Means test
Encyclopedia
A means test is a determination of whether an individual or family is eligible for help from the government.
" (direct transfer payments to individuals to combat poverty). They are not generally used for primary education and secondary education which are tax-funded. Means tests for public health insurance were once common but are now illegal, as the Canada Health Act
of 1984 requires that all the provinces provide universal healthcare coverage to be eligible for subsidies from the federal government. Nor are means tests used for pensions and seniors' benefits.
in the United Kingdom
. Today, several benefit payments (including Pension Credit
) by the government are means-tested, meaning that the entitlement to it is affected by the amount of income and savings. October 2006 saw the introduction of means testing as part of the determination of legal aid in the Magistrates Court. Similar ideas have been made by the Ministry of Justice
for the higher Crown Court
in November 2008 with a consultation paper proposing the introduction of Crown Court
means-tested legal aid. As of 29 January 2009 the consultation is closed and awaiting a decision.
as the test used by courts to determine eligibility for Title 11 of the United States Code
Chapter 7 or Chapter 13 bankruptcy.
During the Great Depression
, the test was used to screen applicants for such programs as Home Relief in the United States
, and starting in the 1960s, for benefits such as those provided by the Food Stamp Program
.
In 1992, third-party Presidential candidate Ross Perot
proposed that future Social Security
benefits be subjected to a means test; though this was hailed by some as a potential solution to an impending crisis in funding the program, few other political candidates since Perot have publicly made the same suggestion, which would require costly investigations and might associate accepting those benefits with social stigma
.
In 2005, the United States substantially changed its bankruptcy laws
, adding a means test to prevent wealthy debtors from filing for Chapter 7 Bankruptcy
. The most noteworthy change brought by the 2005 BAPCPA amendments occurred within . The amendments effectively subject most debtors who make an income, as calculated by the Code, above the median income of the debtor's state to an income-based test. This test is referred to as the "means test." The means test provides for a finding of abuse if the debtor's income is higher than a specified portion of their debts. If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances."
Debtors whose income is below the state's median income are not subject to the means test. Notably, the Code-calculated income may be higher or lower than the debtor's actual income at the time of filing for bankruptcy. This has led some commentators to refer to the bankruptcy code's "current monthly income" as "presumed income." If the debtor's debt is not primarily consumer debt, then the means test is inapplicable.
Thus, the means test is "a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. (These filers may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 to wipe out their debts altogether.)" The bankruptcy means test is rather complex but quite generous and most debtors have no trouble meeting its requirements. Consumers can use a means test calculator to determine their eligibility. Others have suggested that the means test is not all that fair or equitable, and have somewhat cynically pointed out that the reference to consumer protection in the bankruptcy act is ironic at best, since those with primarily consumer debt are required to pass a means test while businesses are not. What is undeniable is that it is complex, and the terms that govern many parts of it - including those terms that control whether it applies at all - are of unsettled definition.
(USA), Medifund (Singapore) and Medical Cards (Ireland).
It has been announced that means testing is one of the top three areas the Health Sector in Singapore would look at to further improve its subsidiary benefits. This will be done so according to income.
, in the Beveridge Report
(blueprint for the UK's post-war social system) was opposed to means-testing, due to the poverty trap (below). Issues of a poverty program versus a social program include:
Stigma: A program benefiting only the poor may carry a stigma on its use, and be demeaning; compare poverty food.
Political support: A program benefiting only the poor may lack broad-based political support, in contrast to programs that all share in.
Redistribution: Poverty programs transfer money from the rich to the poor, as they benefit the poor only but are paid for by the tax payers.
Further objections to means-testing include:
Poverty trap
: Means tests, particularly sharp cut-offs, create high effective marginal tax rate
s and can serve to keep people in poverty, both by removing social support as the person tries to escape poverty, and by discouraging such attempts by high costs. For example, asset-based limits, such as requiring an individual to have little or no savings to qualify, not only discourage saving (because of the cost of being disqualified from such savings) but require a person to become completely destitute to qualify, thus meaning that they do not have any much-needed savings when attempting to escape poverty.
Access: Means tests, particularly complicated ones and ones that differ between programs and between different levels of government, complicate access to programs – individuals cannot easily know if they qualify, and may qualify for some programs but not others. In the absence of centralized outreach, the added complication of means tests means that some, perhaps many people who qualify for programs do not benefit from them.
Administrative costs: Means tests increase administrative costs (overhead), due to the work of verifying that the tests are satisfied. Some argue that these costs can offset or more than offset the savings by reduced payouts under means-testing.
Entitlement/promises: If means-testing is implemented in an existing program, particularly for which people have paid taxes but not benefited, as in pensions or medical insurance, the reduction in benefits can be seen as a breach of promise and entitlement of the program.
US specific:
Canada
In Canada means tests are used for student finance (for post-secondary education), and "welfareWelfare
Welfare refers to a broad discourse which may hold certain implications regarding the provision of a minimal level of wellbeing and social support for all citizens without the stigma of charity. This is termed "social solidarity"...
