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The effect of tax and benefit policy over different 'model lifetimes'

An analysis of how well the benefit, pension and taxation systems meet the needs of individuals throughout their lifetimes.

Written by:
Martin Evans and Jill Eyre
Date published:

This report uses a new research tool, LOIS (the Lifetime Opportunity and Incentives Simulation programme), to assess the impact of current social policy from cradle to grave.

It analyses the strengths and weaknesses of the benefit, pension and taxation systems and how far they are likely to meet the needs of individuals throughout their lifetimes. In this context, the authors reassess specific Government promises, such as those to end child and pensioner poverty.

Comparing low- and average-paid model lives, the report:

  • Shows how difficult it is for parents to reconcile child poverty against future poverty in old age;
  • Develops new ideas about the design of social policy over the lifetime;
  • Reveals the pitfalls of private pensions for the low-paid.


The many radical policy changes since 1997 have occurred at a time of growing demarcation in policy development into lifetime phases: children, working age and pensioner groups. This study, by researchers in the Centre for Analysis of Social Policy at the University of Bath, used a new, custom-built, lifetime simulation programme to see the impact of current policies over the lifetime. The study employed a number of 'model lifetimes' to look at how opportunities potentially unfold or shrivel according to lifetime earnings and events and how current policy design can lead to 'opportunity traps' which persist throughout individuals' lifetimes. The study found that:

  • In the short-term, policies to counter child and pensioner poverty and to promote work have produced positive results but further improvements will become more and more difficult to achieve.
  • Policy focused on equal access to opportunities for low-paid people can fail because the opportunity is given too late to make a real impact on lifetime poverty or on long periods when savings and work incentives are seriously compromised.
  • A lifetime 'opportunity trap' can exist where it is either too late or too costly to take up an opportunity or where taking it up has either no or only marginal impact on lifetime income profiles.
  • Opportunity traps are heightened by having children - the combination of childcare costs, paying rent for family-sized accommodation, low pay and interactions with in-work benefits means that low-paid families can face high rates of marginal tax for at least 16 years.
  • Families with children also face real dilemmas over their lifetime. Saving for retirement will make families poorer while there are children in the home but improve incomes in retirement. Failing to save for retirement reverses this so that avoiding child poverty may lead to poverty in retirement (the 'lifetime poverty see-saw').
  • Escaping from opportunity traps is difficult without raising earning capacity. Low-paid people may be able to catch up on one dimension of inequality but it would be very difficult to equalise life chances without combinations of generous pensions and good earnings progression.
  • One-off interventions to raise income up to the average, such as retraining, are potentially more effective in reducing inequalities in life chances and bringing lifetime opportunities up to the average.


Social policies affect us throughout our lifetime but most policy is designed to intervene at certain points, for instance: child benefits when we are children or have children and pensions for retirement. The many radical policy changes since 1997 have occurred at a time of growing demarcation in policy development into lifetime phases: children, working age and pensioner groups. The Prime Minister has hailed this programme as "more ambitious and far-reaching than any since the Second World War" (A New Contract for Welfare, The Stationery Office, 1998). This research analyses current social policy taking a lifetime perspective to assess how policies interact over our lives and the cumulative effect of this.

The research takes an innovative approach using simulated hypothetical lifetimes - a set of circumstances and events that are held constant to enable comparison between people, lifetimes and events. These models assume only the current set of policy rules and their underlying assumptions about inflation and up-rating. The model lifetimes are:

  • Mr Modal - who has average male earnings, is single throughout his life and owns his home.
  • Mr Meager - has low earnings, is single throughout his life and rents his home.
  • Ms Middleton - has average earnings, has a partner on average earnings, buys the joint home and has two children.
  • Ms Lowe - has low earnings, has a partner on low earnings, rents the joint home and has two children.
  • Mr Jobin - has low earnings, is single, rents his home and suffers unemployment.
  • Mr Hales - has low earnings, is single, rents his home but becomes disabled and incapable of work.
  • Ms Singleton - has low earnings, rents her and her partner's home and has a child but becomes a lone parent.

These model lifetimes are used to analyse and understand how current policy design will:

  • protect against poverty;
  • provide incentives to work and save;
  • promote opportunity throughout the lifetime.

The risk of lifetime poverty

Lifetime poverty profiles look at both 'poverty gaps' (periods below the poverty line) and 'poverty clearance' (periods when income is above the poverty line). Poverty clearance is necessary to enable saving so as to avoid potential poverty later in life. Poverty clearance during retirement also allows an escape from means-tested benefits and thus optimises lifetime savings.

Measuring lifetime poverty uses a measure of 60 per cent of equivalent after housing cost income. Allowing for housing costs is essential to avoid anomalous and contradictory comparisons between renters and owner-occupiers over the lifetime.

For average earners (Mr Modal and Ms Middleton), their risk of poverty is mostly focused on retirement. The State underwrites a retirement income of 104 per cent of poverty for a single person but 96 per cent for a couple. Average earners can afford to contribute to private pensions to increase poverty clearance in retirement. But private pension provision is highly variable, with only occupational final salary schemes assured of giving poverty clearance over retirement. Private money purchase pension schemes have greater uncertainty as well as hidden costs of charges and commissions, which together provide a wide range of potential outcomes for the same lifetime contribution.

