to invest directly in the education of the poor in an attempt to enhance their human capital.

Perhaps the most plausible explanation for the existence and widespread use of in-kind benefits can be subsumed under the term of paternalism. Such paternalistic arguments are most relevant when the in-kind benefit recipients are under-age children, and consequently the actual welfare benefit goes to parents. Parents may under certain circumstances not take full account of the utility of their children, and they will, almost by definition, not internalize the positive externalities deriving from the social returns to their children’s education or health. Suboptimal spending on children's education may lead not only to poorer prospects for these children, but also to slower future economic growth for society.This provides a strong rationale for in-kind intervention by the state or city on both efficiency and equity grounds. In-kind transfers can then also be a means for the state or city to implement intra-family redistribution from parents to children, by providing benefits to children in amounts greater than those that would have been purchased by parents out of the equivalent cash transfer. Key to the notion of paternalism is therefore the existence of so-called inter-dependent preferences and negative consumption externalities. If a social planner (the city or the state) or a group of social security contributors (the rich), meaningfully cares also about the consumption patterns of the poor, then the unconstrained consumption choices of the latter group may under certain circumstances create negative externalities for the former group.

In addition, in-kind benefits can have significant price effects – in both directions. The state or city can lower the price of the publicly provided good by pushing up its supply, and it may actively wish to do this in order to achieve policy objectives other than redistribution. Public housing policies that aim to preserve low or moderately priced housing even in expensive city environments are one example. However, in-kind benefit programmes may also increase prices. For instance, programmes that purchase and then redistribute food may be seen as a form of agricultural price support.The very existence of social services can at a later stage in the policy process also create important political feedback effects, essentially because in-kind programmes can create specific constituencies for these programmes above and beyond their immediate recipients, such as the producers or providers. For example, proposals to restructure or cut back the notorious US Food Stamp Program or to transform it from an in-kind to a cash transfer programme have been unsuccessful due to the opposition of a political coalition of agricultural interests (who have always supported the programme) and advocacy groups for the poor.

AIMS

The project will evaluate the effects of the different benefit types based on targets and their degree of realization as well as intended and non-intended outcomes.The study will comprise of three main parts: an international literature analysis on theoretical and empirical backgrounds, the development of a comparative framework of the effects of monetary benefits and benefits in kind, and the detailed analysis of benefits in the long-term care sector offered by the City of Vienna.

FINDINGS

The theoretical analysis indicates that there are very plausible rationales for the existence – and persistence over time – of in-kind transfers in real world policy settings.The different parameters spelled out in this analytical framework provide an analytical reference point for discussing the pros and cons of cash versus in-kind benefits in specific cases of social policy that are most prominent in the welfare provision of the City of Vienna.

The standard rates for the Minimum Income Benefit (“Bedarfsorientierte Mindestsicherung”) in Vienna (as in other Federal States in Austria) are relatively high in an international comparison. Beside material safeguarding also support for labour market (re)integration is offered within the framework of the Mindestsicherung. Potential alternatives towards more benefits in kind would be measures which provide increased work offers for special target groups as well as public support for access to cheap products of daily living. Measures of work integration are often used to avoid the trade-off between work incentives and material safeguarding as an alternative to a reduction of the benefit generosity. In principle, the introduction of increased work offers would be suitable, also employment potentials could be boosted with this measure. However, there is the risk of crowding out effects as well as of further exclusion of particularly disadvantaged groups. In contrast, the public support for access to products of daily living (by cutting monetary benefits at the same time) does not seem to be sustainable and does not cause any steering effects.

Within the framework of the Minimum Income Benefit in Vienna there are also increased standard rates for minor children in comparison to the other Federal States. In addition, with the Viennese Family Bonus (“Wiener Familienzuschuss”) as in other Federal States a means-tested supplementary monetary benefit for families with small children (aged 1 and 2 years) is available.An alternative would be more child-focused benefits in kind (e.g. special support, free lunch in schools, activity card for children, etc.). Basically, within the family area in Austria in an international comparison there would be backlog demand with regard to benefits in kind. For the United States several studies show that benefits in kind targeted at children show a number of positive effects.The empirical evidence available suggests that the most targeted programmes (educational promotion, school lunch programme, etc.) feature the best cost-benefit ratio. However, a potential risk for stigma and increased administrative efforts should be kept in mind.

The heating allowance in Vienna represents an optional one-time monetary benefit within the heating period.The target group consists of low-income people.The benefit amounts to € 100 per household.An alternative towards benefits in kind would be energy vouchers or long-distance heating and energy counseling for free. In order to avoid “heating cost traps” (additional fees due to switching on and off energy supply, too little resources and information for investments in energy-saving systems) and to reach further political targets (saving energy, environment), the introduction of benefits in kind seems to be worth considering.A high participation of entitled persons should be secured via personal visits and advisory service.The additional administrative efforts should be compensated by the given potential savings.

The area of benefits for people with long-term care needs is specifically challenging as the bulk of care is currently provided by informal carers, and both cash benefits and services in-kind are eventually facilitating a care arrangement that may or may not be supported by professionals.

The strengths of cash benefits, in particular if they provide relevant means to pay market prices, consist in high flexibility and independence of beneficiaries who are able to cope with personal assistants and related organisational tasks. However, it depends on definitions and accompanying measures to realise defined objectives and, in particular, support for informal carers.A specific challenge concerns quality assurance and control to avoid the main threat related to cash benefits as these may fuel the emergence of ‘black markets’ of care provision.

Strategies that point at boosting services in kind embrace the possibility to steer care processes by means of individual care planning (targeting) and related professional services.The latter may be adapted to the individual needs of users as well as to expectations of the informal care system. In any case, the service strategy creates a high demand of labour force that may be difficult to obtain in a short-term perspective.Another inconvenience consists in additional costs for organisation and management, and in the fact that structures, not only in residential care, are relatively difficult to adapt to changing needs and expectations of users.

Full study

OTHER INFORMATION

 

 

PROJECT DURATION

2011/08 – 2012/08

FUNDED BY

City of Vienna, MA 24