Poverty risk factors and counter measures

A 2007 study on poverty and targeting social benefits by the Economics Research Centre of the University of Cyprus reveals that pensioners are most likely to experience poverty. Other vulnerable groups are single-parent families, unemployed persons, those with low levels of education, families with more than three children, and women. The study examines the best ways of targeting social benefits such as child allowances, student grants and reduction of income tax.

Poverty rate

In March 2007, the Economics Research Centre (Κέντρο Οικονομικών Ερευνών, ΚΟΕ) of the University of Cyprus (Πανεπιστήμιο Κύπρου) published a study entitled Poverty in Cyprus and targeting social benefits (ΗΦτώχεια στην Κύπρο και Στόχευση Κοινωνικών Παροχών). The study makes a longitudinal econometric analysis of poverty in Cyprus during the 1991–2003 period, using data from the family budget studies of the Statistical Service of Cyprus (Στατιστική Υπηρεσία της Κυπριακής Δημοκρατίας). The research also analyses the extent to which targeting social benefits is an effective means of combating poverty.

Between 1991 and 1997, the poverty rate increased from 22.1% to 22.6%. This upward trend was reversed between 1996 and 2003, when the poverty rate declined from 22.6% to 21.4%.

Effect of household composition

The findings of the study show that the highest poverty rate is seen in the category of pensioners, in particular those who are single, followed by retired couples. The poverty line or threshold for 1991, 1996 and 2003 was €5,249.00, €6,397.59 and €7,689.86 respectively; this threshold is measured as less than 60% of the national average income of a household. According to the study, in 1991 57.8% of households consisting of retired couples were below the poverty line; by 1997, this proportion had increased to 63.8%, but declined in 2003 to 45.7%. As regards single pensioners, the poverty rate is higher: 82.3% of such households were below the poverty line in 1991, although this figure fell to 74.3% in 1997 and to 62.1% in 2003.

After pensioners, single-parent families are the group of households with the second highest poverty rate. In 1991, 24.9% of such households were below the poverty line, a rate which (unlike that of pensioners) increased significantly in the following years, reaching 31.4% in 1997 and 37% in 2003.

With regard to household groups other than pensioners and single-parent families, the following findings are noteworthy:

• the poverty rate among one-person households declined from 23.6% in 1991 to 17.1% in 2003;

• the group with the lowest proportion (around 6%) of households below the poverty line includes the categories of couples with up to two children;

• in the category of couples without children, the poverty rate decreased from 11.1% in 1991 to less than 6% in 2003;

• the poverty rate for couples with three or more children has fluctuated between 12% and 14%, with an upwards trend emerging.

Secondary risk factors

Apart from the family composition of the population, the authors of this study used econometric methods to identify the secondary factors contributing to the likelihood of a household being below the poverty line. The findings showed that the characteristics most associated with this likelihood are: being a single-parent family; having children aged under 23 years in the household; the head of the household being of a young age (20–30 years); having a low educational level; living in a rural area; and the head of the household being a woman.

Conversely, the likelihood of a household being below the poverty line is very small when the wife has a high level of education and is working. Moreover, households are at low risk of being below the poverty line when the head of the household and other adults in the household – for example, the spouse or adult children – work as well.

Targeting social benefits

In addition to presenting the situation with regard to poverty rates in Cyprus, the study also made a proposal for reform of the social benefit system. It suggests that poverty can be reduced by establishing certain thresholds for distribution of social benefits to those groups in genuine need of state assistance. However, the amount of social benefits should be kept the same.

To show how effective a targeted social policy can be, the research examined various hypothetical reforms in the system of tax benefits using the method of simulation. The effectiveness of each hypothetical reform is calculated by the degree to which it reduces the poverty rate. The hypothetical reforms examined refer to redistribution of child allowances, student grants and reduction of income tax.

Redistribution of child allowances

The existing system of providing child allowance is based on the large-family system, that is, the amount of the allowance depends on the number of children. In 2006, the basic annual child allowance provided to a family with one child was €373.29, while €746.60 was given to a family with two children; €2,239.78 was the amount due to a family with three children, while a family with four or more children was entitled to receive €1,119.90 for each child. The alternative methods of providing child allowance, as proposed by the authors of the study, are: a) a uniform amount of allowance for each child; b) a uniform child allowance based on income thresholds; c) a uniform child allowance based on the poverty line. After each of these scenarios was examined, the results showed that the state can further reduce poverty in two ways: first, by distributing a uniform child allowance to families with a maximum income of €25,629 – which would reduce poverty by 4.5%; and second, by adopting the poverty line of the current year as a threshold for awarding the allowance to families that are below this line.

Student grants

According to the existing system, all students attending recognised educational institutions are entitled to receive the basic student grant of €1,708.60 a year. The study argues that the student grant should be subject to household income thresholds, and examines three alternative scenarios with different income thresholds, where the beneficiaries are households with incomes of less than €17,086, €25,629 or €34,172. As in the example of the child allowance, the amount of state expenditure required to provide the student grant remains unchanged; however, it is redistributed to households by means of specific income thresholds.

The results of the econometric analysis showed that the proposed income threshold of €17,086 increases the poverty rate, because many students who live in households with incomes below the poverty line do not receive a grant. In contrast, the proposed €34,172 income threshold improves the position of students in poor families, and therefore compares more favourably with the rest. Through this analysis, the study offers alternative solutions to decreasing poverty without spending more money but by redistributing the existing amount of social benefits.

Direct taxation

A further scenario examined in the study refers to the impact of a possible increase in untaxed income from €17,086 to €20,503.20. This possibility is currently being considered by the government and appears to have the support of the majority of the political parties. The KOE research investigated the extent to which an increase in benefits can be more effective in combating poverty than an increase in untaxed income, by comparing the poverty rate in these two cases. As the table shows, the findings indicate that increasing untaxed income does not reduce poverty, but is marginally favourable to one-person households. However, increasing the social pension is the only measure that reduces the average poverty rate, precisely because it primarily targets people living below the poverty line, that is, older people.