First edition published in Great Britain in 2015 Revised edition published in Great Britain in 2017 by Policy Press • University of Bristol • 1-9 Old Park Hill • Bristol BS2 8BB • UK • Tel +44 (0)117 954 5940 • e-mail pp-info@bristol.ac.uk • www.policypress.co.uk North American office: Policy Press • c/o The University of Chicago Press • 1427 East 60th Street • Chicago, IL 60637, USA • t: +1 773 702 7700 • f: +1 773-702-9756 • e:sales@press.uchicago.edu • www.press.uchicago.edu © Policy Press 2017 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book has been requested ISBN 978-1-4473-3647-1 paperback ISBN 978-1-4473-3649-5 ePub ISBN 978-1-4473-3650-1 Mobi ISBN 978-1-4473-3648-8 ePdf The right of John Hills to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 All rights reserved: no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of Policy Press The statements and opinions contained within this publication are solely those of the author and not of the University of Bristol or Policy Press The University of Bristol and Policy Press disclaim responsibility for any injury to persons or property resulting from any material published in this publication Policy Press works to counter discrimination on grounds of gender, race, disability, age and sexuality Cover design by Soapbox Design, London Reader’s Guide This book has been optimised for PDA Tables may have been presented to accommodate this devices’ limitations Image presentation is limited by this device’s limitations Good times, bad times The welfare myth of them and us Revised edition John Hills Contents List of figures Glossary and acronyms Acknowledgements Preface to the revised edition Introduction: ‘Them and us’ Are the poor too expensive? Redistribution and the welfare state The long view: Social policies and the life cycle It’s complicated: High frequency living Good years, bad years: Reacting to change The long wave: Wealth and retirement The longest wave: From generation to generation A moving backdrop: Economic crisis, cuts, growth and ageing Conclusion: Britain’s misunderstood welfare state Endnotes, figure sources and figure notes References To Tony, Howard and Julian List of figures 2.1 ‘Should government redistribute income from the better-off to those who are less well off?’ 2.2 ‘Would you say the gap between those with high incomes and those with low incomes is too large, about right or too small?’ 2.3 ‘Should it be the government’s responsibility to reduce income differences?’ 2.4 ‘Should government spend more money on welfare benefits for the poor, even if it leads to higher taxes?’ 2.5 Pen’s parade of incomes in the UK, 2012–13 2.6 Inequality in disposable incomes in industrialised countries, 2013 (Gini coefficients, %) 2.7 Distribution of household incomes, 2013–14 2.8 Inequality of market incomes in industrialised countries, 2013 (Gini coefficients, %) 2.9 Inequality before and after redistribution in the UK and Sweden, 2013 (Gini coefficients, %) 2.10 Taxes and benefits by household income group, 2013–14 2.11 Preferences for taxation and cash benefits, 2008 (%) 2.12 The poor cost more? Benefits and taxes going to poorest fifth of all households, 1979, 1996–97 and 2010–11 2.13 Net gain to poorest fifth of all and of non-retired households as a percentage of average market income 2.14 Shares of income going to each fifth of distribution, 1979 to 2010–11 3.1 Seebohm Rowntree’s ‘cycles of want and plenty’ in a labourer’s life, York, 1899 3.2 Schematic effects of Beveridge’s social insurance over the life cycle 3.3 Schematic effects of Beveridge’s social insurance and short-term income changes 3.4 Market income by age of household, 2005–06 3.5 Taxes and benefits by age of household, 2005–06 3.6 Market and disposable incomes by age of household, 2005–06 3.7 Poverty rates for different population groups, 1996–97 to 2014–15 3.8 Net incomes by age, 1997–98 (GB) and 2010–11 (UK) 3.9 Difference in median net income for each age group from overall median, 1997–98 and 2010–11 3.10 Range of net incomes by age, 2010–11 3.11 Overall balance of cuts and reforms after 2010 by age 3.12 Lifetime social benefits and taxes by income group (1991 tax and social security systems) 3.13 Projected lifetime receipts from health, education and social security, and taxes paid towards them by year of birth, 1901–1960, GB 4.1 Example case with regular weekly income: one-earner couple with two children and mortgage, 2003–04 4.2 Example case with unchanging circumstances but varying income: lone parent with one child and mortgage, 2003–04 4.3 Example case with changing circumstances: lone-parent tenant with one child, 2003–04 4.4 Highly stable cases: incomes in four-week periods, 2003–04 4.5 Highly erratic cases: incomes in four-week periods, 2003–04 4.6 Income trajectories followed by 93 families, 2003–04 4.7 Unemployment rate in the UK by duration 4.8 Proportion of claimants remaining on Jobseeker’s Allowance, spells starting in April 2007, 2009 and 2011 4.9 Components of income for a couple with one child, 2010–11 4.10 Combined tax and benefit withdrawal rates for a couple with one child, 2010–11 4.11 Net income by hours worked under current system and Universal Credit, lone parent with two children 5.1 Income-age trajectories for women born in 1966 from 1991 to 2007 5.2 Income trajectories in the first 10 years of BHPS compared to random patterns 5.3 Age-earnings profiles by gender, private sector employees with high and low education, UK (gross hourly wages in 2000 terms) 5.4 Average hourly wage-age trajectories for men and women born before 1955 by qualifications 5.5 Proportion of claimants remaining on Incapacity Benefit or Severe Disablement Allowance, spells starting in April 2004 and April 2007 5.6 Positions in income distributions of 1992 and 2006 of those who started in top and bottom tenths of distribution in 1991 5.7 Where people starting in different fifths of the income distribution spend their time over following years 5.8 Length of spell of poverty starting in one year 5.9 Patterns of poverty