Comprehensive Review of Expenditure

Comprehensive Review of Expenditure September 2011

Table of Contents Chapter 1 Overview... 3 Chapter 2 Chapter 3 The economic and social role of social protection expenditure and the review of national poverty targets... 16 Overall approach to expenditure reductions and key structural changes... 27 Chapter 4 Social Insurance System... 44 Chapter 5 Control... 55 Chapter 6 Children and Families... 74 Chapter 7 People of Working Age Corporate and Policy Overview... 96 Chapter 8 People of Working Age Schemes and Options for Change...113 Chapter 9 Retired and Older People...202 Chapter 10 Administrative Budget...219 Chapter 11 Spend to Save...231 Chapter 12 Agencies...239 Appendices...249 1. Budget measures 2009, 2010, 2011 2. Programme for Government Commitments 3. Recipient Numbers Statistical Report, July 2011 4. EU / ECB / IMF Programme 5. Replacement Rates 6. Additional EU and income composition material 2

Chapter 1 Overview Introduction 1. The overall purpose of the Comprehensive Review of Expenditure is to assess the effectiveness and value for money of spending programmes across all Departments and Agencies and provide Government with a set of decision options, so it can: i. Meet overall fiscal consolidation objectives, both as regards spending and numbers reduction targets; ii. Re-align spending with the Programme for Government priorities; and iii. Consider new ways of achieving Government objectives in the context of public sector reform. 2. This Review represents the Department of Social Protection s (DSP) contribution to the overall Comprehensive Review of Expenditure. The Review is wide ranging given the scale and complexity of DSP expenditure, the key role it plays in the wider economy and its importance in any consideration of measures which will contribute to fiscal consolidation. A large number of options for changes in schemes and services have been identified by scheme (or blocks of schemes). These are not being advanced as the recommendations of the Department but as items which might be technically feasible within the parameters of given schemes or across schemes. However, options which are consistent with the sustainable structural reform of the system are specifically highlighted. The particular range of measures adopted is, of course, a matter of policy to be decided by Government. 3. The options set out in the report should be seen in the context of the very significant programme of change which has been and is ongoing in DSP, for example: Budgetary Changes 4. A series of changes to Social Welfare schemes have already been introduced in Budgets 2009, 2010 and 2011, for example: Budget 2009 halved the entitlement to Child Benefit for 18 year olds, introduced a new personal rate for Jobseeker claimants aged 18 and 19 years and limited the payment of Illness Benefit to two years duration, Budget 2010 and Budget 2011, respectively provided for a general reduction in weekly payment rates for all recipients aged under 66 (mainly 16.30 per recipient over the two Budgets). Appendix 1 sets out full details of DSP Measures in Budgets 2009 to 2011. Organisational Transformation 5. The merger of DSP with FÁS and the Community Welfare Service is underway and will form a new organisation focusing, not only on income support but also helping clients, on a 3

case managed basis, to reduce their dependence on that support. This presents DSP with the opportunity to drive efficiencies, while at the same time building service capability. 6. This will underpin the development of new National Employment and Entitlements Service (NEES) announced by the Minister for Social Protection on 3 rd August 2011 (as provided for in the Programme for Government). The NEES will integrate the employment and benefit payment services within DSP thereby playing a vital role in re-building the economy. In this regard, DSP has also recently launched two new employment related schemes Tús and JobBridge the National Internship Scheme. 7. In 2011, DSP assumed administrative responsibility from the Department of Enterprise, Trade and Innovation (D/ETI) for the Redundancy and Insolvency Payments Scheme. 8. In 2010, DSP assumed responsibility from the Department of Community, Equality and Gaeltacht Affairs for the Rural Social Scheme and Community Services Programme. 9. DSP has responsibility for the Civil Registration Service which provides for the registrations of births, stillbirths, adoptions, deaths and marriages in the State and, from 2011, provides for the registration of civil partnerships. The service is managed by the General Register Office (GRO). 10. DSP is engaged in an ongoing programme of continuous improvement to enable the organisation to work more efficiently and effectively, provide an improved client service and maximise the capabilities of DSP staff. This involves the redesign of office systems, business processes, procedures and work practices and the introduction of new technology solutions. This positions DSP to better adapt to political priorities and changing client needs, and to improve productivity in the administration of welfare schemes and services. These initiatives will also enhance DSP systems for control of fraud and abuse and improve management and reporting capabilities. Policy Commitments 11. Policy commitments in the Programme for Government which are specifically relevant to DSP expenditure are listed in Appendix 2. The critical importance of introducing structural change generally is emphasised in Chapter 3. In particular, the Memorandum of Understanding with the EU/ECB/IMF Funding Group includes a specific commitment that DSP will build on its recent studies on working age payments, child income support and Disability Allowance with a view to producing a comprehensive programme of structured reforms that can help better targeting social support to those on lower incomes, and ensure that work pays for welfare recipients. 1 These issues are dealt with in more detail in Chapters 6 and 7. A progress report will be made by end December 2011 and a programme of reforms will be submitted to Government at the end of the first quarter of 2012, informed by the outcome of this Comprehensive Review of Expenditure. Overview of the Social Welfare System 1 The main commitments in the MOU are detailed in Appendix 4. 4

