House of Commons - Social Security

Select Committee on Social Security Second Report

SECOND REPORT

SOCIAL SECURITY REFORMS:

LESSONS FROM THE UNITED STATES OF AMERICA

The Social Security Committee has agreed to the following Report:

1. In December 1997 the Social Security Committee visited the United States of America to study aspects of welfare reform. We wish to thank all those in Washington D.C. and the State of Wisconsin who generously gave of their time to help us appreciate how welfare reform is operating at both national and State level in the United States. We are particularly grateful to the British Ambassador HE Mr (now Sir) Christopher Meyer and Mr Michael Hodge, HM Consul-General in Chicago, and their colleagues for organising a superb programme to enable us to make the most effective use of the limited time available.[1]

2. The Committee had three main areas of interest that we wished to study in greater depth:

- the Wisconsin Works (W-2) programme

- the operation of the Earned Income Tax Credit for low income workers.

The background to these subject areas is described in Appendices 1 to 3. A note of the visit and of the meetings attended is at Appendix 4. Some selected papers and documents given to the Committee are at Appendices 5 to 10.

3. The purpose of this short Report is to highlight areas of interest arising from the Committee's visit. Since the election of the new Labour Government in May 1997, and in particular in very recent months, the complex subject of reform of the social security system has engendered considerable political controversy. We believe that some of the issues we discussed in the United States are relevant to the debate and reform process in the United Kingdom.[2]

4. From the outset, it must be acknowledged that the United States and the United Kingdom are profoundly different societies. There are fundamental differences in the economic sphere, in the social and ethnic make-up of the population and in the political system. The United Kingdom has a universal, socialised health care system; the United States does not. More specifically, the social security systems of the two countries are different. Indeed, the term 'social security' has a different meaning on the other side of the Atlantic. In the United Kingdom, 'social security' is a generic term applying to all benefits providing financial help whether contributory, universal or means-tested. In the United States, 'social security' refers to the contributory system of state pensions for the elderly and short-term unemployment benefits; on the other hand means-tested benefits, more akin to the United Kingdom's Income Support system, are referred to as 'welfare'. 'Welfare' has a considerable social stigma, while 'social security' does not.

5. Nevertheless, despite the differences in the systems, there are features and problems common to both the United States and the United Kingdom. It is these common features, and the American approaches to dealing with them, that might prove illuminating in the British context. The similar features include:

the desire for reform: both countries have systems which in recent years have been subject to increasing scrutiny and concern over rising costs, caseload numbers, possible behavioural effects and their effectiveness in preventing and/or alleviating poverty

the consequences of changes to family formation and rising divorce rates; both countries have seen increasing numbers of out-of-wedlock births and broken marriages, and a substantial rise in the numbers of lone parents (mainly women) living solely on means-tested benefits

changes to the labour market: both countries have placed importance on the need to encourage and reward work in a period when rapid changes to employment have led to more part-time and fewer permanent jobs and wages at the bottom end of the market have either fallen in real terms or failed to keep up with wage increases higher up the scale.

6. The far-reaching changes to the welfare system in the United States introduced at both national level[3] and State level are based on a wide political consensus. The Committee was told on numerous occasions during its visit that it was widely accepted that the previous system had failed, because it had created dependency and discouraged individual responsibility while leaving many people still in poverty.[4] We were told it was worth taking risks with a new system because the old system contained risks and dangers that had in fact already been realised: the status quo was not in itself a safe option.[5] This consensus was perhaps most strikingly noticeable from those who would be identified as being from the liberal end of the political spectrum.[6] For example the AFL - CIO told the Committee that it had accepted that there was a consensus among trade union members, and the population as a whole, that people should be expected to work wherever this was possible.[7] Undoubtedly, the American reforms have been based on the supremacy of the work ethic. Many of the Americans appeared ready to take risks and accept some casualties to achieve that end. It is questionable whether any similar consensus exists in the United Kingdom. Any changes in social security laws that reduce an individual's benefit entitlement are likely to be controversial whatever the overall goals or likely results.

