Living Standards, Poverty And Inequality In The UK - 2024

25th July 2024

How do rising mortgage rates and differential inflation affect incomes and poverty?.

How have incomes and poverty changed for pensioners?.

What has happened to living standards since the pandemic?
1. Between 2021-22 and 2022-23, median household income before housing costs (BHC) fell by 0.5%. As a result, median income in 2022-23 was 1.6% lower than in 2019-20. This is equivalent to a fall of 0.6% per year, the same rate of change as seen between 2007-08 and 2011-12, following the global financial crisis.

2. During the pandemic and cost-of-living crisis (2019-20 to 2022-23), poorer households' incomes stagnated while middle- and high-income households saw small falls. This is the net effect of faster income growth for poorer households between 2019–20 and 2021–22, followed by larger falls for them between 2021–22 and 2022–23.

3. The global financial crisis and its immediate aftermath (2007–08 to 2011–12) was more inequality-reducing than the pandemic / cost-of-living crisis period, with poorer households seeing rises in income (rather than stagnation). By contrast, the recovery period from 2011–12 to 2019–20 was inequality-increasing as incomes rose by more among middle- and high-income households than among low-income households. When taken together, households across the income distribution have experienced similar, weak growth in their incomes since 2007–08.

4. In both periods of crisis, declines in income from employment were the main factor pushing down incomes. Similarly, both periods saw the government respond by introducing additional benefit support which served to – on average – stop poorer households' incomes from falling. However, in 2022–23 that support was temporary, in the form of cost-of-living payments and the energy rebate. Those payments have since ended, which will tend to reduce poorer households' incomes going forward.

Poverty and deprivation
1. Despite the significant challenges posed first by the pandemic and then the cost-of-living crisis, poverty rates changed very little between 2019–20 and 2022–23. The overall rate of absolute poverty rose slightly to 18% in 2022–23, the same level as seen in 2019–20. The relative poverty rate fell slightly to 21%, just below the rate in 2019–20. Rates of child and pensioner absolute poverty were also similar to pre-pandemic levels, at 25% and 12% respectively. This comes after a decade of historically slow falls in absolute poverty.

2. In contrast, rates of material deprivation rose substantially between 2019–20 and 2022–23, as more households reported being unable to afford all sorts of essentials. For example, the share of working-age adults that report being unable to adequately heat their home rose from 4% to 11% (1.8 million to 4.6 million), while the share who reported being unable to keep up with bills rose from 5% to 6% (2.1 million to 2.5 million). Increases were seen across all age groups and at all income levels. Part (though unlikely all) of the reason material deprivation has risen much more than poverty may be that the way poverty is measured ignores two factors: differences in inflation and differences in mortgage interest rates faced by different households.

3. In the latest year of income data (2022–23), the average inflation rate – used for the headline poverty statistics – was 10.7%. However, the inflation rates faced by the poorest and richest fifths of households were 12.6% and 10.0%, respectively. Official statistics – which do not take account of variation in inflation faced by households – show absolute poverty rose by 0.8 percentage points (520,000) between 2021–22 and 2022–23 (to 17.9%). Accounting for differences in inflation increases the growth in poverty by another 210,000 (meaning 1.1ppts or 730,000 growth).

4. Headline poverty statistics are adjusted to account for households' housing costs, including mortgage interest payments. But these are calculated on the assumption that all households have the same interest rate, ignoring the significant (and growing) variation in rates between households. In 2022–23, the average mortgage rate was around 2.3%, translating to interest payments of £240 per month for a household with a typical outstanding mortgage. But a tenth of households faced a mortgage interest rate of at least 4.7%, equivalent to £490 per month. Accounting for variation in mortgage interest rates shows that absolute poverty among mortgagors, officially 7.9% in 2022–23, is persistently underestimated by around 0.3ppts, or 70,000 people. As around a third of households are mortgagors, the impact on the headline poverty rate is only around 0.1ppts.

5. Increases in interest rates between December 2021 and December 2023 are likely to have pushed mortgagor poverty rates up by 1.4ppts (320,000 more people), when measured accounting for variation in mortgage interest rates. But official poverty statistics, which apply a single average interest rate to all households, will only capture 1.0ppts (230,000) of this.

6. Despite having only a modest impact on aggregate statistics, mismeasurement of interest rates still means individual households' mortgage interest payments are in some cases severely mismeasured, limiting our ability to understand how recent shocks have affected financial hardship and other outcomes. The majority of mortgagor households' (after-housing-cost) incomes are mismeasured by at least £500 per year due to the assumption of a single mortgage interest rate. Other data suggest that adults who have seen a substantial rise in interest rates since the pandemic were 2ppts more likely to be behind on bills than those who had not. This implies an additional 370,000 adults behind on bills once all households have remortgaged at higher interest rates.

