Poorest pensioners left in difficult fuel dilemma

Published on Wednesday, 08 June 2011 09:08
Posted by Scott Buckler

Households receiving the Winter Fuel Payment spend 41% of it on fuel even though there is no obligation to do so. When the same households receive additional income which is not labelled in any way, they spend just 3% of it on fuel (June 8th)

To put it another way, simply increase the income of a pensioner household by £100 and they will increase their spending on fuel by £3. Label
that increase a “Winter Fuel Payment” and £41 will go on fuel. Contrary to the predictions of standard economic theory this suggests the
name of a benefit has a significant influence how it is spent. This link between the name of a benefit and how it is spent suggests that
government is able to “nudge” people into particular spending decisions through the way it labels. Of course, if the aim of a particular transfer is not to increase spending on any particular good or service but rather to carry out straightforward redistribution then a label might actually have unintended consequences – and care should be taken in naming benefits.

Laura Blow, Senior Research Economist at IFS, said “The winter fuel payment was introduced to encourage older households to spend more on heating in the winter. Remarkably it appears to have had just that effect. The fact that it is labelled a winter fuel payment appears to mean that much more of it is spent on fuel than would have been the case had no such label been attached.This suggests that simply calling a benefit by a particular name can have a real effect on how it is spent. The potential implications for government policy are

Pensioners choose heat over food in cold weather Some households containing people over the age of 60 reduce food expenditures during unseasonably cold weather. They appear to face a "heat or eat trade-off", cutting back on food spending to finance the additional cost
of keeping warm during cold shocks. The research finds that the poorest 25% of older households increase fuel spending in response to colder weather and that the increase is of similar proportion to the response of other older households; on average by around 7%. But it appears that poorer households also reduce food expenditures to finance these unexpected extra heating costs. Food expenditures are reduced by a little over 7% in this group. On average over all periods this group of households has a weekly spending of around £111, 25% of which goes on
food and 11% on fuel.

The reduction in food expenditure is evident only among the poorest quarter of older households and only when the temperature is substantially lower (more than 2 degrees Celsius) than would be expected for that time of year. Cold weather shocks of this magnitude occur about one in every forty winter months. This suggests that policies specifically targeted at helping families during cold weather shocks, such as the Cold Weather Payment, in conjunction with the annual Winter Fuel Payment, do not fully protect all
older households from the impact of very cold weather.


Source: IFS

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