12. Ireland s social welfare system is: contingency based, delivered predominately through statutory schemes supplemented by some administrative schemes and funded very broadly 60:40 through general taxation and contributions to the Social Insurance Fund (SIF), (see Chapter 4 on the Social Insurance System). 13. In general, to qualify for a primary weekly social welfare payment a person must experience a defined contingency, such as unemployment or lone parenthood, and satisfy either a social insurance contribution requirement (for a PRSI based payment) or a means test (for payments funded through general taxation). 14. There is both an insurance-based and a means-tested payment in respect of many contingencies, including unemployment, widowhood, old age etc. The main exceptions to the contingency model are the Child Benefit scheme, which is virtually universal and Supplementary Welfare Allowance (SWA), which is a means tested general guarantee of minimum income not linked to any specific contingency. 15. In addition, the Household Benefits Package is available to all persons aged 70 and over, regardless of social welfare status or the composition of the household. Finally, the Respite Care Grant is payable to all persons providing full time care and attention without a means test or the necessity to be in receipt of a carer s weekly payment from DSP. Typical Payment Rates 16. The most typical social welfare payment rate is the 188 per week personal rate paid on most schemes to people of working age. For example, this is what the majority of people on the Live Register receive in Jobseeker s Benefit or Jobseeker s Allowance payments. It is also the most typical rate of payment issued to people on Disability Allowance, Blind Pension, One-Parent Family Payment, Illness Benefit, Farm Assist, Pre-Retirement Allowance and Widow s, Widower s or Surviving Civil Partner (Non Contributory) Pension. For most social welfare recipients, this comprises their total income from the social welfare system. 17. A wide variety of Employment Supports are operated by DSP, including the Community Employment Programme, Family Income Supplement, Farm Assist, Back to Work Allowance, Back to Work Enterprise Allowance and most recently the JobBridge scheme. See Chapter 8 for full details of all employment supports operated by DSP. 18. In a minority of cases, increases are paid in respect of a dependent adult (spouse or partner), typically 124.80 per week, and/ or one or more dependent children at a payment rate of 29.80 per week in respect of each child. Appendix 3 details the numbers of recipients, qualified adults and qualified children by scheme as at July 2011. Additional payments, sometimes known as secondary benefits, may also be paid in certain circumstances. These include Household Benefits, Fuel Allowance, Living Alone Allowance, Over 80 Allowance, Rent Supplement and Mortgage Interest Supplement. 5

19. A recurring theme in public debate is whether people on the Live Register have a financial incentive to work given the level of wages available in the economy and the level of social welfare payments made to people on the Register. The following information gives some background in that regard. Half (50%) of the people on the Live Register receive less than the maximum personal weekly rate: o 20% or 89,000 receive no payment o 15% or 70,000 receive payment for part of the week only o A further 15% or 70,000 others receive Jobseeker s Allowance or Jobseeker s Benefit of less than the maximum personal rate of 188.00. People on the Live Register may also qualify for other payments, provided they meet the qualification conditions for those payments, notably Rent Supplement or Mortgage Interest Supplement however, these are a small minority of the totals on the Live Register: o 10% or 46,000 are getting Rent Supplement o 2% or 10,500 are getting Mortgage Interest Supplement 20. The great majority of people on the Live Register have a strong financial incentive to work and significant numbers leave the Register each month. Nonetheless, despite the cash support provided by schemes such as Family Income Supplement, some households perceive particular difficulties in moving off the Register e.g. families who receive Rent or Mortgage Interest Supplement in addition to their weekly Jobseeker s Allowance or Benefit. Replacement rates across a range of family situations are detailed in Appendix 5. Pressures on the Social Welfare System 21. The following charts demonstrate the increasing pressures on the Social Welfare system in terms of increasing demand resulting from the increased numbers of older people and children, and the significant increase in the percentage of the working population in receipt of a weekly primary Social Welfare payment. For example, the average weekly number of recipients of SPC/SPT is estimated to increase by circa 19,500 in 2012 over the projected out-turn for 2011. The resultant additional expenditure required is estimated at over 200 million. 6

Chart 1.3: Births registered by Year 2000 2009 Key point; almost all children benefit from Child Benefit and approximately 41% are qualified children on a primary weekly welfare payment. Overview of the Department Scale of Business 22. DSP will spend over 20.6 billion on schemes, services and administration in 2011, accounting for almost 40% of gross current voted expenditure. Despite the increased number of people receiving social welfare payments, DSP expects spending in 2011 to be below the 21.35 billion 2 spent in 2010. The high-level composition of this total is outlined in Tables 1.4 and 1.5 at the end of this Chapter. 23. Some 1.4 million people each week receive a social welfare payment and, when qualified adults and children are included, a total of almost 2.1 million people benefit from weekly payments. Over 600,000 families receive child benefit payments in respect of over 1.2 million children each month. The activities of DSP include: Operating some 72 separate schemes and services; Processing applications: over 2 million applications cleared in 2010; Undertaking control reviews, 935,000 in 2010; Dealing with over 6.5 million telephone calls in 2010; Making over 85 million payments in 2010; Processing applications for Personal Public Service Numbers for clients from some 140 countries and Processing employee PRSI returns (2.97 million in 2010). 2 21.35 billion spent in 2010 includes expenditure on FÁS Employment and Integration supports and associated administration costs. 8

