Social Assistance Pilots Program SA Pilots Seminar Ways for improving housing subsidies system Liudmyla Kotusenko CASE Ukraine March 2010

1.Characteristics of the housing subsidies beneficiaries 2.Problems of the housing subsidies system 3.Ways of improving the housing subsidies system 4.Methodology of calculating effects of different options of proposed changes 5.Expected outcomes of introduction of different options of proposed changes 6.Comparison of expected outcomes of different optionsContent 2

Characteristics of the housing subsidies beneficiaries (HBS-2008) Characteristics of the housing subsidies beneficiaries (HBS-2008) 65% of the beneficiaries are households consisting of pensioners only 53.5% of the beneficiaries are single pensioners 22% of the beneficiaries are households with children 1.5% of the beneficiaries are multi-children families 55% of the beneficiaries have housing privileges (77% of them are households of pensioners) 3

Source: Finance Ministry of Ukraine Distribution of subsidies by income deciles (HBS-2008) Distribution of subsidies by income deciles (HBS-2008) The subsidies system is poorly targeted: Only 23.8% of the beneficiaries belong to deciles 1-2* Only 31.1% of the subsidies funds reach households in deciles 1-2* * Deciles are formed as total income minus subsidy amount per person 4

Characteristics of deciles (HBS-2008) Characteristics of deciles (HBS-2008) 5 Deciles Average monthly total income excluding housing subsidy, UAH per person Deciles bordersMean 149 – – – – – – 1,0851,026 71,085 – 1,2321,156 81,232 – 1,4291,324 91,429 – 1,8061, ,806 – 36,4292,564 Total49 – 36,4291,127

Problems of the housing subsidies system 1.Subsidies cover non-poor households: about 93,000 of the beneficiaries, or 12.3%, had total income higher than UAH1,000 per person about 53,000 of the beneficiaries, or 7%, had a living area of more than 70 m 2 per person 2.Unintended bias towards single-member households along with lower coverage of more vulnerable population groups, such as large families 3.Poor coverage with subsidies of households that do not have access to utilities 4.The complexity of administering the system of subsidies, the necessity of monthly recalculations of the subsidy amount based on the actual consumption 6

Variants of improving the housing subsidies system: hypothetical scenarios Variants of improving the housing subsidies system: hypothetical scenarios Scenario 1: Developing more favorable rules for accessing housing subsidies for families with children Scenario 2: Excluding the wealthier households from the subsidies system Scenario 3: Combination of scenarios 1 and 2 Scenario 4: Increasing the obligatory payment for housing and utilities up to 30% of a household income (saving 15% for vulnerable groups of population) Scenario 5: Harmonizing of assistance to low income families and subsidies Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption Scenario 7:Replacing the housing subsidies and benefits to low- income families with a unified cash benefit 7

Methodology of calculations All calculations are based on the HBS-2008 In order to estimate the expected effects of selected scenarios, the sample of potential beneficiaries of subsidies was formed. It consisted of households that could be eligible for subsidies in 2008 on the basis of income, expenditures on housing and utilities and other characteristics Similar criteria were applied to identify households eligible for a subsidy after implementation of changes For estimation of the subsidy eligibility, the declared privileges of households were taken into account 8

Scenario 1: Developing more favorable rules of access to housing subsidies for families with children (1) Problem: only 2.6% of households with children are covered with subsidies, while the coverage rate for all households is 4.4%, and for single-person households 10.7% (HBS-2008) Objective:to support low-income families with children that require additional assistance after receiving benefits to low-income families Changes: reducing the obligatory payment amount down to 10% of income for households with 2+ children, whose average monthly income is under minimum subsistence level 9

Scenario 1: Developing more favorable rules of access to housing subsidies for families with children (2) Number of beneficiaries: +22% Share of beneficiaries among households with children: +77% Expenditure on subsidies: +34% Share of funds reaching the deciles 1-2 rises from 44% to 53% Coverage of households of 1-2 deciles with subsidies rises from 10% to 15% Amount of subsidy for part of former beneficiaries increases 10

Scenario 1: Developing more favorable rules of access to housing subsidies for families with children (3) Pros: (1) Coverage of households with children with subsidies rises from 4% up to 7,2% for and from 8,4% up to 17,5% for multi-children families (2) The number of recipients grows mainly due to households of 1-3 deciles (3) Targeting of the poor with subsidies rises At the same time, the expenditure on subsidies increases by a third 1

Scenario 2: Excluding the wealthier households from the subsidies system (1) Problem: coverage of households of the higher income deciles with housing subsidies Objective:exclude the wealthy households from the subsidies system Changes: (1) Implementing direct income test with threshold at 2 subsistence minimums (2) Implementing surface threshold at: (а) 55 m 2 for single-person households and 30 m 2 per person in other cases for urban applicants (b) 66 m 2 for single-person households and 36 m 2 per person in other cases for rural applicants 1212

