Select Committee on Social Security Minutes of Evidence

Memorandum submitted by Professor Pete Alcock (CP3)


    (i)  The contributory principle within social insurance schemes provides both a financial base for social security protection and an ideological legitimacy for the redistribution of resources and support. In practice such comprehensive protection has not been secured within the UK National Insurance scheme, largely because the contributory principle has not operated to include all those in need within the scheme.

    (ii)  There are gaps in social insurance cover because many contingencies associated with poverty do not give rise to NI benefit entitlement. This has been compounded by the collapse of the male breadwinner model on which NI protection was initially based. NI provision has not kept pace with changes in labour markets, family structures and demographic trends. At the same time policy changes within social security have restricted entitlement to NI benefits and expanded the role of means-testing.

    (iii)  The advantages of social insurance are: the contingency base, the support given to labour market participation, the reduction in stigma, the avoidance of disincentives, the individual base for entitlement, the existence of a nominal insurance fund, and the administrative simplicity of the scheme. The weaknesses of social insurance are: the changing socio-economic environment, the impact of contribution conditions, the limited contingencies for payment of benefits, the failure to meet the costs of families, the regressive nature of contribution payment, and the continued administrative fiction of the scheme.

    (iv)  The contributory principle appeals to an inclusive concept of solidarity and implies a quasi-contractual link between rights and responsibilities within social security. This contrasts with means-testing which is based on a much more divisive approach in which those who pay may resent supporting those who receive—and those who receive may feel alienated and excluded from those who pay. Without a return to social insurance there is a serious danger that its advantages as the key integrating principle of social security will be lost and that means-tests will become the defining feature of social protection.

    (v)  Despite changes in labour market and family structures both are still the core social relations within British society. Social insurance protection has declined because it has not been adapted to respond to these changes. The decline in NI entitlement and the expansion of means-testing could be reversed through the adoption of a modernised approach to social insurance protection - building on the strengths of insurance and eliminating its weaknesses.


  1.1  The contributory principle within social insurance schemes provides both a financial base for the social security protection provided and an ideological legitimacy for the redistribution of resources and support which is implicit in such protection. In such a dual context social insurance schemes draw on both the individualistic principles of private insurance protection and the solidaristic principles of social security.

  1.2  The financial base is represented in the UK by the NI fund. This is composed of contributions from employees, employers and a supplement by the Treasury. Such a tripartite structure has always characterised NI protection—when it was first introduced it was known popularly as "ninepence for fourpence". In fact, of course, the fund exists as a financial base in an accounting sense only for the resources are actually collected and distributed on a "pay-as-you-go" basis. Each year the "fund" is exhausted and future benefit entitlements must be met from future contributions.

  1.3  Ideological legitimacy nevertheless flows from this contributory model. The link between payment by contributors and entitlement to future benefit provides a strong model of entitlement for NI claimants, many of whom may believe that they have "paid for" the benefits which they claim. More generally the social insurance base symbolises an inclusive model of social security protection—at different times of our lives, we all have the opportunity to pay in and to get back contributions. This is sometimes described by social policy analysts as horizontal redistribution—although, as discussed later, its legitimacy is undermined by the exclusion of many of those in need of support from social insurance protection.

  1.4  Social insurance can be compared to private insurance in that the contributions made are similar in some ways to the premiums paid to secure private protection. Regular fixed payments are made and in return, if certain specified risks are encountered, protection for contributors is provided. However, as many commentators have pointed out, there are many differences between private insurance and social insurance. The two systems can not readily be inter-changed, and social insurance has developed more as a form of public social security protection than as substitute for private insurance cover.

  1.5  Therefore it is the solidaristic principles of social insurance which are more important in defining the role of the contributory principle within current NI provision. The Beveridge model of social insurance, on which the British scheme is built, was intended as the basis of state protection against poverty; and it was organised on a contributory basis because Beveridge and the other policy-makers believed that this would ensure comprehensive protection for all citizens. In practice such comprehensive protection has not been secured, in part because the contributory principle has not operated to include all within the scheme. The fundamental question facing those concerned with the future development of social insurance is whether such practical problems can be overcome whilst retaining the solidaristic principles which underpin the scheme.