24. Service is provided from 11 headquarter buildings in Dublin, 9 decentralised offices, 63 Local Offices, 62 Branch Offices (operated by agents on a contract basis) and 61 other offices throughout the country. Statutory Agencies under the aegis of DSP 25. The Citizens Information Board is the national agency responsible for supporting the provision of information, advice and advocacy on social services and for the provision of the Money Advice and Budgeting Service (MABS). www.citizensinformationboard.ie 26. The Pensions Board is responsible for overseeing the implementation of the Pensions Act which concerns the regulation of occupational pensions and Personal Retirement Savings Accounts. The Board also advises the Minister in relation to pension policy. www.pensionsboard.ie 27. The Office of the Pensions Ombudsman investigates complaints of financial losses, due to maladministration and disputes of fact or law, in relation to occupational pension schemes and Personal Retirement Savings Accounts. The Pensions Ombudsman is a statutory officer and exercises his functions independently. www.pensionsombudsman.ie 28. In 2009, DSP integrated the Combat Poverty Agency and the Office for Social Inclusion integrate to form a new Division which has overall responsibility for advising Government on the strategies for social inclusion, and for supporting their implementation. 29. In 2010, the Government reassigned responsibility for the Family Support Agency from DSP to the Department of Community, Equality and Gaeltacht Affairs. Service Delivery 30. Most social welfare payments are delivered directly by DSP. DSP pays agency fees to An Post, in respect of the outsourcing of payment provision at Post Offices, and to the Revenue Commissioners, in respect of the insourcing of collection of the PRSI contributions. 31. The payment of 85 million payments per year is underpinned by DSP s Information Communications Technology (ICT) system which is one of the largest ICT operations in Ireland. 32. The administrative effort undertaken by DSP s staff in carrying out the range of day to day activities set out above is very significant. The majority of that effort is associated with: Processing claims for new clients; Administering schemes which have a high level of churn whereby claimants leave and re enter the scheme (e.g. some workers in the education sector move on and off the Live Register on a number of occasions each year); Maintaining the claimload (claims in payment) for each scheme (e.g. changing client information, managing overpayments, signing clients on the Live Register and reviewing claims); and providing a robust and dynamic information service 9

33. DSP s broad-ranging and comprehensive control strategy which aims to minimise fraud and eliminate incorrect payments also requires a very significant administrative effort. Options for Change set out in this report Scaling Back Expenditure on Schemes 34. The types of changes that could be considered tend to fall into a number of categories, including in no particular order of priority: Reductions in the rates of payment. Tightening the eligibility criteria for a scheme such as more stringent social insurance contribution requirements; The introduction of means testing in relation to social insurance based payments; Changes to the means testing arrangements for social assistance payments; Adjustments to allowances other than primary payments, such as the Household Benefits Scheme and Fuel Allowance; A range of changes specific to a particular scheme or groups of schemes. 35. It should be noted that some of the options identified in this Review are mutually exclusive while others interact with each other (often in a complex way). Accordingly, where a number of options are shown in respect of a given scheme, the cumulative savings may not be the sum of the savings shown for each individual measure. Finally, some options may conflict with wider Government policies e.g. to promote employment, education or training. It should be noted that any savings identified in this Review may require revision following the finalisation of the Departmental Existing Level of Service Estimates for 2012. Abolishing Schemes 36. Consideration was also given to the possible abolition of schemes. This is, in general, quite a complicated issue for a range of reasons, including, in no particular order of priority: The role of most weekly schemes in providing weekly income maintenance to persons who have no or very little income, the poverty impact of same and the economic stabiliser effect is dealt with in detail in Chapter 2; The underlying and long standing social insurance principle that, on foot of payment of contributions by employees/employers, protection is provided on a non-means tested basis if and when a range of contingencies occur e.g. illness or unemployment; In the event of the abolition of a given social insurance payment, persons would have access to a social assistance payment for the equivalent contingency, e.g. Jobseeker s Allowance in the case of unemployment. While not all would qualify due to means testing, many would; thereby reducing the overall savings quite significantly; Greater reliance on means testing would have significant administrative resource implications, particularly in the context of high unemployment levels; and In the event of the abolition of a social assistance payment, it is probable that all potential recipients of the given scheme would qualify under another contingency or for Supplementary Welfare Allowance (SWA). Savings, accordingly, are likely to be very limited. 10