" (direct transfer payments to individuals to combat poverty). They are not generally used for primary education and secondary education which are tax-funded. Means tests for public health insurance were once common but are now illegal, as the Canada Health Act
Canada Health Act
The Canada Health Act is a piece of Canadian federal legislation, adopted in 1984, which specifies the conditions and criteria with which the provincial and territorial health insurance programs must conform in order to receive federal transfer payments under the Canada Health Transfer...
of 1984 requires that all the provinces provide universal healthcare coverage to be eligible for subsidies from the federal government. Nor are means tests used for pensions and seniors' benefits.
United Kingdom
Resentment over a means test was among the factors giving rise to the National Unemployed Workers' MovementNational Unemployed Workers' Movement
The National Unemployed Workers' Movement was a British organisation set up in 1921 by members of the Communist Party of Great Britain. It aimed to draw attention to the plight of unemployed workers during the post World War I slump, the 1926 General Strike and later the Great Depression, and to...
in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. Today, several benefit payments (including Pension Credit
Pension Credit
Pension Credit was introduced in the UK in 2003 by Gordon Brown, then Chancellor of the Exchequer, and was designed to lift a large number of the poorest retired people out of poverty. It replaced the Minimum Income Guarantee, which had been introduced in 1997...
) by the government are means-tested, meaning that the entitlement to it is affected by the amount of income and savings. October 2006 saw the introduction of means testing as part of the determination of legal aid in the Magistrates Court. Similar ideas have been made by the Ministry of Justice
Ministry of Justice (United Kingdom)
The Ministry of Justice is a ministerial department of the UK Government headed by the Secretary of State for Justice and Lord Chancellor, who is responsible for improvements to the justice system so that it better serves the public...
for the higher Crown Court
Crown Court
The Crown Court of England and Wales is, together with the High Court of Justice and the Court of Appeal, one of the constituent parts of the Senior Courts of England and Wales...
in November 2008 with a consultation paper proposing the introduction of Crown Court
Crown Court
The Crown Court of England and Wales is, together with the High Court of Justice and the Court of Appeal, one of the constituent parts of the Senior Courts of England and Wales...
means-tested legal aid. As of 29 January 2009 the consultation is closed and awaiting a decision.
United States
Means testing "refers generally to the eligibility for relief for debtors who have sufficient financial means to pay a portion of their debts." The means test is perhaps best recognized in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
as the test used by courts to determine eligibility for Title 11 of the United States Code
Title 11 of the United States Code
Title 11 of the United States Code is the primary source of bankruptcy law in the United States Code.-Contents:Title 11 is subdivided into nine chapters. It used to include more chapters, but some of them have since been repealed in their entirety...
Chapter 7 or Chapter 13 bankruptcy.
During the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
, the test was used to screen applicants for such programs as Home Relief in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, and starting in the 1960s, for benefits such as those provided by the Food Stamp Program
Food Stamp Program
The United States Supplemental Nutrition Assistance Program , historically and commonly known as the Food Stamp Program, is a federal-assistance program that provides assistance to low- and no-income people and families living in the U.S. Though the program is administered by the U.S. Department of...
.
In 1992, third-party Presidential candidate Ross Perot
Ross Perot
Henry Ross Perot is a U.S. businessman best known for running for President of the United States in 1992 and 1996. Perot founded Electronic Data Systems in 1962, sold the company to General Motors in 1984, and founded Perot Systems in 1988...
proposed that future Social Security
Social Security (United States)
In the United States, Social Security refers to the federal Old-Age, Survivors, and Disability Insurance program.The original Social Security Act and the current version of the Act, as amended encompass several social welfare and social insurance programs...
benefits be subjected to a means test; though this was hailed by some as a potential solution to an impending crisis in funding the program, few other political candidates since Perot have publicly made the same suggestion, which would require costly investigations and might associate accepting those benefits with social stigma
Social stigma
Social stigma is the severe disapproval of or discontent with a person on the grounds of characteristics that distinguish them from other members of a society.Almost all stigma is based on a person differing from social or cultural norms...
.
In 2005, the United States substantially changed its bankruptcy laws
Bankruptcy in the United States
Bankruptcy in the United States is governed under the United States Constitution which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." Congress has exercised this authority several times since 1801, most recently by adopting the Bankruptcy...
, adding a means test to prevent wealthy debtors from filing for Chapter 7 Bankruptcy
Chapter 7, Title 11, United States Code
Chapter 7 of the Title 11 of the United States Code governs the process of liquidation under the bankruptcy laws of the United States...
. The most noteworthy change brought by the 2005 BAPCPA amendments occurred within . The amendments effectively subject most debtors who make an income, as calculated by the Code, above the median income of the debtor's state to an income-based test. This test is referred to as the "means test." The means test provides for a finding of abuse if the debtor's income is higher than a specified portion of their debts. If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances."
