Do means-tested benefits alleviate poverty?: Evidence on Germany, Sweden and the United Kingdom from the Luxembourg Income Study

Abstract

This article analyses the relationship between means-tested benefits and poverty in Western Europe. Means-tested benefits, as social assistance or housing benefits, are designed as safeguards against poverty for the low-income strata of the population, but our knowledge on their impact is fairly limited. How effective are they in reducing poverty rates? To what degree can they fill the gap that income redistribution through taxes and non-means-tested social security benefits leaves? How large is the impact of means-tested transfers in private household budgets, and how does the role of means-tested benefits vary across countries? This article uses the household data of the Luxembourg Income Study to explore the effectiveness of means-tested programmes in terms of poverty alleviation in Britain, Germany and Sweden in the early 1990s. The results of this analysis show a considerable variation in the degree means-tested benefits can actually protect people from poverty. A comparison of household income before and after means-tested benefits exhibits different patterns of poverty alleviation. Using four relative poverty lines (30 percent, 40 percent, 50 percent and 60 percent of median household income adjusted for family size), this piece of research illustrates that there is considerable variation in the degree people are lifted up the income scale by means-tested benefits.