How have pensioner incomes and poverty changed in recent years?
Average pensioner incomes and pensioner poverty
1. Before, and during, the Great Recession, average pensioner incomes were catching up with working-age incomes. Between 2002–03 and 2011–12, median pensioner incomes grew by 22% (after adjusting for inflation), whereas incomes of working-age adults fell by 3%, due to slow growth prior to 2007 and big falls in incomes during the Great Recession. Poorer pensioners' incomes were growing at a similar rate to average pensioner incomes prior to 2011, leading to relative pensioner poverty falling from 25% in 2002–03 to 13% in 2011–12.

2. Since 2011, average pensioner incomes have been growing at a similar rate to working-age incomes. Average incomes for pensioners – which are now very similar to average incomes below state pension age – grew by 12% from 2011–12 to 2022–23, driven by higher state and private pension incomes. This growth was almost identical to the growth in average working-age incomes of 13% over the same period – driven up by rising incomes from employment.

3. However, since 2011, income growth for poor pensioners has lagged behind the population as a whole. From 2011–12 to 2022–23, incomes for poor pensioners (at the 10th percentile of the pensioner income distribution) rose by only 5% (after adjusting for inflation). This is in part because poor pensioners have benefited from neither the rises in employment income nor the rises in private pension income that pushed up incomes for people on middle incomes.

4. This slow income growth for poorer pensioners means that relative pensioner poverty rose from 13% in 2011–12 to 16% in 2022–23, equivalent to an increase of 300,000 pensioners. A key reason for low income growth for poor pensioners has been that growth in state pension incomes has been offset in large part by falling levels of other benefits – higher state pensions increase pensioner incomes, making them increasingly ineligible for further means-tested state support. Indeed, for the poorest third of pensioners, state pensions rose by 6% between 2011–12 and 2022–23 but total benefit incomes (including state pensions) only rose by 1%. In other words, the support that poor pensioners get from the state increasingly comes from the state pension, rather than the means-tested benefit system.

5. In the years since the onset of the pandemic (2019–20 to 2022–23), lower-income pensioners experienced higher income growth than higher-income pensioners, as they received more state support during the cost-of-living crisis and have benefited more from falling (real-terms) housing costs. Indeed, relative income poverty among pensioners fell from 18% to 16% between 2019–20 and 2022–23.

6. However, these income poverty statistics understate the financial difficulties faced by poorer pensioners, as they do not account for the fact that poorer households are more exposed to sharp rises in gas, electricity and food prices. Pensioner material deprivation – a measure of the household's inability to afford key essentials – rose from 6% (700,000 pensioners) in 2019–20 to 8% (1 million pensioners) in 2022–23. For example, the fraction of pensioners who could not afford to keep their home warm rose from 2% to 5% (230,000 to 570,000 pensioners).

Trends in different sources of pensioner incomes
7. Before the pandemic, the average incomes of pensioners were pushed up in part by rising state pension incomes. This was due to a combination of triple-lock indexation of the basic state pension since 2011, the introduction of the new state pension in 2016, successive generations of women having spent more years in paid work, and both men and women having accumulated higher earnings-related pensions. Reforms in 2010 and 2016 also substantially boosted the state pension incomes of many women (notably by comprehensive ‘crediting’ for those who spent long periods out of paid work looking after children). As a result, the gender gap in state pension incomes has all but disappeared for those born after 1950.

8. Despite large increases in state pension incomes for women born since 1950 (and higher average household incomes among pensioners), these changes have not led to large falls in relative income poverty for these women compared with previous generations at the same age (in their late 60s and early 70s). In part this is because the reforms of 2010 and 2016 were designed to boost the incomes of (generally) women with low state pension incomes, rather than boosting the incomes of pensioners with low household incomes. It is also due to higher state pensions leading to falls in eligibility to other benefits for low-income families.

9. Rising incomes from private pensions have been the largest single contributor to growth in average pensioner incomes over the last two decades. This is a result of both gradually increasing coverage (54% of pensioners received income from private pensions in 2019–20 compared with 50% in 2002–03) and increasing amounts received (the average private pension income among those with positive incomes rose from £4,700 to £7,600 a year over this period).

10. Average income from employment (including self-employment) among those aged 66–74 has also been rising gradually over time. This is mainly due to rising employment rates but is also due to rising average earnings among those in paid work. While employment income is not the key income source in older age nor is it the key driver of changes over time, on average it makes up just over half of total household income for working households in their late 60s and early 70s.

Read the full report at IFS HERE
or
Download as Pdf - 96 Pages