Is the social safety net keeping up with the rising cost of living?

A fundamental criterion by which one judges a society is how it protects its most vulnerable members. The latter is usually done through a network of legislation we typically call the welfare state or the social safety net. Besides social benefits, this also includes in most countries, a minimum wage.

A recent study carried out by Caritas Malta calculates that to live decently in 2020, a family of two adults with two children requires nearly 14,000, whereas an elderly couple requires just over €8,000. This constituted an increase of 22% for the family of two adults with two children and of 25% for the elderly couples since the study made by Caritas in 2016. Besides accounting for a rise in the cost of living, this increase was also due to the addition of new items to reflect changing social norms. For instance, Caritas started to include the cost of running an air conditioner in the summer months, an internet connection and a smartphone for every adult. That said, in its calculations the bulk of the minimum budget (between 40% and 50% depending on household characteristics) was on food items.

The Caritas 2020 study indicates that a family on one national minimum wage and earning other benefits like the in-work benefit and other allowances, would be some €600 below the required minimum budget. However, if both parents work, income and benefits would be higher than this budget. Similarly, a lone parent with two children who is working on the minimum wage, would earn close to €15,000, or €4,000 more than the minimum budget required for a decent living.

The Caritas 2016 study, even though it had a much more limited minimum budget estimation, indicated that a family of two adults with two children with only one adult working faced a deficit of about €2,000, while a lone parent with two children had about €2,500 more than the required budget.

A comparison of these two studies suggests that, even if one allows for a significant improvement in what constitutes a decent lifestyle, relatively speaking, families on low income were much better off in 2020 than they were in 2016.

This is in line with the steady decline in material deprivation statistics over this period. In 2020 there were 16,636 materially deprived persons, as against 19,251 in 2016 (a fall of 14%). At the same time, the number of persons depending on social assistance fell from 27,910 in 2016 to 21,521 in 2020 (-23%). Similarly, the number of lone parents on social assistance declined from 3,494 to 2,616 (-25%) over the last four years.

The number of persons depending on social assistance fell from 27,910 in 2016 to 21,521 in 2020.

Another interesting study on this aspect was recently published by the Central Bank of Malta. Instead of focusing on the cost of living as measured through the Retail Price Index (RPI), this study calculates indices which focus more on the expenditure patterns of low-income households. The RPI calculates the price change of a basket of goods and services, which is derived from average expenditure shares obtained through the Household Budgetary Survey, but an “average” household is skewed towards high income households, whose expenditure makes up a relatively larger share of total consumer spending.

The Central Bank study instead calculates the inflation rate as experienced by those on low income by looking at their specific consumption basket. The results suggest that between 2010 and 2020 these households experienced some periods of higher inflation than suggested by the official rate. This was particularly so during periods of rising food and energy prices. Indeed, the differential between the two rates was higher than one percentage point until 2013. After 2013, the gap generally reduced following the sharp drop and subsequent stabilisation in energy prices. Between 2016 and 2019, inflation for low-income households averaged just 0.1% above the official RPI.

Thus, in practise when pre-2013 Governments limited rises in social benefits and in the minimum wage to the COLA, they ended up steadily reducing the effective purchasing power of lower-income households. This explains why the numbers in a situation of severe material deprivation and dependent on social assistance had been rising steadily. On the other hand, the practise of the Government to give increases over and above the COLA has reversed these trends.

The study concludes that “even when accounting for the estimated inflation faced by the average low-income household, the minimum wage still maintained its 2010 real value in 2020”. As for pensioners on the minimum pension, the study argues that “the purchasing power of the national minimum pension as of 2020 was higher than in 2010”. In fact, the actual increase in the minimum pension was nearly two and a half times that required to keep pace with the RPI and nearly twice that required to keep pace with the increase in the prices of the basket of expenditure of these pensioners.

It is crucial that these results are maintained and that Government continues to ensure that the social safety net remains relevant and adequate.

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