Minimum Income Guarantee: medium-term social security modelling

Methodology

The mid-MIG is modelled as a reformed social security system in which each household’s basic benefit entitlement is at least as high as the relative poverty line after housing costs (AHC). As shown in Annex A, this is equivalent to at least around two-thirds (65%) of the Minimum Income Standard (MIS) excluding childcare and housing costs for working-age households, depending on the household type, and around 100% of the MIS for pensioner households.

The AHC relative poverty line in 2024-25 is projected to be £1,658/month for a couple with no children, or £962/month for a single adult with no children. Each child aged 14+ would add an extra £696/month to a household’s poverty line. These estimates are used to set the relevant rates of Universal Credit (UC) and Pension Credit (PC) in Scotland, as shown in the table below.

Notes: PC weekly amounts converted to monthly; all figures rounded to nearest pound.

As shown in the table, the current age distinction in the UC standard allowances is removed under the mid-MIG. The two-child limit is also removed, such that there is no limit on the number of children in a household that attract the increased child element. In addition, the benefit cap is abolished, although this policy is already mitigated in Scotland through Discretionary Housing Payments.

Work allowances are also removed, with the 55% taper applying from the first pound of household earnings. This is in keeping with the significantly higher benefit rates, which will extend UC further up the earnings distribution. Scottish Child Payment (SCP) is assumed to be replaced by the mid-MIG and is therefore also removed in the modelling.

While the intention of the mid-MIG is to bring every household up to poverty line, some households may remain in poverty for various reasons:

• In practice, housing costs can still pull some households into poverty if these costs are not offset by the housing element of UC or other sources of income. Housing-related benefits are unchanged in the modelling.
• Introducing the mid-MIG has the potential to raise the relative poverty line, which is defined as 60% of median household income^[2]. This effect is however moderated by the use of a UK-wide median, which is less sensitive to changes that only occur in Scotland.

On the other hand, there are a number of offsetting factors which mean that the mid-MIG will take some households further above the relative poverty line:

• The level of the UC child element is based on the increment to a household’s poverty line associated with each child aged 14 and over. Since children aged 0 to 13 attract a lower increment in terms of poverty measurement, households with children in this age bracket may find that their benefit entitlement is higher than their poverty line. This is shown in the Annex.
• UC and PC are paid at the level of the benefit unit, while poverty is measured at the level of the household. All else equal, benefit units have lower poverty lines if they share a household, whereas their (non-housing) benefit entitlements remain unchanged. Households with multiple benefit units may therefore find that their entitlements take them further above the poverty line.
• Many households which have other income sources, including other elements of UC, besides the standard allowance and the child element. Households with earnings will have their benefit award tapered, but as the taper is less than 100%, their incomes will still be higher than equivalent households without earnings.

The mid-MIG is modelled on the basis of the current labour market, but an additional scenario is modelled in which all workers, including self-employed workers, are paid at the least the real Living Wage (rLW) of £12 per hour. This provides an indication of the cost of the policy if the labour market was also contributing towards the achievement of the MIG.^[3]

The time-limited mid-MIG is assumed to be identical to the mid-MIG, except that claimants can only receive it for up to a year. At that point, claimants would fall back onto the existing benefit system for four years before once again becoming eligible for the mid-MIG. People who are unable to work due to caring responsibilities and disability would not be subject to the time limit. A variant of the time limit is also modelled in which claimants can receive the mid-MIG for up to six months every five years, rather than twelve months every five years.

Estimating the effect of the time limit is not straightforward. Our modelling of the mid-MIG is based on cross-sectional data (the Family Resources Survey) which is treated as representative of the year. We must therefore consult other sources in order to capture the dynamic nature of the benefit caseload. However, no sources are available that perfectly meet our needs. Data on flows in and out of employment is available, but this is not the same as flows on and off benefits, and is particularly unsuitable since a high proportion of mid-MIG claimants will already be in work. We can alternatively consult longitudinal household surveys such as Understanding Society, which do collect benefit information; but this data is not sufficiently granular as it is only collected at annual intervals.

Our chosen method is to use cross-sectional administrative data on the duration of UC claims. Annex B sets out how we adjust the data to correct for various statistical issues that result from using a point-in-time caseload to analyse the distribution of claim durations. The results remain highly illustrative and are only quantified in terms of costs; the household impacts would depend on the distribution of claim durations between different groups, and this information is not readily available. The analysis also assumes a ‘steady state’ in which the caseload has stabilised. In reality, moving from a mid-MIG and a time-limited MIG or vice versa would involve a transitional period, as would moving from the current system to either of these.

All modelling in this paper is undertaken using UKMOD, a tax-benefit microsimulation model which is maintained, developed and managed by the Centre for Microsimulation and Policy Analysis at the Institute for Social and Economic Research (ISER), University of Essex. The model inputs 2021-22 and 2022-23 data from the Family Resources Survey (FRS) and projects this forward to 2024-25, the year on which all analysis in this paper is based. All modelling assumes full benefit take-up and full roll-out of Universal Credit.