37. Other options include the merging of schemes or adjustment of the range of application of certain schemes, for example by merging Blind Pension with Disability Allowance or by the introduction of a Single Working Age payment. Public Submissions 38. The Minister for Public Expenditure & Reform initiated a public consultation process to provide input into the Comprehensive Review of Expenditure. Members of the public were invited to submit proposals for potential savings, reform and efficiencies in the delivery of public services. Proposals in relation to DSP schemes and services were considered by the respective scheme and policy areas in the department as part of this Review process. Cross Cutting Issues 39. The already wide ranging responsibilities of DSP mean that any changes to programmes operated by other Government Departments may impact on DSP. DSP is committed to working with other Departments to explore cross cutting issues in particular to ensure that where any transfer of functions is involved, savings identified in one area take account of costs incurred in the other. Examples of these issues are: Procurement policy; Implementation of shared services / outsourcing; Implementation of egovernment; Coordination / synergies the area of debt collection; Centralised identity management; Assessment of means for public service purposes; Subsidised publicly provided transport; Regional structures and services delivery; Examination of agency funding multiple exchequer sources grant shopping ; Social housing supports (including tax-related); and Identification and elimination of disincentives to labour activation. 40. It is important to note that any savings arising in one Department / Agency from transferring a specific function will likely be offset by the costs incurred by the Department into which the function transfers. Consideration of DSP taking on additional functions should be mindful of the transformation programme already underway to fully integrate a large number of programmes and schemes which transferred to DSP in 2010 and 2011. Specifically, the NEES will integrate the provision of employment services and benefit payment services within DSP and in so doing to ensure that the payment of income supports to people who do not have a job is directly linked to the equally, if not more important, task of supporting people in their pursuit of employment and related opportunities and improving their life chances. 41. Managing the change process required to develop the NEES, in such a manner so as to maintain the continuity of existing services while building new service capability, will present a key challenge to DSP management and staff involved in implementing the change process and will require additional administrative resources in order to fully realise the synergies to be derived from merging three streams into an entirely new service. 11

42. There is also a range of cross cutting issues for which DSP would have primary responsibility and which are or will be addressed in this report, including the Cross Cutting Issues provided by DSP to the Department of Public Expenditure and Reform (DPER), namely: i. Payment to carers; ii. iii. iv. Rent and Mortgage Interest Supplement; Fuel Allowance; and Means testing arrangements. Deliverability of Change 43. The deliverability of changes is critical, both in terms of the legislative and logistic requirements and public acceptability generally. The withdrawal of payments from individuals and households that are currently receiving payments may be perceived as unfair even by those who accept the necessity for a policy change in that the change may involve a very significant reduction in income for affected persons. For example, a discontinuation of entitlement to a half-rate illness or jobseeker s payment (payable at the moment in conjunction with another full rate payment) which applied to persons already benefiting from this arrangement would mean a weekly loss of up to 94 per week for up to 12 months. 44. Applying changes to new entrants only reduces the savings in the period immediately after implementation. The proportion of claims eventually affected, and the length of time that elapses before they are affected, varies considerably from scheme to scheme. Some schemes e.g. pensions and disability related schemes, have a relatively low level of turnover. On the other hand, there is a considerable level of churn in many schemes and consequently, rules affecting new entrants only will affect most or all recipients within a reasonable period. This is particularly so in schemes with prescribed end points (such as Jobseeker s Benefit, Illness Benefit and most obviously Maternity Benefit) but is also true in schemes with no prescribed end points, such as Jobseeker s Allowance, Supplementary Welfare Allowance and Rent Supplement. However, of critical importance in this regard is the definition of what constitutes a new entrant. The implications of applying changes to new entrants only is further discussed in Chapter 3 in the context of introductory new lower rates of payment for new entrants. 45. However, the saving or preservation of existing levels of entitlement for existing recipients in the latter type schemes means that, effectively, two different sub-schemes would exist often for a considerable period. This is undesirable from an administrative and equity point of view and therefore, consideration should be given to prescribing an end-date (or sunset clause) for any interim arrangements that preserve the entitlements of existing recipients. In addition, changes that are difficult to implement for logistics reasons, however, apparently desirable from a policy or other perspective, will simply not deliver savings in the short term. 12

Format of this Report 46. This Review has examined the scope for change both in individual schemes, grouped by Programme, and in relation to issues which transcend individual schemes and Programmes. With regard to the latter, Chapter 2 deals with the economic and social role of social protection expenditure. 47. Chapter 3 sets out the broad principles which should underpin the review of DSP expenditure and the development of options to curtail such expenditure. It also deals with a number of specific issues which transcend individual schemes such as: Changes in rates of payment; Taxation and/or income testing of payments not currently subject to either (mainly Child Benefit, but other possibilities also including the taxation of the Illness Benefit and Jobseeker s Benefit where such does not currently apply); Concurrent receipt of more than one primary payment e.g. half-rate Carer s Allowance, half-rate Jobseeker s Benefit or Illness Benefit paid with One-Parent Family Payment or Widow/er s payments; The payment of Family Income Supplement concurrently with some primary welfare payments as well as the concurrent entitlement to some primary welfare payments for persons in receipt of schemes operated by other bodies such as the Community Employment scheme; Means testing issues; and Non primary (secondary) payments e.g. Household Benefits, Rent Supplement, Fuel Allowance, Treatment Benefits, Respite Care Grant and Bereavement Grant. 48. PRSI and the Social Insurance Fund are dealt with in Chapter 4. 49. Issues relating to the control of fraud and abuse are dealt with in Chapter 5. 50. Issues relating to the child income support Programme are dealt with in Chapter 6. 51. Issues relating to Working Age schemes policy are dealt with in Chapter 7. 52. Chapter 8 describes Working Age schemes and puts forward possible options for change. This comprises the majority of DSP s schemes. This Working Age programme is divided into sub-programmes to facilitate consideration of the range of issues arising in this complex and diverse programme. 53. Issues relating to supports for retired and older people are dealt with in Chapter 9. 54. Issues relating to administrative expenditure are dealt with in Chapter 10. 55. Spend to Save options are outlined in Chapter 11. 56. The Department s agencies are considered in Chapter 12. 13