Debtors whose income is below the state's median income are not subject to the means test. Notably, the Code-calculated income may be higher or lower than the debtor's actual income at the time of filing for bankruptcy. This has led some commentators to refer to the bankruptcy code's "current monthly income" as "presumed income." If the debtor's debt is not primarily consumer debt, then the means test is inapplicable.
Thus, the means test is "a formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. (These filers may use Chapter 13 bankruptcy to repay a portion of their debts, but may not use Chapter 7 to wipe out their debts altogether.)" The bankruptcy means test is rather complex but quite generous and most debtors have no trouble meeting its requirements. Consumers can use a means test calculator to determine their eligibility. Others have suggested that the means test is not all that fair or equitable, and have somewhat cynically pointed out that the reference to consumer protection in the bankruptcy act is ironic at best, since those with primarily consumer debt are required to pass a means test while businesses are not. What is undeniable is that it is complex, and the terms that govern many parts of it - including those terms that control whether it applies at all - are of unsettled definition.
Other international examples
Examples of means testing in the healthcare sector include MedicaidMedicaid
Medicaid is the United States health program for certain people and families with low incomes and resources. It is a means-tested program that is jointly funded by the state and federal governments, and is managed by the states. People served by Medicaid are U.S. citizens or legal permanent...
(USA), Medifund (Singapore) and Medical Cards (Ireland).
It has been announced that means testing is one of the top three areas the Health Sector in Singapore would look at to further improve its subsidiary benefits. This will be done so according to income.
Criticism
Means-testing has been criticized on a number of grounds, the most fundamental of which is the distinction between a social program, which helps all equally or in proportion to their taxation, and a poverty program, which disproportionately helps the poor. For example, William BeveridgeWilliam Beveridge
William Henry Beveridge, 1st Baron Beveridge KCB was a British economist and social reformer. He is best known for his 1942 report Social Insurance and Allied Services which served as the basis for the post-World War II welfare state put in place by the Labour government elected in 1945.Lord...
, in the Beveridge Report
Beveridge Report
The Report of the Inter-Departmental Committee on Social Insurance and Allied Services, known commonly as the Beveridge Report was an influential document in the founding of the Welfare State in the United Kingdom...
(blueprint for the UK's post-war social system) was opposed to means-testing, due to the poverty trap (below). Issues of a poverty program versus a social program include:
Stigma: A program benefiting only the poor may carry a stigma on its use, and be demeaning; compare poverty food.
Political support: A program benefiting only the poor may lack broad-based political support, in contrast to programs that all share in.
Redistribution: Poverty programs transfer money from the rich to the poor, as they benefit the poor only but are paid for by the tax payers.
Further objections to means-testing include:
Poverty trap
Poverty trap
A poverty trap is "any self-reinforcing mechanism which causes poverty to persist." If it persists from generation to generation, the trap begins to reinforce itself if steps are not taken to break the cycle.-Developing world:...
: Means tests, particularly sharp cut-offs, create high effective marginal tax rate
Effective marginal tax rate
The effective marginal tax rate is the combined effect on a person's earnings of income tax and the withdrawal of means testing of state welfare benefits...
s and can serve to keep people in poverty, both by removing social support as the person tries to escape poverty, and by discouraging such attempts by high costs. For example, asset-based limits, such as requiring an individual to have little or no savings to qualify, not only discourage saving (because of the cost of being disqualified from such savings) but require a person to become completely destitute to qualify, thus meaning that they do not have any much-needed savings when attempting to escape poverty.
Access: Means tests, particularly complicated ones and ones that differ between programs and between different levels of government, complicate access to programs – individuals cannot easily know if they qualify, and may qualify for some programs but not others. In the absence of centralized outreach, the added complication of means tests means that some, perhaps many people who qualify for programs do not benefit from them.
Administrative costs: Means tests increase administrative costs (overhead), due to the work of verifying that the tests are satisfied. Some argue that these costs can offset or more than offset the savings by reduced payouts under means-testing.
Entitlement/promises: If means-testing is implemented in an existing program, particularly for which people have paid taxes but not benefited, as in pensions or medical insurance, the reduction in benefits can be seen as a breach of promise and entitlement of the program.
See also
- EntitlementEntitlementAn entitlement is a guarantee of access to benefits based on established rights or by legislation. A "right" is itself an entitlement associated with a moral or social principle, such that an "entitlement" is a provision made in accordance with legal framework of a society...
- Entitlement theoryEntitlement TheoryEntitlement theory is a theory of distributive justice and private property created by Robert Nozick in his book Anarchy, State, and Utopia...
- Social welfare
- Conditional Cash TransferConditional Cash TransferConditional cash transfer programs aim to reduce poverty by making welfare programs conditional upon the receivers' actions. The government only transfers the money to persons who meet certain criteria...
US specific:
- Chapter 7, Title 11, United States Code