Effect of social transfers on child and pensioner poverty in the EU

Official poverty rates in the European Union are usually based on disposable household income after taxes and public cash transfers (e.g. child benefits) collected from nationally representative household surveys. Since they also collect information about different sources of household income, it is possible to re-estimate national poverty rates based on incomes after taxes but before transfers. Comparing poverty rates before and after transfers gives us an idea about how effective social policies are in reducing poverty.

This is a straightforward statistical exercise, but it should be taken with a grain of salt because it does not tell us what the world would look like if all benefits were suddenly withdrawn or if they had not existed in the first place. In other words, it does not account for how policy changes would have affected individual behaviour.

Nevertheless, it is an intuitive way to illustrate the difference that transfers make to household incomes across countries and Eurostat routinely publishes at-risk-of-poverty rates before and after transfers, based on 60% of the national post-transfer median.

Subtracting the post-transfer poverty rate from the pre-transfer poverty rate gives us the absolute difference. However, to account for the fact that some countries have much higher pre-transfer rates than others, relative per cent reduction in child poverty may be more illustrative.

For instance, in 2013 child poverty rates in Greece would have been 27% (or 10 points) higher if they were calculated using pre-transfer household income. The greatest relative difference is observed in Finland, where the child poverty rate would have been 69% (or 20 points) higher. Cash transfer policies in Southern European countries as well as in newer EU member states tend to be less effective in reducing child poverty, while they are more effective in most Nordic countries as well as in Ireland and the UK.

Source: Eurostat (last update 15.12.2014).
Source: Eurostat (last update 15.12.2014).

Changes in the absolute difference that social transfers make to child poverty rates can also be tracked over time. Between 2008 and 2013 cash transfers became less effective in reducing relative child poverty in about one-third of EU member states, including countries like the Czech Republic, Hungary, France, Slovakia and Sweden. In one-third of the countries, including Germany and Norway, there were no substantial changes over time, while in another third cash transfers appear to have become more effective in reducing child poverty.

However, these differences are not necessarily due to changes in the structure or generosity of cash transfer systems, as they may also be driven by the amount of poverty to be reduced. When many people lose their jobs and start receiving unemployment or social assistance benefits, it may appear that transfers became more effective in reducing poverty even if the social protection system remained the same. For instance, it appears that cash transfers became more effective in Greece during the recession, but post-transfer child poverty rates increased from 23% to 29%, based on 60% of the median income each year.

Source: Eurostat (last update 15.12.2014). Break in the series for Austria, Croatia, Cyprus, Spain and the UK.
Source: Eurostat (last update 15.12.2014).
Break in the series for Austria, Croatia, Cyprus, Spain and the UK.

Finally, to see if transfers became more effective for pensioners than for children, this exercise is replicated for individuals aged 65 and over. In the overwhelming majority of EU member states, social policies indeed appear to be more effective in reducing elderly poverty over time. Unsurprisingly, this is driven by pensions as opposed to other cash benefits. Interestingly, in Bulgaria, the Czech Republic, Denmark and Ireland, pensions became less effective in reducing pre-transfer poverty just as other transfers became more effective.

Source: Eurostat (last update 15.12.2014). Break in the series for Austria, Croatia, Cyprus, Spain and the UK.
Source: Eurostat (last update 15.12.2014).
Break in the series for Austria, Croatia, Cyprus, Spain and the UK.

Thus social transfers became more successful over time in reducing poverty among the elderly in more countries than they did with regard to child poverty. In fact, a simple “difference in differences” calculation between the estimates in the above two figures shows that only in three countries – Luxembourg, Poland, and Switzerland – policies became more effective in reducing pre-transfer poverty among children than pensioners.

Source: Eurostat (last update 15.12.2014). Break in the series for Austria, Croatia, Cyprus, Spain and the UK.
Source: Eurostat (last update 15.12.2014).
Break in the series for Austria, Croatia, Cyprus, Spain and the UK.

Disclaimer: the views expressed in this post are the responsibility of the author alone.