persistence over nine-year periods 5.10 Persistent low income 1991–94 to 2005–08 5.11 Total effective marginal tax and withdrawal rates on £1,000 differences in parental income – average for 27 universities 6.1 Pen’s parade of household wealth (excluding pensions), 2010–12, GB 6.2 Pen’s parade of household wealth (including pension rights), 2010–12, GB 6.3 Wealth by age of household, 2008–10, GB 6.4 Wealth in 1995 and 2005 by initial age of household 6.5 Projections for remaining years of life for men reaching 65 between 1955 and 2055 7.1 Six-year survival rates (%) for men and women aged over 60 by wealth 7.2 Differences in ‘school readiness’ (average position out of 100) by parental income 7.3 Factors related to differences in teachers’ assessment of children at the start of primary school 7.4 Children’s test scores (aged 5–16 in 2004) by parents’ socio-economic position and parents’ test scores in childhood (aged 10 in 1980) 7.5 Attainment gaps between children receiving free school meals (FSM) and other children at different ages, 2013–14, England 7.6 Trends in attainment gaps between children by background, by year of birth 7.7 GCSE results for girls (rank in national distribution) by area deprivation, 2010, England 7.8 University attended by background, UK-born students, UK universities 7.9 Class of degree achieved by background, UK-born students, UK universities 7.10 How much of the variation in children’s earnings is associated with parental income? (Men born in 1958 and 1970) 7.11 The Great Gatsby curve 7.12 Education earnings premiums and earnings mobility 8.1 Losses from general cuts in social benefits and services or general tax increases averaging £1,000 per household, 2013–14 8.2 Distributional effects of Labour’s tax and benefit reforms from 1997 to 2009 compared to systems adjusted with prices or incomes 8.3 Effects of reforms to direct taxes, tax credits and benefits, May 2010 to 2015–16 (compared to price-linked base) 8.4 Institute for Fiscal Studies estimates of effects of tax and benefit reforms, January 2010 to April 2015, by household type 8.5 HM Treasury estimates of distributional effects of tax, benefit and public service changes by 2015–16 8.6 Distributional effects of direct tax and benefit changes in six countries, 2008–13 8.7 Effects of fiscal drag and benefit erosion over 20 years, if real earnings grew by per cent per year 8.8 Effects of fiscal drag and benefit erosion if part of revenue used for tax cuts or benefit increases 8.9 ONS projections for percentage of population in each age range, 2011 and 2051 8.10 OBR long-term public spending projections, 2013 9.1 Spending on the welfare state, 2016–17 (£ billion) 9.2 Agreement that ‘social benefits and services make people lazy’, 2008 9.3 Commitment to work and benefit levels in different countries Glossary and acronyms BENEFIT EROSION Situation where benefits fall in value relative to average incomes, for instance, because they are increased each year in line only with prices, when incomes are growing in real terms CASH TRANSFERS Cash benefits and tax credits from government DECILE GROUP One-tenth of a population divided up in order of income, wealth, etc DEFINED BENEFIT Kind of pension where the amount paid depends on final salary (or other measure of earnings) rather than on investment returns DEFINED CONTRIBUTION Kind of pension where the amount paid depends on how much is paid in and on subsequent investment returns DISPOSABLE INCOME Income after direct taxes DIRECT TAXES Taxes paid by an individual or a household where the amount paid depends on their circumstances; they include Income Tax and National Insurance Contributions EFFECTIVE MARGINAL TAX RATE (OR DEDUCTION RATE) The proportion of any increase in earnings or other earnings that is taken in direct taxes and reduced means-tested benefits EQUIVALISED INCOME Income adjusted for family size FISCAL DRAG Situation where tax takes a greater proportion of people’s income because tax allowances and brackets grow more slowly than average incomes GINI COEFFICIENT Index of inequality (equal to zero if all households or individuals have the same and or 100 per cent if one person has everything and the rest nothing) INDEXATION Adjustment each year of benefits, tax allowances, etc, for inflation or to keep in line with earnings or income growth INDIRECT TAXES Taxes where the amount paid does not depend on an individual’s income, but on things such as spending on particular goods, and often collected via businesses, such as Value Added Tax MARKET INCOME Income from wages, private pensions, interest and other investment income, before taxation or state benefits MEDIAN The middle level of income, wealth, etc, in a population, with half having more and half having less NET INCOME Income after direct taxes PEN’S PARADE Way of showing income or wealth distribution, with the height of each column in proportion to the amount received by each group in order PERCENTILE Value separating each per cent of a population arranged in order of income, wealth, etc POVERTY TRAP Situation where people on low incomes gain little from any increase in gross income because of combined effects of taxes and reduced means-tested benefits PROGRESSIVE TAXATION Tax system where those with higher resources pay taxes that are a greater proportion of those resources QUINTILE GROUP One-fifth of a population divided up in order of income, wealth, etc REGRESSIVE TAXATION ... helped them with most of the rest of the purchase of their Stockport house, with part of an inheritance from his grandmother) and the £100 a week the nursery charged And between them, they seemed... device’s limitations Good times, bad times The welfare myth of them and us Revised edition John Hills Contents List of figures Glossary and acronyms Acknowledgements Preface to the revised edition... invented them And that is true of the stories at the start of each chapter describing what has happened to both families and to their children and grandchildren a quarter of a century later As the