7. Even among those advocating change in the United Kingdom, many different beliefs and viewpoints can be identified as driving the desire for reform:

- a belief that some of the money spent on social security should be reallocated to other government expenditure programmes such as health and education or alternatively that budget reductions allow for lower taxation

- a belief that the expenditure is badly targeted, is subject to fraud and abuse and encourages dependency among those that could be expected to work

- a belief that the level of poverty shows the system has failed in its objectives and so reform, perhaps entailing higher expenditure if necessary, is required

- a belief that tackling social exclusion is paramount and that action should be taken to remove barriers to work relating to the poverty and unemployment traps.

8. The reforms in Wisconsin highlight various different motivations for changing the nature of the welfare system.[8] Although the numbers on welfare have been reduced, expenditure on welfare programmes has not fallen by the same proportion. Indeed, far more is being spent per head on the existing caseload.[9] Costs of supporting people in work including subsidies for child care, transport, and health care have risen.[10] It should be noted that in the United States, the focus of welfare reform is on lone parents, who represent by far the largest single group on means-tested welfare. In the United Kingdom, lone parents are part of the first phase of welfare-to-work but ultimately welfare reforms will embrace other groups, such as the long-term unemployed and some sick and disabled people. Initial emphasis on reducing costs has now changed to a greater emphasis on helping people to help themselves out of poverty and dependency. Therefore those who look to Wisconsin for a model of how to reduce the costs of social security are likely to be disappointed. Wisconsin's schemes are far more developed and mature than those of most other States and still they are not yet delivering substantial savings. Whether savings will occur in the future is debatable as the economy is currently booming; harder economic times would be more likely to add to costs of welfare.

9. If welfare reform is not concerned with reducing public expenditure, then what is its purpose? In Wisconsin, the purpose is clear: to move all people capable of work from welfare into work.[11] To achieve that end both incentives and sanctions, carrot and stick, are applied.[12] For many welfare recipients in Wisconsin, there are significant to barriers to work, most particularly the availability and costs of child care, the availability and costs of transport and the reluctance to leave welfare and lose access to free health insurance schemes. There are also personal problems of drug dependency and learning difficulties.[13] Wisconsin is prepared to pay for help with all these matters as long as the claimant goes into work. The financial amount of help that the claimant receives may be similar to that available through a welfare cheque but it is only available because the claimant is working.[14] On the other side of the equation are the sanctions that apply if the claimant fails to satisfy the work requirement; welfare payments can be stopped entirely. The person concerned will be expected to rely solely on charity or family and friends.

10. Perhaps the most striking example of the emphasis on the work ethic to be found in Wisconsin was that single mothers with children are expected to satisfy the work requirement once their youngest child reaches 12 weeks old.[15] We regard that 12 week requirement as potentially damaging for both mother and child. It could be argued that this requirement is also inefficient, in that by making the mother work outside the home, the State has to pay for child care (possibly expensive and possibly low quality). The counter-argument was that for married women, federal law provided for 12 weeks maternity leave and that many women went back to work at this stage. To apply different rules for those on welfare amounted to one rule for the majority and another for the poor.[16] We were told that it was younger people (including those who identified themselves as 'liberal' on most issues) who were most in favour of rules to compel mothers of young children back into the labour market; older people were more likely to believe that women should stay with the children.[17] The merits or otherwise of the 12 week requirement became submerged in the general desire for the State to deliver its tough message: work or no benefit.

11. The situation in the United Kingdom for lone parents could scarcely be more different. As long as the youngest child has not reached the age of 16, no work requirement whatsoever is placed on a lone parent. Once the New Deal for lone parents has been rolled out nationally mothers with children over the age of 5 will have to attend an initial interview but need not participate any further in the scheme. The age limit to balance choice against obligation for lone parents is a major policy decision that needs to be taken in the United Kingdom.

12. On a more general level, the Wisconsin reforms highlight choices that the United Kingdom may have to make: whether we wish to spend more of our social security budget supporting people in work rather than out of work and, if so, does the state need to compel people, with stricter sanctions applied, to take whatever work is available. The New Deal for the young unemployed which has already begun in pilot in this country removes the option of remaining on benefit. In Wisconsin placing sanctions on those not fulfilling work requirements is the basic underpinning of the entire welfare system. To what extent should the principle be applied to other groups such as the older unemployed, lone parents and the partially incapacitated in the United Kingdom? Would such a policy still be applied if in-work costs for these groups (child care in both countries, Housing Benefit in the United Kingdom and Medicaid insurance in the United States) meant that welfare spending for such claimants stayed the same or actually increased? What level of sanctions should be applied to those not prepared to meet work requirements? Is it always preferable that someone able to work should be working than to receive the same income by not working?