Table 1.4: Gross expenditure for Vote 38 and Social Insurance Fund 2010 2011 % change Provisional REV Estimate on 2010 Provisional Outturn million Outturn million Gross Vote 38 expenditure 13,920.1 13,649.1-1.9% Less Social Insurance Fund (SIF) transfers: Subvention to SIF 1,854.6 178.2 1,906.2 177.3 2.8% -.0.5% Administration expenses recovered from SIF Adjusted Vote 38 expenditure 11,887.3 11,565.6-2.7% Social Insurance Fund Expenditure 9,462.8 9,054.6-4.3% Total DSP Gross Expenditure 21,350.1 20,620.2-3.4% Appropriations in Aid -38.6-44.4 15.0% (other than DSP Social Insurance Fund Admin) Net DSP Expenditure 21,311.5 20,575.8-3.5% Of which Exchequer Pay 230.6 234.0 1.5% No of public service employees included in Exchequer pay above. (full time equivalent number) - Department 4,949 - Agencies 86 14

Table 1.5: Breakdown of Gross Expenditure by Programme. Programme Name 2010 2011 % change Provisional REV in 2011 on Outturn Estimate 2010 million million outturn 2011 % of overall DSP Gross Expenditure 1. Children 3,198.3 3,069.1-4.0% 14.9% 2. People of working age 12,007.7 11,291.4-6.0% 54.8% 3. Retired and older people 6,007.2 6,092.0 1.4% 29.5% 4. Customer Information Management 9.2 14.3 55.4% 0.1% 5. Operational Capabilities 127.6 153.3 20.1% 0.7% Gross DSP Expenditure 21,350.0 20,620.1-3.4% 100% 15

Chapter 2 The economic and social role of social protection expenditure and the review of national poverty targets Introduction 1. Social protection, along with the tax system, plays a key role in redistributing resources between income groups and over the lifecycle The design of social transfers is crucial in determining the way, and the extent to which, income inequalities are moderated and resources are distributed to those in poverty. Important features include the composition of social transfers and the degree of targeting. This role is intensified during a period of economic recession, when social transfers help to cushion households against the effects of unemployment and falling incomes. 2. Accordingly, the necessity to reduce overall Government current expenditure must be balanced against the primary redistributive role of the social protection system. While DSP is being transformed into a new organisation focused on helping clients to reduce dependence on income support, it has to be recognised that, in the short to medium term, the income supports provided will play a crucial role in the lives of clients and in helping to partially offset the effect of the downturn on the wider economy. In this regard, the options chosen to reduce overall expenditure will need to be carefully balanced having regard to any potential poverty impacts and the effect on demand in the wider economy. While there are a wide range of options to reduce social protection expenditure, choosing specific policy instruments to achieve that balance presents particular challenges. 3. This chapter begins by examining the role of social protection in stabilising the social and economic impacts of the economic crisis. It then reviews recent poverty trends and progress towards the national poverty target. Finally, it examines the role of social transfers: In reducing income inequality and the differing performance of the components of social transfers in this regard; and In reducing poverty risks, and in a comparative context and over time; The stabilising effect of social protection 4. The economic crisis has had a major impact on disposable household incomes and on private consumption. This is especially evident through the reduction in consumer demand across all sectors of the economy, thereby creating knock-on effects in terms of higher unemployment and reduced government revenue. In this context, expenditure on social protection can play an important role in stabilising the economy by supporting the overall demand for goods and services in the domestic economy. In turn, this supporting role can contribute to mitigating the societal consequences of the recession. 5. The last Household Budget Survey (2004/5) shows that consumption of low income households exceeds income received, while higher income households have an excess of income over disposable income and thus save any remaining balance; 16

Table 2.1: Household Income and Consumption 2004/2005 Income and consumption of households in 2004/2005 - top and bottom deciles and State < 190 < 312 < 2019 > 2019 State Gross income 159.20 246.28 1,737.43 2,831.92 987.96 Disposable income (1) 158.99 244.65 1,420.76 2,232.01 842.98 State transfers (1a) 140.68 184.04 66.48 57.29 125.41 % of benefit income (1a/1) 88.5% 75.2% 4.7% 2.6% 14.9% Total consumption (2) 217.17 304.39 1,216.10 1,656.82 787.12 Income - consumption (1-2=3) - 58.18-59.74 204.66 575.19 55.86 Income - consumption / Income (3/1) -36.6% -24.4% 14.4% 25.8% 6.6% Source; 2004/5 Household Budget Survey, CSO 6. Redistribution from higher income to lower income households has a well known economic effect, in that overall consumption increases as a result of income transfers. The stabilising/ multiplier effect of transfers on consumption is likely to be much stronger at present than in 2004/5 for two reasons: Gross household savings were roughly 10% at the time of the HBS, and had increased to over 16% by 2009. Savings are still likely to be highly concentrated at higher income levels; and Based on the results of the 2009 SILC survey, social welfare is the dominant income source in the bottom half of the income distribution, which reflects the increase in the older population and increased working age dependency set out in the introduction. For example, 50% and 40% of gross incomes in deciles 4 and 5 were from social transfers in 2009 compared to 35% and 20% at the time of the HBS. 7. This effect also clearly works in reverse, in that reduced social welfare incomes have a much higher impact on consumption than reduced incomes at higher levels. Increased household consumption is recognised as being essential for economic recovery, and social welfare plays an important part in maintaining demand for goods and services. 8. The stabilising effect of social protection is also examined in a recent study for the European Parliament on the role of social protection as an economic stabiliser (IZA Research Report, 2010). This estimates that half of a large unemployment shock is absorbed by the welfare system in the EU, compared to only 34% in the US. The cushioning of disposable income 17