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Effect of social transfers on child and pensioner poverty in the EU

Child poverty vs. pensioner poverty in the EU

Child poverty is on the rise in the European Union while pensioner poverty declines.

Between 2008 and 2013 child poverty increased faster or fell more slowly than pensioner poverty in 26 out of 30 European countries for which Eurostat data are available. This is based on the definition of relative income poverty that holds the poverty line constant at the 2008 level in real terms to allow for a more straightforward comparison over time.

Although the elderly have traditionally been another vulnerable group, they have fared somewhat better than children during the recent economic crisis and the ensuring period of muted and uneven recovery. On the whole, child poverty increased in 18 countries since 2008, while pensioner poverty went up in only seven countries. As of 2013, child poverty is higher than elderly poverty in 22 out of 30 countries.

The figure below plots the percentage point change in the poverty rate of children under 18 (blue bars) and adults aged 65 or over (orange bars) as well as the difference between the two (red dashes).

The biggest differences in the poverty change between children and the elderly were observed in Latvia (22 points), Cyprus (21 points), Malta (15 points), Spain (12 points) and Bulgaria (11 points), where pensioner poverty decreased by at least 10 percentage points even as child poverty was rising.

In contrast, in countries like Greece and Iceland, although both poverty rates increased substantially, child poverty went up more. This pattern also held in Hungary, Ireland, Luxembourg, and Slovenia.

Source: Eurostat (last update 14.11.2014).
Source: Eurostat (last update 14.11.2014).

Why did the recession apparently hit children so much more than the elderly?

Partly it is because old-age pensions tend to be relatively stable (even if they remain ungenerous), while earnings and working-age benefits have often been eroded in real terms. In some countries state pensions are set to rise with (or even above) inflation. For example, in the United Kingdom state pensions are protected by the triple lock:  “increasing each year by whichever is the highest out of prices, average earnings or 2.5%”.

According to the OECD Society at a Glance (2014) report, working-age benefits have been the main target of fiscal consolidation across the industrialized world, although several countries (e.g. Austria, Greece, Italy, Portugal and Slovenia) froze pensions too.

Yet, in many countries where pensioner poverty rates decreased the most, they remain very high. For example, at least one in three pensioners live in poverty in Cyprus (35%), Greece (40%) and Latvia (42%) – the highest levels of elderly poverty (using the anchored measure) in the European Union.

Source: Eurostat (last update 14.11.2014).
Source: Eurostat (last update 14.11.2014).

Disclaimer: the views expressed in this post are the responsibility of the author alone.

Child poverty vs. pensioner poverty in the EU

Why is “anchoring” the best way to monitor child poverty during an economic crisis?

At times of economic turbulence, the way we measure poverty can make a big difference to the conclusions we draw. Income poverty across the European Union is conventionally defined as the share of the population whose household income (adjusted for size and composition) after taxes and social transfers is below 60% of the national median. As a relative measure of monetary poverty, it identifies those who are at risk of falling below the general standard of living enjoyed by the society in which they live.

The very nature of this indicator makes it less useful for monitoring poverty at times of rapid change in living standards during an economic crisis. If the median income falls, the poverty line will decrease, potentially making some of those below the poverty line appear to be out of poverty even if they are becoming worse off. “For this reason, for comparisons over time, it may also be advisable to anchor the threshold at a specific point in time (i.e. a past reference year) during crises or other periods of major change in the economic environment” (Eurostat).

One of the most illustrative example of what difference fixing the poverty line at a point in time can make is Greece. Using the national median income in 2008 prices as a backdrop (right-hand axis), the figure below plots three indicators on the left-hand axis: 1) the child poverty rate, 2) the anchored child poverty rate, and 3) the severe child deprivation rate.

Between 2008 and 2010, there is little change in any of the indicators, while the median income is increasing slightly in real terms (i.e. adjusting for inflation). From 2010 onwards, all three measures of child poverty go up, including severe material deprivation. The anchored child poverty rate increases from 20.7% in 2010 to 51.8% in 2013, while the traditionally measured child poverty rate goes up from 23% in 2010 to 28.8% in 2013.

