Social Insurance Policies and Income Risk in the United Kingdom

The paper compares the impact of British welfare policies on net income risk for welfare receiving households. Welfare policy provides social insurance against household income risk. A major role of the welfare policy is to mitigate the impact of adverse income shocks through financial support such as benefits. This is particularly relevant as the British welfare system is currently undergoing a major reform. The new system, Universal Credit, provides considerably lower benefits to programme recipients for their daily expenses than the former Legacy System (Brewer, 2019). I exploit a natural policy experiment, the British welfare policy reform, to quantify the effects of the change in the welfare system on net income risk for programme receiving households. The main finding is that net income risk increases for households under Universal Credit compared to households under the Legacy System, as there is reduced social insurance for households under the new policy scheme. Universal Credit households also face almost double the probability of encountering an adverse permanent income shock of 10 per cent, compared to households under the Legacy System, in particular amongst Universal Credit receiving households with children. The lower cost to taxpayers associated with Universal Credit has reduced the effectiveness of the social insurance provided. The policy suggestions indicate the need for welfare policy design that focus on support that takes account of income risk.