leads to a demand stabilisation of up to 30% in the EU, compared to 20% in the US. This conclusion is also endorsed in the 2010 Joint Report on Social Protection and Social Inclusion by the European Commission and the Social Protection Committee: firm policy interventions and automatic stabilisers embedded in European welfare states have limited the economic and social impact of the crisis. 9. Despite this, the main policy focus to-date in Ireland has been on taxes and fiscal stimulus in stabilising the economy. For example, the car scrappage scheme, the reduction in employer PRSI and the reduction in VAT rates for tourism sector. Meanwhile, the policy agenda for social protection has been to see it as exclusively an instrument to reduce government expenditure rather than to cushion the economic downturn. Also, a key policy driver is the desire to reduce the perceived disincentive effects of social protection by increasing conditionality, curtailing benefits and restricting entitlement. 10. In many European countries, discretionary measures have been introduced to further cushion economies, along with traditional social protection measures. Examples of discretionary measures include easier access to welfare benefits or improved payment rates for redundant workers. In addition, some countries have expanded public work schemes to prevent dismissals. A third approach has been to reinforce activation policies such as job placement and training schemes. Ireland has also introduced several activation programmes focussed on retaining people at work. The impact of social transfers on at-risk-of-poverty 11. The redistributive effect of social transfers can also be measured by their impact on poverty. This is directly relevant to policy as the Irish Government has set a national poverty target to reduce the rate of consistent poverty to between 2-4% by 2012 and to eliminate it by 2016, from a baseline rate of 7% in 2005. 3 The impact of social transfers cannot be assessed in relation to consistent poverty, rather in relation to the income component of the measure, the at-risk-of-poverty rate. 12. The table below details the impact of social transfer on the at-risk-of-poverty rate in 2009. It distinguishes between social transfers, which exclude pensions for old age and survivors and all social transfers. It is useful to exclude pensions in the analysis since their role is not only to redistribute resources across income groups, but also between generations. The impact of social transfers is measured in two ways: the percentage point reduction in the at-risk-ofpoverty rate and the overall reduction in the baseline rate (referred to as the poverty reduction effect). The latter is especially useful for comparative purposes. 3 National Action Plan for Social Inclusion 2007-2016. 18

Table 2.2: Impact of social transfers on at-risk-of-poverty (ARoP) rate, 2009 (SILC 2009) ARoP rate excluding all STs % ARoP rate including pensions & excluding all other STs, % ARoP rate including all STs % Poverty reduction effect of STs (including pensions) % Poverty reduction effect of STs (excluding pensions) % Total population 46.2 36.0 14.1 69 61 Children 47.3 46.2 18.6 61 60 Working age 38.3 34.3 13.0 66 62 Older people 88.0 21.7 9.6 89 56 13. For the whole population, the at-risk-of-poverty rate is reduced from 46.2% (excluding all social transfers) and from 36% (including pensions) to 14.1%. This is a reduction of 32 percentage points including pensions and 22 percentage points excluding pensions. In relative terms, the poverty reduction of social transfers in the state is 69% (with pensions) and 61% (excluding pensions). 14. For children, the at-risk-of-poverty rate is reduced from 47.3%/46.2% to 18.6%, a reduction of 29-28 percentage points. The poverty reduction of social transfers is thus around 60 per cent, with or without pensions. The at-risk-of-poverty rate for working age people is reduced by between 25 and 21 percentage points, giving a poverty reduction effect of 69% with pensions and 62% without. 15. For older people, the at-risk-of-poverty rate falls from 88% (without pensions) to 9.6% and from 21.7% with pensions to 9.6%. The poverty reduction effect of all social transfers for older people is 89%, or 56% excluding pensions. The evolution of the poverty reduction effect of social transfers 2003-2009 16. The trends in the poverty reduction effect of social transfers between 2001 and 2009 are charted below. This coincides with the significant welfare improvements delivered between 2002 and 2007 under Building an Inclusive Society and the more modest increases in 2008 and 2009 under the National Action Plan for Social Inclusion. 17. In 2001, the poverty reduction effect of social transfers (excluding pensions) was 26%. By 2007, this had increased to 50% and by 2009 had reached 61%. The latter period shows in particular the important role that the welfare system played in cushioning the effect of rising unemployment and falling incomes (as reflected in the underlying increase in the at-risk-ofpoverty rate before social transfers (excluding pensions) in these two years (from 33 to 36%). 19

