Social security flaws are driving problem debt

A new research report from StepChange Debt Charity, Problem debt and the social security system, shows why it is vital that the Government should take urgent steps to reform the design flaws within the system that are causing people to experience destitution.

The shocking research findings reveal that half (52%) of the charity’s clients who are in receipt of support meet the definition of destitution, having gone without two or more basic essentials in the past month, with 27% having recently used a food bank.

Even worse, in national polling more than one in ten of those surveyed (10%) said that they had used a loan shark as a result of a problem linked to social security. In total, 43% of those using social security had used credit to pay for essentials over the past year – a key risk factor in developing debt problems.

Common causes of problems include delays and errors, unaffordable deductions from benefits to repay debt and design features of Universal Credit including the five-week wait and unpredictable swings in payments.

National polling shows that 25% of those receiving Universal Credit are in problem debt, three times the rate among the general population (8%) and not far off double the rate of those on legacy benefits (14%).

StepChange argues that the social security system should support financial resilience and recovery from problem debt, but that the present system too often undermines rather than supports these aims. The charity highlights that debt collection practices through the social security system would not meet basic regulatory standards required of consumer credit firms.

StepChange says the government should make short-term changes to ‘debt-proof’ Universal Credit and become a leader of best practice in debt collection by:

  • Ending the five-week wait for Universal Credit
  • Minimising perverse fluctuations in payments by introducing an annual disregard for changes in income
  • Allowing people to choose whether to receive their support monthly or more frequently
  • Reinstating paying housing support direct to the landlord as the default option
  • Overhauling the system of deductions to repay debt to ensure that deductions are only made when they are affordable and in the best interests of claimants
  • Introducing discretionary hardship payments for those who cannot afford to repay a budgeting advance

In the longer term, the charity says the government should develop a sustainable plan to reinstate the link between the value of working age support and the cost of living.

StepChange Debt Charity head of policy Peter Tutton commented: “We already knew that too many people are experiencing hardship and misery through problems with the Universal Credit system. What is new is the evidence of exactly how Universal Credit actively worsens debt problems, more so than the legacy benefits system. Sending people into the arms of loan sharks, and making a debt situation worse at the very time when people most need help, cannot possibly be what social security is for. It’s time to put these problems right.

“Elsewhere the government is doing good work to help people struggling with debt, with the new Breathing Space and statutory debt repayment plan schemes offering hope of real progress. But the goal of improving the financial resilience and inclusion of households is at risk of unravelling because of serious and avoidable problems in the welfare system. There is an urgent need to rethink the way that Universal Credit and legacy benefits can help people recover from financial difficulties instead of making those problems worse.”