The purpose of the social protection system, i.e. tax and benefit system, is to alleviate social risks. For example, subsistence benefit ensures minimal income for a person whose other income is not sufficient to cover the costs of general everyday needs. The basis for calculating the subsistence level is absolute poverty rate, in other words the estimated subsistence minimum. The absolute poverty rate/subsistence minimum is also used at international level for assessing the adequacy of the benefits for alleviating poverty. Therefore, it is necessary for the methodology of the estimated subsistence minimum to be up-to-date and meet the needs of the current situation. Current methodology is established in 2004 and takes into account only basic needs and not, for example, social needs.
Praxis carried out an analysis to evaluate the suitability of the current methodology of the estimated subsistence minimum in 2018 and proposed a new amended methodology for calculating the subsistence minimum. In addition, we assessed the relationship between the subsistence minimum and other income distribution indicators.
- Estonian subsistence minimum consists of three main components – minimum expenses on food, housing and other non-food expenses e.g. clothing, health, transportation etc. With all three, methodology for finding subsistence minimum level is a mixture of empirical consumption data and expert estimations. Subsistence minimum level has so far been strictly seen as the lowest expenses a person needs to satisfy one’s physiological survival and has been used as an equivalent to absolute poverty level. Subsistence minimum in 2016 was 200€.
- In this report, the authors expand the essence of subsistence minimum. It should no longer be sufficient objective to simply reach the sole minimum of survival, without looking further into inclusion and participation in society. Subsistence minimum level ought to include not only inescapable expenses for physiological survival, but to include the needs that exceed the bare minimum. Absolute poverty can’t be seen merely as material – poverty means deprivation of choice, whether it is choice to participate in cultural events or self-educate outside the state founded opportunities. To achieve this, the authors propose to change several coefficients that are used to calculate cost of non-food expenses.
- This report proposes three new minimum subsistence levels. Using methodology from similar analysis in 2005 with base method approach, one would see minimum subsistence level of 205€. Increasing expert coefficients of non-food expenses to reflect population median instead of first deciles would then increase minimum level to 250€. Adding imputed rent would further surge the subsistence minimum to 294€.
- To account for different household structures, equivalent scales are used. In 2016, instead of currently used OECD-classical scale of 1:0,7:0,5, OECD-modified weights of 1:0,5:0,3 would fit the data the closest. However, choice of different scales will significantly alter the subsistence minimum for households as using subsistence level equivalent scales of 1:0,8:1,2 would give children four times greater weight than OECD-classical scales.
- Choice of equivalent scales and addition of imputed rent will all influence poverty levels and state budget. Analysis of 8 scenarios shows that the change is not continuously for reduction of relative and absolute poverty. In practice, including imputed rent is complex and will increase the value of poverty indicators.