21. The EU has recently adopted the combination of three indicators to identify the population at risk of poverty and exclusion, for the purposes of setting the EU poverty target in the Europe 2020 Strategy (these are at-risk-of-poverty, material deprivation, and low-work intensity). Ireland has adopted the EU convention of combining its national indicators of poverty for the purposes of the EU target. Both sets of indicators identify the same proportion of the population - 26% - as being at risk of poverty and exclusion. There are some compositional differences between the two sets of indicators. More details on comparisons of the Irish and EU poverty measures are given in Appendix 6. Poverty, lifecycle groups and vulnerable households 22. The consistent poverty rate and the share of the poverty population for lifecycle groups and vulnerable households are set out in Table 2.6. This shows that, among lifecycle groups, children face the highest rate of consistent poverty at 8.7%, 1.6 times the norm. In addition, children represent a large share (42%) of the population in consistent poverty. Of added significance are the negative effects of poverty on childhood development and their legacy into adulthood. The general poverty rate for people of working age is lower than the norm. There are nonetheless two working age groups with higher poverty rates: the unemployed at 11.5% and the disabled unemployed, at 8.8%. Collectively, the unemployed account for almost a quarter of those in consistent poverty. In general, people with a disability have a poverty rate in proportion t with the overall population. Finally, the poverty rate of older people is the lowest at 1.1%, and represents just 2% of the total population. Table 2.6: Consistent poverty rates and poverty share for lifecycle groups and vulnerable households (2009) 4 Poverty Rate % Share of poverty population 5 % Group Rate relative to average Children 8.7 1.6 42 People of working age 4.9 0.9 56 unemployed 11.5 2.1 16 disabled unemployed 8.8 1.6 7 Older people 1.1 0.2 2 People with disabilities 6 5.5 1.0 n/a One- parent families 16.6 3.1 22 Jobless households 14.9 2.7 76 Households in social rented housing 17.9 3.3 49 4 The poverty rates for categories such as women, minority ethnic groups, the working poor and the regions were also examined, but show less evidence of higher poverty risk. However, there is a link between the high poverty risk for lone parents and that for female-head households. 5 There is an overlap between the household categories, ie lone parents are often jobless households, while lone parents and jobless households frequently live in social rented housing. 6 This is an ad hoc indicator based on people aged 16 and over who self-report a chronic illness or health problem. This does not refer to a discrete section of the population, but overlaps with the three age categories. 22

23. Beyond the lifecycle groups, there are households with high rates of consistent poverty due to multiple disadvantages across the lifecycle, including parenting alone, having child dependents, being excluded from the labour market, and reliance on public housing. Lone parent families have a consistent poverty rate of over 16%, three times the norm. Such families account for one fifth of all those in consistent poverty, including half of all children in poverty. Similarly, jobless households are almost three times more likely to be in consistent poverty. Such households account for the vast majority (three-quarters) of all those in consistent poverty. 7 Living in social rented housing is also associated with a high poverty risk, and represents half of those in poverty. Recent Poverty Trends 24. How the national poverty indicators have performed over time is shown in Diagram 2.7. The individual indicators have performed quite differently in the period 2003-2009. At-risk-ofpoverty decreased over time from 20% to 14%, a relative fall of 28%, Material deprivation rose over the period from 15% to 17%, a relative increase of 12%. Consistent poverty declined from 8% to 5.5%, a decline of one third, a decline of a third over time. The aggregate poverty population changed only marginally from 27% to 26%. 25. Within these overall trends, 2007 and 2008 were the lowest points for three of the four indicators. Another trend to note is that material deprivation is higher than at-risk-of-poverty since 2008. The recent rise in material deprivation is further reflected in the increase in consistent poverty in 2009. Diagram 2.7: Trends in poverty using national indicators, 2003-2009 at-risk-of-poverty consistent poverty material deprivation combination 30 25 20 15 10 5 0-3% 13% - 28% - 33% 2003 2004 2005 2006 2007 2008 2009 Source: SILC Progress towards the National Poverty Target 26. The national poverty target in the National Action Plan for Social Inclusion 2007-2016 is to reduce the rate of consistent poverty to between 2-4% by 2012 and to eliminate it by 2016, 7 The problem of jobless households correlates with Ireland s high rate of low-work intensity (20%). 23