Scenario 2: Excluding the wealthier households out of the subsidies system (2) Number of beneficiaries decreases by 14% Share of beneficiaries among single pensioners decreases by 17% Expenditure on subsidies decreases by 10% Share of funds reaching the deciles 1-2 rises from 44% up to 46% Coverage of households of 1-2 deciles with subsidies decreases from 10% to 9% 1313

Scenario 2: Excluding the wealthier households out of the subsidies system (3) Pros: targeting indicators slightly improve, budget burden decreases Cons:introducing the surface threshold at values suggested leads to exclusion from the system not only wealthier households, but also households of the 1-2 deciles 1414

Scenario 3: Combination of scenarios 1 and 2 (1) Number of beneficiaries: +7% Share of beneficiaries among single pensioners: -17% Expenditure on subsidies: +24% Share of funds reaching the deciles 1- 2 rises from 44% up to 55% Coverage of households of 1-2 deciles with subsidies increases from 10% to 14% 1515

Scenario 3: Combination of scenarios 1 and 2 (2) Pros: (1) The number of recipients increases mainly due to households of 1-2 deciles, while the share of the 4-10 deciles households among beneficiaries declines (2) Targeting of the subsidies system rises along with a moderate costs increase Cons:introducing the surface threshold at values suggested leads to exclusion from the system not only wealthier households, but also households of the 1-2 deciles 1616

Scenario 4: Increasing the obligatory payment value (1) Problem: the risk of the rapid growth of subsidies expenditure in case of significant increase of utilities rates and fuel prices Objective:decreasing the budget burden by committing the applicants to cover the higher part of utilities and fuel bills Changes: increasing obligatory payment value up to 30% of total household income for households paying 20% of income now, along with keeping the obligatory payment at 15% of income for vulnerable population groups 1717

Scenario 4: Increasing the obligatory payment value (2) Number of beneficiaries decreases by 19% Share of beneficiaries among households with children decreases by 29% Expenditure on subsidies decreases by 16% Share of funds reaching the deciles 1-2 declines from 44% to 41% Coverage of households of 1-2 deciles with subsidies decreases from 10% to 7% 1818

Scenario 4: Increasing the obligatory payments value (3) Pros: decreasing the budget burden Cons:decline in the targeting of subsidies: the major part of those who loses the subsidy entitlement belong to deciles

Scenario 5: Harmonizing of assistance to low income families and subsidies (1) Problem: justifying the housing subsidies existence in case the benefits to low-income families are paid up to subsistence minimum level (instead of significantly smaller guaranteed subsistence minimum used at the moment) Objective:to simplify the mechanism of calculating subsidies and harmonize it with benefits to low-income families with the aim to stepwise elimination of housing subsidies program Changes: subsidy is calculated as the difference between the household subsistence minimum and its monthly income including privileges. Subsidy amount may not be higher than (1) the amount of housing and utility expenditures in the subsistence minimum and (2) the actual housing and utility expenditures within the norms of consumption. Amount of subsidy increases by the part of obligatory payments 20

Scenario 5: Harmonizing of assistance to low income families and subsidies(2) Scenario 5: Harmonizing of assistance to low income families and subsidies (2) Number of beneficiaries: 3 times growth Expenditure on subsidies: 4.3 times growth Share of funds reaching the deciles 1-2 increases from 44% to 63% Coverage of households of 1-2 deciles with subsidies increases from 10% up to 42% and for all potential beneficiaries it increases from 5.5% up to 17% 2121

Scenario 5: Harmonizing of assistance to low income families and subsidies (3) The sample of formerly eligible 33% of formerly entitled will lose the entitlement to subsidy Households of pensioners will be the most affected, while families with children the least affected ones 22 Share of initially entitled households that will lose the entitlement, by category

Scenario 5: Harmonizing of assistance to low income families and subsidies (4) Pros: covering the poorest with subsidies increases Cons:(1) rapid increase of the subsidies expenditure due to increase in number of subsidies beneficiaries and subsidy amounts growth by the obligatory payments values (2) rise of beneficiaries number in all deciles, not only in the poorest ones (3) the large share of currently eligible households consisting of only pensioners will lose the eligibility in case of scenario implementation 23

Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption (1) Problems: (1) necessity of monthly recalculations of subsidy amount on the basis of actual consumption (2) poor coverage with subsidies of households that do not have access to utilities, particularly rural ones Objectives: simplifying the mechanism of the subsidies calculation and making subsidies more available to people with no or littleaccess to utilities Changes: subsidy is provided in cash and is calculated based not on actual amount of housing and utilities expenditure but on consumption norms within a typical basket of housing and utilities for three types of heating (central, gas heating, solid fuel). A similar mechanism was piloted by MLSP in

Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption (2) Details of the mechanism proposed: 1.The government sets the standards of housing and utilities consumption per person and a typical basket of housing and utilities that may vary by the type of heating. 2.Local authorities set the value of a typical basket of housing and utilities per 1 m 2 of the dwelling area. 3.The household expenditures for housing and utilities are calculated by multiplying the value of a typical basket of housing and utilities per 1 m 2 and a standard dwelling area. Standard area is the actual area of a dwelling that does not exceed 21 m 2 per person plus 10.5 m 2 per family. It also may not be less than 31.5 m 2 for the first person in the household and 10 m 2 per each of the rest. 4.A subsidy is calculated as the difference between the calculated household expenditures for housing and utilities (except privileges) and the amount of obligatory payment (15% or 20% of income). 25

Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption (3) Sub-scenarios analyzed: (1) Paying subsidies in cash based on economically sound norms of housing and utility consumption within the maximum and minimum limits of the dwelling area. For the solid fuel heating basket of housing and utilities, the actual amount of the solid fuel consumption is used for calculations. The most expensive scenario. Targeting is moderate. (2) Paying subsidies in cash based on economically sound norms of housing and utility consumption within the maximum and minimum limits of the dwelling area. For the solid fuel heating basket of housing and utilities, the standard amount of the solid fuel consumption is used for calculations. The most inexpensive scenario (by one third cheaper than the first one). Shows the best targeting indicators. (3) Paying subsidies in cash based on economically sound norms of housing and utility consumption for the dwelling area that does not exceed the maximum limit of the dwelling area. For the solid fuel heating basket of housing and utilities, the actual amount of the solid fuel consumption is used for calculations. Scenario of moderate expenditures (12% cheaper than the first one). Has the poorest targeting. 26

Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption (4) Sub-scenario (2) Increase in the number of the beneficiaries is much higher for rural areas compared to urban Share of funds reaching the deciles 1-2 increases from 44% to 59% Coverage of households of 1-2 deciles with subsidies increases 27

Scenario 6: Paying subsidies in cash based on economically sound norms of housing and utility consumption (5) Pros: (1) increasing the coverage with subsidies of the households most in need and those with poor or no access to utilities (2) simplifying of the subsidies calculations mechanism (3) incentives for saving Cons:(1) exclusion of the households with the amount of obligatory own payment higher than calculated household expenditures on housing and utilities. When standard value of housing and utilities basket is set at the oblast level, households with higher housing and utility rates will likely to lose the subsidies eligibility, while those paying smaller than average rates will likely to benefit more. 28

Scenario 7: Replacing the housing subsidies and benefits to low-income families with a unified cash benefit (1) Problem: subsidies are granted not only to poor households Objective: unification of the support to the population with low incomes assistance by replacing the housing subsidies and benefits to low-income families with a unified social benefit Changes: Introducing the unified social assistance calculated as difference between the threshold value for the household (UAH350 for the first person in the household and UAH175 per each of the rest) and its disposable income. Disposable income of the households is calculated as total income including privileges less the cost of housing and utilities within the norms of consumption 29

Scenario 7: Substituting the housing subsidies and low income allowance with a unified cash benefit (2) Number of beneficiaries: declines by half Expenditure on subsidies: +3% Share of funds reaching the deciles 1-2 increases from 62% to 74% Coverage of households of 1-2 deciles with social assistance declines from 13% to 12% and for all potential beneficiaries it decreases from 6.5% to 3.2% Coverage with social assistance declines through all deciles except the first one 30

Scenario 7: Substituting the housing subsidies and low income allowance with a unified cash benefit (3) The sample of formerly eligible 74% of initially entitled will lose the entitlement 98% of the initially eligible households of pensioners will be become ineligible 31 Share of initially entitled households that will lose the entitlement, by category

Scenario 7: Substituting the housing subsidies and low income allowance with a unified social assistance (4) Pros: (1) increase of the amount of funds reaching the poorest households along with unchanged total costs (2) two times decrease of coverage of the potential beneficiaries with the assistance (through households of all deciles except the first one) Cons:(1) households of pensioners are almost totally not covered with a unified social assistance (2) the stepwise transition to the benefits to low-income families paid to the level of subsistence minimum is not supported 32

Outcomes of different variants of improving the subsidies system Source: Finance Ministry of Ukraine Initial stage (1) 10%, 15%, 20% oblig. paym. (2) Income thresh. + surface thresh. (3) Scena- rio 1 + Scena- rio 2 (4) 15%, 30% oblig. paym. (5) Harmo- nization of subsidies and low- inc. benef. (6) Calcu- lated stan- dards (7) Uni- fied SA Change in beneficiaries number, % — times more —-51 Change in expenditure, % — times more —+3+3 Share in beneficiaries of 1-2 deciles, % * / 77 Share of funds reaching 1-2 deciles, % * / 74 Share of households covered with subsidies, % 5,56,74,85,94,516,7— 6,5* / 3,2 * – initial situation of the scenario 7 33

Conclusions Merging of housing subsidies and benefits to low-income families which is the main task of the pilot #2, under the current rules, will be difficult to accomplish, as these types of social assistance cover different families / households with different income levels:  low-income benefits target families with children with incomes lower than guaranteed subsistence minimum level,  housing subsidies cover mostly pensioners whose incomes usually exceed subsistence minimum. Introducing the unified benefit instead of these two that would cover both categories may turn out to be a costly decision. Possibly scenario #3 (providing more support to families with children and reducing support to high-income families) may be the best solution, assuming that area threshold would be adjusted in order not to exclude pensioners of 1-2 deciles 34