  2.1  The NI scheme operating in Britain is not, of course, a unique example of social security protection. A similar social insurance model has been developed in many other welfare capitalist countries, especially within Western Europe. Each of the national schemes is, of course, distinct in some features. Despite this, however, a loose distinction can be drawn between those social insurance schemes in much of continental Western Europe, which are based on principles developed in Germany by Bismarck; and the scheme still operating to a large extent in Britain, which is based on the principles outlined by Beveridge in his famous report of 1942. These are usually distinguished as the Bismarck and Beveridge traditions, and other countries have also drawn variously upon them.


  2.2  The basic features of the Bismarck tradition are its relatively strict adherence to the insurance notion and its focus on providing social security protection for those leaving established positions in the labour market either temporarily (due to sickness or unemployment) or permanently (on retirement). In Bismarck schemes contributions into the social insurance fund are made by employees, and their employers, in the expectation that these will provide an insurance protection for them on absence from the labour market. The labour market is thus seen as the major source of income for all people in the society—all are either workers or the dependents of workers. And social security aims to protect incomes when the labour market cannot provide. The circumstances and needs of those outside the labour market are consequently not addressed.

  2.3  The close link between labour market status and social security protection is maintained in Bismarck social insurance schemes by the payment of benefits which are related to the earnings received whilst in employment. In a more or less direct sense therefore the level of contributions paid determine the amount of protection provided. This relationship is also guaranteed organisationally by the financial structure of the schemes, which operate as separate insurance funds, ensuring that their resources are sufficient to meet the benefit needs of contributors, with a fairly strict actuarial link maintained between contributory liability and benefit entitlement. This financial structure means that contribution and benefit levels are fixed according to the needs, rules and policies of the social insurance scheme, and are more or less independent of the taxation or redistribution policies of particular governments. In most cases this is also guaranteed at an organisational level by the administration of insurance schemes by agencies, such as trade unions, outside of the formal political structures of the nation state. Bismarck social insurance schemes operate independently and are therefore free from direct interference by government.


  2.4  By contrast Beveridge's primary aim for social security was rather different and focused on the prevention of poverty rather than the protection of wage levels. Thus, although he was attracted to the insurance principle and believed that it would provide a popular basis for social security protection—"The capacity and desire of British people to contribute for security are among the most certain and impressive social facts of today" (p.119), he also wanted insurance protection to provide a comprehensive scheme to prevent poverty. Contributions to, and benefits from, the Beveridge scheme were thus fixed at a flat rate, aiming to provide a subsistence income rather than a continuation of labour market wages. In addition to employee and employer contributions the scheme also relied upon a treasury supplement, financed out of general taxation, and included in it a contribution towards the cost of the National Health Service. Although this was to be identified as a separate insurance fund, the scheme was to be established and run by government as a national social security service. Beveridge described his proposals as a "British revolution"—they were intended to build on the strengths of the structural features of existing provision, but to extend these into a comprehensive state service.

National Insurance

  2.5  In fact the National Insurance (NI) scheme established in Britain after the second world war did not follow entirely the recommendations outlined by Beveridge, although in principle the structure of the scheme was largely similar. In particular, to ensure that all current pensioners were provided with insurance protection, contribution conditions for them were waived and benefits paid out of the contributions collected under the new scheme. This meant that, rather than acting as a funded insurance scheme, NI operated on a "pay-as-you-go" basis with the cost of current benefits being born by current contributions paid—in effect a form of earmarked taxation rather than strict insurance protection.

  2.6  The benefit rates established in the NI scheme were also lower than the subsistence levels proposed by Beveridge, in part in order to ensure incentives both to undertake paid employment and to invest in additional private insurance protection. And the contingencies covered by benefit protection were reduced, with unemployment benefit being restricted to a period of only six months (increased in 1966 to twelve months, although since reduced to six months under the Jobseekers' Allowance (JSA) reforms) and the proposed allowance for divorced women being dropped.

