The winter fuel payment (WFP) is a non-taxable and non-means tested benefit paid, usually in November or December, to all households where one member is older than the female state pension age (currently between 60 and 61 and rising). The payment is usually worth £200 to households where the oldest person is aged less than 80 and £300 where the oldest person is aged 80 or over, but has been supplemented by additional "one-off" payments of £50 and £100 respectively for the past three years. Total expenditure on the WFP in 2010-11 is forecast to be £2.7 billion, and is due to fall to £2.1billion in 2011-12 unless the "one-off" supplements are continued.
In recent months, there has been much speculation that the WFP will be abolished or restricted as part of the programme of spending cuts. This debate has mostly set the expense of paying benefits to richer households against the cost and inefficiencies that arise when benefits are means-tested. Lacking from the debate has been evidence on what the WFP does, and does not, achieve. In this observation we draw on two research projects undertaken by IFS researchers, funded by the Nuffield Foundation** which attempt to provide precisely that.
The first new finding is that some households containing someone over the age of 60 spend less on food during unseasonably cold weather - suggesting that they face the so-called "heat or eat trade-off". This is evident only among the poorest quarter of older households and only when the temperature is substantially lower than would be expected (i.e. when there is a month where the average temperature is more than about 2 degrees Celsius lower than normal for that time of year). This suggests that the WFP, in conjunction with other government policies, does not fully protect all older households from the impact of very cold weather.
The second piece of research examines the extent to which recipients actually spend the WFP on fuel. As an unconditional cash transfer there is no obligation to spend all (or even any) of the payment on fuel: it is simply extra income to those households containing someone over the female state pension age. However, ongoing research at the IFS suggests that recipients spend more of the WFP on household fuel than they spend of other income: households with someone aged 60 or more spend on average a little less than 3p of each additional pound of income on fuel, but when that additional income is provided through the WFP this rises to between 20p and 63p. This discrepancy could indicate that the name of the benefit (possibly combined with the fact that it is paid in November or December) has some persuasive influence on how it is spent.
While the WFP does, therefore, seem to increase fuel expenditure among older households, it is not clear that the policy is successful at protecting those most likely to struggle to heat their homes adequately. Additionally, as a universal payment, much of the money spent on the WFP goes to those who have resources that are more than sufficient to purchase an adequate quantity of fuel. One implication of our research is that it might be sensible to scrap the WFP and replace it with a payment that provides targeted support to those most likely to need help with their fuel bills. Such a payment could be either more closely linked to household income - such as a compensating rise in the means-tested pension credit, or more closely linked to extreme cold weather, or more closely linked to both. One way to more closely link it to both weather and income would be to provide a compensating increase in the generosity of the existing cold weather payments. These are currently paid in weeks of particularly cold weather to households in receipt of certain means-tested benefits and which contains a pensioner, a child under the age of five or someone who is disabled. The cold weather payment (of £25 per week) is received when the average temperature is recorded as, or forecasted to be, less than zero degrees Celsius for seven consecutive days.
If the Spending Review does not prompt the demise of the WFP, then it would be helpful to hear what the Government thinks is the purpose of the payment. If the aim of the payment is to encourage older individuals (regardless of their income) to increase their fuel consumption, then it seems to be a reasonably successful (albeit expensive) policy. If, though, the aim is to reduce hardship among those most likely to struggle with paying their winter fuel bills, then the policy is poorly targeted and a great deal more expensive than necessary.
** Please note: the views expressed here are those of the authors, not the Nuffield Foundation.
Tom Crossley and Cormac O'Dea
Tom Crossley is a Research Fellow at IFS and a Reader in Economics at the University of Cambridge. He is also director of the consumption and saving research sector at IFS.
Cormac O'Dea joined the the consumption sector of the IFS as a Research Economist in October 2007. His current work focuses on household expenditure and saving behaviour.