Source: Eurostat (last update 29.10.2014)
Source: Eurostat (last update 29.10.2014)

As of 2013, are one in two children in Greece living in poor households or one in four?

The answer is that both measures are valid and complementary to each other. Over one in four (28.8%) are at risk of poverty given the current general standard of living. More than one in two (51.8%) are falling below the standard of living prevailing in 2008. It just so happens that the national median income in 2013 is two-thirds of that in 2008 in real terms.

The difference between these two measures hinges on whether, at times when many have become worse off, we only compare our standard of living to those around us or whether we also think about how much we could do with the money we had five years ago (and how much prices have gone up in the meantime).

However, to assess change in the material conditions of children during the economic crisis, e.g. between 2008 and 2013, it is a good idea to use the same poverty line in both years. This is what anchoring the poverty line in 2008 does. During this period, child poverty in Greece went up by a factor of 2.25. At the same time, the share of children living in severely deprived households went up by the same factor (2.24), from 10.4% to 23.3%.

Disclaimer: the views expressed in this post are the responsibility of the author alone.

Why is “anchoring” the best way to monitor child poverty during an economic crisis?

What happened to child poverty in Europe since 2012?

Child poverty is on the rise in half the European countries, according to the latest estimates from Eurostat.

A recent UNICEF report – Innocenti Report Card 12 – highlighted dramatic increases in child poverty in two-thirds of European countries since the start of the global economic crisis. The report released at the end of October 2014 ranked 41 countries of the EU and/or the OECD according to the absolute change in child poverty between 2008 and 2012 , the latest year for which data were available at the time of writing. Figures for 2013 have just been released for the EU member states.

How have the countries at the bottom of the UNICEF league table fared in 2013?

According to the methodology used in Report Card 12, i.e. “anchoring” the poverty line at the 2008 levels for greater comparability, child poverty in Greece has continued to rise. The share of poor children skyrocketed by 11 percentage points from the high of 41%, or four in ten children, to an even higher 52%, or one in two children. This is the highest rate of child poverty in the European Union.

Three other countries in the bottom third of the UNICEF league table have not been able to arrest the rise in child poverty by 2013: Hungary (+ 5 points), Italy (+ 2 points) and Luxembourg (+ 3 points).

In contrast, France brought child poverty down by one point since 2012, Iceland and Latvia by two points, Estonia by three points and Spain by nearly seven points. The result for Spain needs to be interpreted with caution due to a change in data collection methodology. Although Latvia checked the increase in child poverty, more than one in three children (36%) were income poor in 2013, the second highest rate after Greece.

What happened to the countries in the middle of the UNICEF ranking?

Several countries that clung to the top two-thirds of the ranking in the UNICEF report experienced substantial increases in child poverty between 2012 and 2013: Cyprus (+ 7 points), Portugal (+ 5 points), Slovenia (+ 3 points) and the Slovak Republic (+ 2 points).

Child poverty increased by nearly two points in just one year in Malta and the United Kingdom, the countries that experienced comparatively moderate increases in child poverty during the worst of the economic crisis.

Where are the top performers in the UNICEF league table by 2013?

Child poverty increased by 1.5 points in Poland, after it had gone down by 8 points between 2008 and 2012.

The only European country which held its place at the top of the league table is Switzerland, where child poverty fell by nearly 4 points since 2012. Romania also remains in the top third of the ranking, with a one-point decrease in child poverty, while Finland, Norway and Sweden are just behind with no substantial changes in child poverty between 2012 and 2013.

Denmark succeeded in reversing the change in child poverty, with a one-point decrease since 2012, after a one-point increase between 2008 and 2012. Child poverty went down by nearly two points in the Czech Republic, which saw no significant changes in child poverty during the earlier period.

Source: Eurostat (update 29.10.2014). No data for Croatia and Ireland.
Source:
Eurostat (update 29.10.2014). No data for Croatia and Ireland.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disclaimer: the views expressed in this post are the responsibility of the author alone.

What happened to child poverty in Europe since 2012?