Do lump sum payments promote individual choice? Jason Strelitz

Meeting the 2010 child poverty target and looking beyond Evidence that Money Matters – key driver of the experience of poverty Consensus that greater income from paid employment is a critical goal Wide acceptance that financial support needed What kind of financial support promotes better outcomes for children?

Lump Sums as part of a child poverty strategy Do lump sum payments promote choice for low income families? What low income families think What may be driving that Evidence from the EITC Options going forward

Asking low income families If you were to receive a new benefit for each child from Government, would you prefer an extra £3.85 per week or two payments of £100 each, once in June and once in November? (Both options total £200 per year) Respondents: parents in households with children and incomes below £15k - 50% single parent - 78% women - 32% disability in household - 59% household with employment - 86% educated to below degree level

Asking low income families 71% favoured lump sums 29% favoured small regular payments If you were to receive a new benefit for each child from Government, would you prefer an extra £3.85 per week or two payments of £100 each, once in June and once in November? (Both options total £200 per year)

Preference for Lump Sums

Why do others prefer lump sums? Larger amounts of money give me the opportunity to pay for expensive items Larger amounts of money give me more choice in how I spend Its a good way of helping me to save These are the most expensive times of year I wouldnt notice £3.85 a week Why do people prefer small payments? My greatest need is increasing my weekly income I like to have the money each week and choose how to spend it It helps me to budget my money Explaining Peoples Preference

Models of Household Consumption Lifecycle hypothesis - Indifferent to kinds of payment Anticipated future income will factored into current consumption decisions Behavioural Lifecycle Hypothesis - May favour lump sums - Self Control - Mental Accounting / Framing

Behavioural Lifecycle Hypothesis Self-Control – People pay a premium for not having to exercise self control e.g. Prepayment meters Mental Accounting & Framing Different roles assigned to money depending on -How its labelled(child benefit) -Its source(salary vs. bonus) -Where it sits(current account vs. saving)

Thinking practically – Baskets of Goods & Budgeting Strategies Household with 2 children £7.70 = o2.08 – week of apples o1..59 – box of cereal o4.00 – womens toiletries o3p £200 = o2 x School shoes oChest of drawers oChildrens bicycle or oWinter fuel bill Budgeting Strategies focus on making ends meet -Going without necessities - Parents suffering to protect children - High cost credit / debt o Pay off debt o Buy a home computer o Put in savings account;

Lessons from the US EITC In work support – equivalent to Working Tax Credit Choice as how to receive it Over 90% choose to receive as end of year lump sum Evaluations – how it is used see: Linnenbrink et al 2008 Llobera & Zharadnik, 2004 Beverley, 2002 Romiich & Weisner, 2000 Smeeding et al, 2000

Lessons from the US EITC The EITC does more than spread consumption across time period. It allows recipients an opportunity to make changes in economic behaviour Tim Smeeding, Maxwell School, Syracuse Caveats: - can be quite large sums - people managing on low week to week incomes - 98% defer but is the lump sum the main reason? Lump sum: a tool for asset building / social mobility (schooling, transportation, moving, saving) more asset building for those with - larger amount - more financially included

A new lump sum in the UK -To tackle -poverty and deprivation directly, -promote choice (both in how individuals receive and use money -help individuals build assets Questions? 1.Targeting - predictable seasonal difficulties or unpredictable life cycle difficulties 2.Amounts - whats enough to make a difference? 3.Mechanism - tax credit transformation - savings gateways - individual budgets

One Option: Seasonal Grants Based on predictable seasonal difficulties £100 winter per child, + per household £100 summer per child Targeted at those receiving maximum child tax credit