Low-paid lifetimes at 60 per cent of average earnings (Mr Meager and Ms Lowe) will not achieve adequate levels of poverty clearance during working age to allow saving so as to avoid an income at the margins of poverty in retirement.

Simulations that changed Mr Meager's low-paid working life to improve lifetime poverty profiles suggest strongly that one-off interventions to raise income up to the average at one point in time (for instance, through returning to higher education) are potentially more effective than waiting for incremental increases in earnings from job progression to reduce inequalities and to bring lifetime opportunities up to the average. However, such a change has to be made relatively early in the working life, otherwise it is probable that those on low pay may be able to make up on one dimension of inequality - either pensions or home-ownership - but not both. There are therefore constraints of timing across a lifetime in promoting such opportunities for low-paid people.

Families with children (the Middletons and the Lowes) have a much higher risk of poverty if they move to relying on a single earner at the same time as needs increase. State support for children does not ensure consistent poverty clearance because child benefit and tax credits are only increased with prices and thus fall in relative value over time as children age and their needs increase.

Low-paid families with children (the Lowes) fall into poverty and do not escape until there are two full-time earners.

Simulations to explore how far returning to work and paying childcare could help escape poverty or provide greater poverty clearance show that this doesn't help low-paid families. The best way for low-paid families with children to avoid poverty is to raise earnings capacity rather than to work more.

The risk of childhood poverty means that those on low to medium earnings have great difficulty ensuring poverty clearance when raising children and in retirement. Saving for retirement while children are present will reduce poverty clearance merely to gain such poverty clearance later in life. Failing to do so reverses the lifetime poverty profile so that avoiding child poverty may lead to poverty in retirement - a 'lifetime poverty see-saw'.

The research also looked at events that can often accompany low-paid lifetimes and that increase the likelihood of lifetime poverty. These showed that out of work benefits for unemployment, invalidity and disablement and lone parenthood are associated with increasing poverty gaps over the lifetime of Mr Jobin, Mr Hales and Ms Singleton. Mr Jobin's income when unemployed in his 50s is likely to be only 20 per cent of the poverty line if current assumptions hold.

Incentives and opportunities over the lifetime

The high likelihood of low-waged youth poverty is something that will affect lifetime outcomes. First, it will have knock-on implications for parents if the young person is living in the parental home - potentially affecting parental ability to save for retirement, for instance. However, it is also important for the young person's lifetime because of increased reliance on individual earnings over the whole lifetime to fund pensions.

Work incentives are mostly seen as the ability to make a difference at a single point of time - being better off in work than out of work. A lifetime perspective shows that a longer term view may mean that working makes no difference to lifetime outcomes - especially pension income - for those on low pay. Thus work incentives, especially for those within sight of pension age, may need to be thought of differently. Ensuring people are better off in work partly rests on declining levels of benefits out of work; the continued decline of such benefits undermines anti-poverty policy in the short to medium term and is unsustainable in the longer-term.

The current mix of means-tested support for those on low incomes and for families with children leads not only to high marginal tax rates but also to the risk of families having long periods of their lifetime subject to high marginal tax rates. The potential combinations of having children, paying for childcare, paying rent and low pay and their interactions with tax credits and other in-work benefits mean that the Lowes will face not just high rates of marginal tax for a single year but for at least 16 years.

A lifetime perspective on work and savings incentives leads us to frame a concept called the 'opportunity trap'. This concept may sound like an oxymoron because opportunities are usually seen as the opposite of traps. However, an opportunity trap can exist where it is either too late or too costly to take up an opportunity - to be excluded or trapped out of opportunity - or where taking up an opportunity has either no or only marginal impact on lifetime income profiles - to take up an opportunity and still be trapped.


The analysis shows that in the short-term policies to make work pay and to reduce child poverty roughly add up but the longer one looks ahead, the bigger the cracks that appear.

Major design problems exist because policy-makers are not planning for investment in lifetime infrastructure, especially in terms of linking increases in child-related measures and in pensions to increases in earnings. For instance, in less than 18 years time, the current assumptions for ensuring that 'work pays' for lone parents will no longer stand-up, a worrying future when targets are set to abolish child poverty within 15 years.

As seen above, the 'lifetime poverty seesaw' makes balancing the needs of children and retirement are difficult - especially for those of modest incomes.

Using a lifetime perspective to join up periods of high and low risk of poverty and think about prevention, it becomes important not just to identify the durations and depth of poverty but also the duration and heights of poverty clearance. This means that the very group that are missing from current anti-poverty policy - those of working age - may also require more attention if child and pensioner poverty are to be eventually eliminated.

About the project

The research was carried out by Martin Evans and Jill Eyre in the Centre for Analysis of Social Policy at the University of Bath. The researchers developed a new simulation programme, the Lifetime Opportunities and Incentives Simulation (LOIS) to undertake the research.

All simulations are based on hypothetical cases and, while empirically informed through use of both longitudinal and cross-sectional data, no lifetime reflects a real life.


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