from a baseline rate of 7% in 2005. The new Programme for Government contains the objective to eliminate poverty and to achieve the national poverty targets in the National Action Plan for Social Inclusion. Progress on the national poverty target is outlined in Diagram 2.8. This shows that the consistent poverty rate fell continuously from the baseline rate of 7% to 4.2% by 2008, which was just outside the interim poverty target range of 2-4%. Indeed the poverty rate for older people was well within the range (1%). However, in 2009, the poverty rate climbed to 5.5%, which was a return to the previous 2007 figure. This leaves a gap of 1.5 percentage points to be bridged by 2012 if the higher range in the interim target is to be achieved. (One interpretation of the 2012 interim target would be to use 2010 data, which only leaves one year for the 2009 figure to fall by 1.5%.) Diagram 2.8: Progress towards the national poverty target, 2005-2016 8 7 6 5 4 3 interim target 2-4% 2 1 0 Final target 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: SILC 27. The Government has also set out a national poverty target as part of the National Reform Programme for Europe 2020. Taking the 2008 consistent poverty rate of 4.2% as the baseline year, the numerical expression of the national poverty target is to lift 186,000 people out of the risk of poverty and exclusion by 2016. 8 Underpinning the national poverty target is the policy of ensuring that the incomes of the poorest families are protected as much as possible during the economic recession and that these families are enabled to benefit from the economic recovery and growth in employment when it arrives. The proposed trajectory for this target and the actual 2009 figure is set out in Diagram 2.9. 28. The challenge of meeting the national poverty target is considerable, as indicated by the rise in the consistent poverty rate to 245,000 in 2009 and it is possible that the rate may even be higher in 2010. The timescale for achieving the poverty target will be influenced by the pace at which economic and employment growth returns to the Irish economy. It is envisaged that in the early years fewer people may be lifted out of poverty or indeed the numbers may increase due to the effects of the economic recession and the implementation of the National 8 The numerical figure is based on the Central Statistics Office estimate of the national population in 2008 (4,422,100). 24

59. Effectiveness / Social Impact: The risk of poverty has fallen dramatically in Ireland over the last decade, especially for older people. The recent increase in consistent poverty suggests that Ireland is entering a new phase of social impacts, where increasing numbers on welfare are struggling with basic needs, and this has implications for achieving national targets; 60. Risk Groups: Families with children (especially lone parents) and unemployed/jobless households are relatively high risk groups based on consistent poverty, while older people are now a low risk group. 26

Chapter 3 Overall approach to expenditure reductions and key structural changes Introduction 1. The social welfare system is complex and is influenced by policy objectives and other factors which transcend individual schemes. The most obvious of these is, of course, the levels of income support weekly rates of payment. The broad principles which should underpin the review of DSP expenditure and the development of options to curtail such expenditure are first outlined. The two main approaches to achieving savings are then detailed. This chapter then goes on to identify the principal structural changes required to ensure a targeted and sustainable social welfare system in the years ahead. Finally, this chapter reviews a range of options which are consistent with the overall structural changes identified. 2. The overall objective underpinning this Review, and in considering Budgetary policy over the years ahead, should be: The refocusing of the corporate structure and activities towards reducing long-term dependence on welfare payments through substantially more intensive interaction with individual clients with the goal of higher employment and participation levels; The introduction of significant structural reform, along the lines proposed in the Value for Money Reviews published in November 2010, in order to facilitate the move from welfare to work; To ensure an adequate and sustainable welfare system in the years ahead, particularly having regard to the challenges faced by demographic pressures; To reduce the complexity of the system in order to simplify it for both clients and staff, particularly in the context of scarce and reducing administrative resources; To ensure that the resources available to DSP in 2012 and later years are directed towards providing targeted support to those who are most at risk of poverty; To ensure that payments are delivered only to those with an underlying entitlement, in the most efficient and effective manner; To maintain, as far as possible, a sustainable social insurance system, based on paid PRSI contributions with an appropriate level of entitlements in due course based on these contributions; and To ensure that any measures adopted should be consistent with the medium to longer term development of the social welfare system or, at a minimum, should not make such progress more difficult. 27

3. These objectives can be achieved through: i. Concentrating available resources towards the maintenance of primary weekly and monthly income support; ii. iii. iv. Major structural reform of the schemes and services operated by DSP, including a critical examination of the continuation of entitlement to more than one primary payment as well as the levels of other supplementary payments and benefits in kind; Other structural changes to welfare schemes, such as the relatively generous disregards which apply to certain schemes, contribution conditions for some social insurance payments and arrangements relating to late claims; Ensuring that all Budgetary changes have regard to the cross-cutting impact of the totality of all measures, including taxation and other non-dsp changes, on individuals and families; and v. Delivering the transformation programme and, in particular, operationalising the NEES (outlined in detail in Chapter 7). Delivering Expenditure Reductions 4. The level of the overall DSP expenditure reduction required in 2012 is likely to be very significant. There are two main approaches towards delivering such savings. The first is to reduce weekly and monthly rates of payment while the second is to dramatically reduce (or discontinue entirely) the level of expenditure on supplementary benefits e.g. the Household Benefits Package. Primary Rates of Payment 5. The Programme for Government contains a commitment to maintain welfare rates. The priority, therefore, should be to avoid reducing primary rates of payment and achieve any savings required through structural reform. However, if it becomes necessary to consider some level of reduction in primary rates of payment, such an approach should have regard to: i. Movements in price inflation 10 ; ii. Current rates of payment for different groups of recipients; iii. The potential impact of any change on poverty levels; iv. The role of welfare payments in stabilising the social and economic effects of the downturn; and v. The cumulative impact on recipients who experienced reductions in the level of their primary payments (and Child Benefit, if applicable) in Budgets 2010 and 2011. 10 The Consumer Price Index increased by 2.2% over the 12 months to end August 2011. 28