13. The federal nature of the United States allows for experimentation with different welfare schemes in different States.[18] Different approaches can be tried and tested and Wisconsin's reforms have influenced other States and initiatives at federal level.[19] The unitary political system in the United Kingdom has made experimentation more difficult, although the Earnings Top-Up and the New Deals for lone parents and the young unemployed are making use of pilot schemes. There appeared to be a greater willingness in the United States to try different schemes at state, county or city level than occurs in this country.[20] Yet it is this country with social security policy traditionally formulated centrally and delivered through centralised administration that would appear to have most to gain from allowing greater flexibility and experimentation. The United States federal system, coupled with a willingness to experiment even within States, allows for a comparative approach to welfare reform. There is however little evidence that the individual States do exchange evidence or that effective initiatives and best practice in one State become the norm in other States. In the United Kingdom, one group of claimants having a different benefit entitlement or qualification rules from another group (perhaps based simply on geography) might be seen as unfair to the group with the lower entitlement, despite the fact that in many aspects of life such as housing and employment, equality cannot be assured. The United Kingdom would benefit from greater flexibility and experimentation. More pilot schemes and geographical experiments, particularly when focused on areas with low unemployment, might also allow for quicker, more focused evaluation and monitoring. Additionally a successful use of piloting might involve two separate Agencies piloting the same schemes with evaluation made of the effectiveness of delivery. Such initiatives are developing in this country (for example the use of both the Department of Social Security and the Employment Service in the piloting of the New Deal for Lone Parents).

14. The Committee was told that welfare reform was far more than a matter of changing rules and regulations; what was required was a change in culture and beliefs.[21] The change in culture was required in both claimants and welfare staff alike. For claimants, the message that needed to be understood was that willingness to work in the labour market was the basis of any welfare entitlement. The national changes in rules involving cut-offs of benefits after the relevant time-limits,[22] and the sanctions involved in States' welfare rules, were specifically intended to force claimants to recognise that living indefinitely on benefit was no longer an option. It is not clear what was going to happen once families pass the time-limits and are no longer eligible for benefits. We repeatedly asked whether it was possible that families with children would be allowed to become destitute in such an affluent society. The answer from virtually all concerned was that nobody knew what was going to happen, although there was an underlying belief that children would not be left to starve, if necessary by changing the laws again to allow some form of residual poverty relief. In the meantime, it was the message sent out by the welfare changes that was considered important. Welfare claimants had to believe that they faced a life without benefit entitlement in order to concentrate their minds and ensure that they made sufficient efforts to leave welfare of their own volition, by taking advantage of the welfare-to-work initiatives available to them. There might be an element of bluff in the legal changes but to change and challenge aspects of a dependency culture, tough and frightening messages were believed to be necessary.[23]

15. There was also evidence of a culture change in staff working in the welfare sector. Prior to the development of welfare-to-work initiatives, staff working on welfare programmes regarded their main duties as processing benefit claims, ensuring the correct money was paid at the right time. We were told that the staff's duties and their relationship with claimants had changed completely. In line with the new requirements, staff took a far more pro-active approach in their dealings with claimants. Their first contacts with claimants would be to assess how they could enter the labour market rather than assessing benefit entitlement. The whole emphasis had changed with staff seeing themselves as a support for the claimant to provide help in manoeuvring the claimant into work.[24] Welfare workers were encouraged to see recipients as colleagues in a joint enterprise rather than dependents.[25] Certainly there are lessons for the United Kingdom where we have a large number of officials involved almost entirely in processing claims yet having little direct contact and forming no relationship with claimants. The New Deal presents a major challenge to this group, and especially the Employment Service, who will have to take on more of a "counsellor" role. The change in culture evidenced in the United States might prove useful in helping unlock energy and talent among the United Kingdom's welfare staff. An important part of the culture change involved the ongoing nature of the relationship between staff members and claimants. This is especially important as workers returning to the labour market are likely to experience some failures and setbacks with initial job placements. They need to be encouraged to keep trying as it might be the third or fourth job that proves successful, not the first or second. Staff support, ideally from the same contact person, could make all the difference during this crucial transition period.

