Title: Inequality and the insurance value of transfers across the life cycle
Funder: Economic and Social Research Council

Abstract: Context and motivation The provision of 'social insurance' (the benefits governments pay to those who are ill, unemployed, disabled, poor or old), accounts for more government expenditure than any other category of public spending. This social insurance is potentially valuable to all households, not just those receiving those benefits at a given point in time. It ensures that, should households find themselves in difficult circumstances, they will be shielded from extremely low living standards. However, the provision of social insurance also brings costs. These costs are both direct (e.g. the financial cost of the transfers) and indirect (e.g. the provision of benefits reduces the incentives to work and save). Balancing these costs and benefits is a challenge for policy-makers. As governments seek to manage the rising costs of providing social insurance and achieve their redistributive objectives in the context of rising inequality, robust evidence is needed on the effects of taxes and transfers on the behaviour and well-being of households. Aims and methodology Our proposed research will develop and test models of household savings and labour supply to evaluate how reforms to social insurance schemes would impact household behaviour, household well-being, inequality and the public finances. A central challenge is to develop and apply a methodology that can robustly estimate the extent that household behaviour changes when policies change - including both past and potential future reforms. To do this we will develop 'lifecycle' models which link household decisions (such as saving, labour supply, participation in social insurance programs, and intergenerational transfers) in each period with their well-being in that period and their consequent opportunities (and well-being) in future periods. Our models will innovate substantially over those found in existing work, both in terms of their scale and the range of policies whose impact they will be used to quantify. Importantly, this will allow us to study complementary policies in a coherent framework, rather than in isolation. For example, we will examine how public pensions and private pension subsidies interact, and in considering reforms to retirement provision, we will jointly consider the public and private pension systems (rather than separately, as has been the case in previous work). This state-of-the-art methodology brings with it substantial data requirements and large computational burdens, which we will overcome by building on previous ESRC investments at the Institute for Fiscal Studies. We will use new and little-exploited linked survey and administrative data as well as frontier computational methods and computer investments to estimate these models. Applications, benefits and impact Our ultimate aim is to allow policy-makers and the broader user community to better understand how household behaviour responds to government policy on social insurance. The questions that we will answer include: - How should the generosity and the structure of the state pension system respond to demographic pressures? - What are the effects of provision of disability benefits on labour supply and on the health outcomes of those who receive them? - Why do retired households maintain their wealth into their oldest years rather than spend it? How would changes to inheritance taxation change this? - To what extent are inheritances (and the prospect of future receipt of inheritances) affecting household saving behaviour and inequality? We will maximise our impact by producing a range of outputs that will communicate the results to diverse audiences. In addition to a series of academic articles that will be submitted to top economic journals, we will produce a number of non-technical reports, accompanied by press releases, that summarise the key findings directed at non-academic audiences (journalists, policy-makers and other non-academic users).


Research activity codes: 8.3 POLICY, ETHICS AND RESEARCH GOVERNANCE
Health categories: GENERIC HEALTH RELEVANCE