The Comedy of the Winter Fuel Payment Means Test

Means testing insanity in the United Kingdom.

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The United Kingdom has a welfare benefit called the Winter Fuel Payment (WFP). Despite the name, the payment is not tied to winter fuel. It is just a lump-sum cash benefit paid each winter to individuals who have reached the pension age (currently 66).

For the last 27 years, the WFP has been paid out universally without regard to household income. The current government has decided to change that for the next winter and only pay out the benefit to individuals who receive the means-tested Pension Credit or certain other means-tested benefits. The idea behind this is to save money and lower the government deficit by not paying the benefit to individuals with higher incomes.

This move suffers from the same problem all means testing does. If the UK government believes individuals above a certain income level have too much disposable income, then it can address that problem directly through the tax system rather than assess what amounts to a tax only on elderly people with income above that level. This would be distributively fairer, ensure that fewer individuals fall through the cracks of the benefit system, and be more administratively efficient.

But this move by the new Labour government is also uniquely bizarre. When the government announced that it was going to start paying the WFP only to those receiving the means-tested Pension Credit (or similar benefits), it was pointed out that the Pension Credit, like all means-tested programs, suffers from a non-participation problem: because of the administrative burden involved, not everyone who is eligible for the Pension Credit signs up for it. So this effort to exclude high-income individuals from receiving the WFP is also going to exclude many low-income individuals from receiving the WFP.

The government’s response to this critique was to say that it was going to embark upon an aggressive awareness campaign aimed at getting everyone who is eligible for the Pension Credit to sign up for it. The problem with this is that, currently, only 63 percent of people who are eligible for the Pension Credit are signed up for it. If that number were to go to 100 percent, then all of the savings from lower WFP outlays would be offset by higher Pension Credit outlays, negating the whole cost-savings rationale for the WFP cuts to begin with.

Thus, the only way the government can actually reduce the budget deficit from these WFP changes is if the Pension Credit participation rate stays low and low-income people fail to claim the Pension Credit and WFP benefits they are eligible for. It is often alleged that means-testing proponents actually like the fact that the administrative burdens of the tests exclude some poor people because that saves money. But rarely do you ever see it laid out this explicitly.