16. The United States has seen wages at the bottom end of the labour market drop in value in real terms. Between 1979 and 1997 the medium earnings of male non-graduates fell by 23 per cent in real terms, with a drop of 17 per cent recorded by males with no more than a high school education.[26] Also rates of unemployment are low and the demand for labour has pulled previously economically inactive people into the work force. Part of the welfare-to-work culture in the United States has been concerned with improving support for people in low paid work. The main financial incentive to take work involved the Earned Income Tax Credit (EITC).[27] The EITC was discussed in the Committee's First Report of this Session, Tax and Benefits: An Interim Report.[28] One very noticeable feature about EITC in the United States is that it is not seen as connected in any way to welfare payments. As a part of the tax system, it is regarded as a bonus to working people. It is therefore not stigmatised and is widely supported by the population at large. While significant reductions were taking place in the welfare entitlement of families in the United States, a new Child Tax Credit - of greatest benefit to middle income families - is about to be introduced.[29]

17. Over recent years, the costs of the EITC have grown enormously and the number of people receiving it has risen.[30] So while the American public appears to have turned decisively against welfare payments to the non-working, massively increased public expenditure to low income workers has few, if any, detractors. (Increasing awareness about the level of fraudulent claims for EITC has posed some challenges for the administration of the scheme although it does not appear to have eroded public confidence in the principle).[31] EITC performs much the same role as Family Credit has in the United Kingdom. One significant difference was that almost all recipients (99 per cent) of the EITC receive the money in one lump sum at the end of the tax year.[32] Hardly any took up the option of receiving monthly payments during the year. In the United Kingdom, low income workers receive Family Credit usually on a weekly basis. Any British system of paying an in-work credit should build on the strengths of our existing PAYE system; British recipients would simply not be able to manage financially until the end of the tax year.

18. As in the United Kingdom with Family Credit, EITC is only available to people with dependent children.[33] Dr John Karl Scholz referred to a tax credit for childless workers as the last frontier of social policy but believed it would not happen because of the costs involved.[34] In the United Kingdom, the Earning Top-Up pilot will help determine whether we cross that last frontier. The general thrust of American welfare policy was clear. The more appealing and rewarding that work became, and the less appealing that welfare became, would result in the desired aim; the ending of dependency and greater impetus towards welfare into work. The wider the gap between welfare and work, the less acute becomes any unemployment trap. Making work more attractive appeared popular in the United States, regardless of the increased expenditure involved. It is an important element in the whole welfare to work equation.

19. Despite these differences in society and welfare systems, the American reforms raise a number of themes and issues that need to be addressed as the Government embarks on welfare reform in the United Kingdom. Mr Jay Hein, of the Hudson Institute studying the Wisconsin reforms, identified some important themes behind the success of the Wisconsin initiatives:

basic bi-partisan political support (although there were differences in emphasis from the different political perspectives)
a belief that a profound culture change in the welfare programme was needed
competent and committed bureaucracy and staff
change in claimant perception of welfare
change from passive income maintenance system to pro-active welfare to work strategy.[35]

We endorse these themes as the key issues that need to be addressed in the evolving debate on welfare reform in the United Kingdom.

20. In the United Kingdom, there may never be full political consensus on such a social security reform. The first step is recognition that reform is needed. As a Committee we can at least agree that some significant reform of our social security system is needed. A system which has millions of children being raised on Income Support cannot be said to be wholly successful. We recognise that the British economy does not have the demand for labour that the American economy provides. The British labour market has, however, undergone profound changes; there is overall employment growth and an increase in part-time, temporary and more flexible work patterns. These labour market changes provide the right opportunities to reform the social security system. We believe that the British social security system should be more closely tailored to work requirements for claimants. We would not wish to see anything approaching Wisconsin's requirements for lone parents with young babies to work; any requirement involving under school age children seems counter-productive and possibly harmful to families. The exact nature of the link between benefit and work requirements for families with children is an important question which this Committee will be studying further. Certainly officials in Wisconsin believed that their reforms, with increased expenditure where necessary, helped the poor more than any welfare cheque was able to do. There are lessons to be learnt, with necessary caution, from the American experience. Welfare schemes can be made more active programmes; the numbers of welfare can be significantly reduced and families can be helped (with some push where necessary) to move to self-sufficiency and a higher standard of living. We believe these lessons should be looked at closely in the British context.



© Parliamentary copyright 1998	Prepared 18 February 1998