Professor Dorothy Watson:

I will be brief. I thank the Chairman for the introduction. I will talk briefly about a piece of research we did at the ESRI where we looked at the impact of social transfers on poverty. In contrast to what my colleague, Professor Tim Callan, will talk about, the focus of this research was on the very bottom of the income distribution and the significance of social transfers in alleviating income poverty. Therefore, the focus was very specific. The research focused on the period from 2004 to 2011. Therefore, it covered a period of economic well-being, economic growth and also the period at the beginning of the recession. I will summarise the findings under four headings: looking at changes in the significance of social transfer income for households, changes in the effectiveness of social transfers in reducing income poverty, variations in this respect across life cycle groups, and how Ireland in the period compared with other European countries. To give an indication of what is covered by the term "social transfers", it includes the State means-tested and non-means-tested social welfare payments, and it also includes child benefit and pensions, whether those pensions are from the State or from an occupational pension scheme.

Looking at changes in the significance of social transfers, as we might expect as a result of the recession, social transfers became much more important as a component of household income over the period.

In 2004 for instance, on average 20% of household income came from social transfers, but by 2011 that had increased by 50% up to 30%. There was a huge increase in the significance of social transfers. If one looks at households in receipt of social transfers, because we are including child benefit and pensions, a very high percentage of households receive some social transfer income. It was already very high in 2005 but it increased from 85% to 87% in 2011. There was a more significant change in the average amount of social transfer income received by those households. It went from an average of €233 per week in 2004 to €327 per week in 2011, and that is in 2011 prices. Part of the increase was due to increasing rates of payment of social transfer payments up until 2009, and of course also, more important, an increase in the proportion of people who were receiving payments such as unemployment assistance and unemployment benefit once the recession started.

How effective were social transfers in reducing poverty? When we talk about poverty reduction effectiveness there are a couple of different ways to measure it, but one of the best measures is to look at how much of a gap there is between the poverty threshold - the level of income a household would need not to be considered income poor - and the income the household gets from non-social transfer sources, from market sources such as work, interest in dividends and so on. We call that gap the poverty gap. A measure of the effectiveness of social transfers is to ask what percentage of the average poverty gap do the social transfers bridge or close. In 2012 for instance, the poverty threshold of a household with two adults and two children would have been €473 per week, and if the family had €300 per week from work the poverty gap would be €173. We ask how much of the gap is bridged by social transfers.

Looking at the population as a whole, the reduction in the poverty gap was 84% in 2004 and increased to 88% by 2011. There was an improvement in the extent to which social transfers bridged the income poverty gap in the period. There are a variety of reasons for that but I will not go into them now. I can address them later if people would like.

Looking at different life cycle groups, what we see is that the poverty reduction effectiveness ranges from 84% for working age adults to 95% for retirement age adults. The system is very effective at reducing poverty for adults of retirement age. Part of the reason is that they are very dependent on social transfers and they are less likely to have income from work. Another factor is that we are including the non-means tested pensions as well as occupational pensions in what we consider to be social transfers. The effectiveness for children is somewhere in the middle at about 87%.

How does Ireland compare with other European countries in this respect? Because our social protection system and social system in general places a great deal of emphasis on cash benefits rather than on providing services, when we compare Ireland with other European countries in terms of looking at the impact of cash benefits on poverty reduction, we come out looking pretty good. In 2005, using the measure of closing the poverty gap, Ireland was about in the middle of the EU 15 countries. That had improved by 2010, which at that point was the latest year we were able to look at, where Ireland had moved towards the top of the distribution. In terms of poverty reduction effectiveness, Ireland compared favourably with other European countries.

To summarise, the analysis indicated that social transfers in Ireland increased in terms of how effective they were in reducing poverty between 2004 and 2011. That was mainly due to an increase in social protection spending, because a larger number of people were receiving social protection payments, in particular those related to unemployment. The effectiveness is particularly high for pensioners. Ireland compared favourably in that respect with other EU 15 countries.