  2.7  In a number of significant ways therefore the National Insurance (Beveridge) scheme in Britain is quite different to the social insurance (Bismarck) schemes found in much of continental Western Europe. And these differences have remained despite the many developments to the NI scheme which have been introduced in the fifty years since then. Earnings-related contributions were introduced in Britain in the 1960s, together with an earnings-related supplement paid for the first six months of unemployment after 1966, which was withdrawn in 1982-83. In the 1970s benefit protection was extended to married women and an earnings-related pension scheme, first mooted in the 1960s, was introduced, although protection under it was reduced in the late 1980s.

  2.8  The extensions to the scheme in the 1960s and 1970s were followed by restrictions and reductions in the 1980s and 1990s. Throughout the period, however, the ability of the NI scheme to act as a comprehensive protection from poverty has been continually called into question, and its inter-dependency with other aspects of the social security service has become ever more apparent. In practice social insurance in Britain operates alongside other forms of social security protection based upon social assistance and universal support.

Social Security

  2.9  The common characteristic of social insurance schemes is the link which they provide between the payment of contributions into a scheme for social security and the receipt of benefits from the scheme at times of need. The payment in anticipation of the need provides the insurance aspect of the scheme. The obligation of all to pay, in order for all to benefit, provides its social context. Insurance schemes thus meet the two major requirements of any social security provision:

    —  protection from poverty by redistribution of resources to groups identified as being in need;

    —  social integration by the provision of a close link between contributions from citizens and rights to benefit.

  Thus the link between payment and benefit has traditionally made the notion of social insurance a popular feature of social security provision in most welfare capitalist economies.

  2.10  The Beveridge social insurance scheme in Britain was developed in this context as a feature of the social security provision provided by the state, rather than as a public substitute for the limitations of private insurance protection. It was an alternative to the Poor Law, not an alternative to the commercial insurance market; and its aim was to prevent poverty rather than to protect individual income expectations.

  2.11  In preventing poverty (or Want as Beveridge called it) social insurance is predicated upon the assumption that the experience, and the risk, of poverty is cyclically related to life course development. This perspective was drawn from Rowntree's seminal studies of poverty in Britain earlier in the century in which periods of poverty were assumed to be associated in particular with life cycle events such child birth and retirement. These could be contrasted with periods of full-time waged employment when the risk of poverty would be removed. Poverty could thus be prevented by providing social security protection which redistributed income over the life cycle, collecting contributions in periods of employment and providing benefits in periods of need—horizontal redistribution. It is a form of social security which is closely associated with the Beveridge model of social insurance, and which he believed would receive widespread support because of its appeal to collective self-protection.

  2.12  Although this model of social security is based on collective self-protection, it is a model of self-protection predicated upon, and organised around, a wage labour market based upon full, and full-time, employment. The benefits provided by the scheme are funded largely from contributions made by employees and their employers; and they are paid to claimants on condition that they are absent from, and thus no longer supported by, the labour market. This economic history of social insurance in Britain is closely related to the history of the development of modern labour markets. In some ways social insurance might be regarded as the "natural" social security protection for a capitalist labour market economy. As discussed shortly, however, the changes which have been taking placed in recent years in such economies cast doubt upon the ability of social insurance to continue as an effective means of ensuring such security.


  3.1  The social insurance model of social security protection has not provided social security protection for all because it was predicated upon a full employment labour market and stable nuclear family structure, and has not kept pace with social and economic changes which have been experienced in Britain, and in other welfare capitalist countries, over the past fifty years. Social insurance assumes that horizontal redistribution can prevent poverty by meeting the relatively limited needs for a substitute income during absence from the labour market. In the 1990s, however, absence from the labour market is a more widespread, and more permanent, phenomenon, affecting particular groups of people much more seriously than others, and requiring vertical redistribution from those who have secure jobs and sizeable incomes to those who have little prospect of either. Thus there are large, and growing, gaps in the supposedly comprehensive insurance coverage.

Gaps in Social Insurance

  3.2  Long term unemployed—Social insurance provides protection for unemployment based on the assumption that absence from the labour market will be a temporary phenomenon. Thus NI unemployment benefit has only ever been paid for a limited period. This period was extended to twelve months in 1966, but since the introduction of the new JSA it has been reduced again to six months. However, with the abandonment of full employment, the numbers of people unemployed long term has being growing dramatically in recent times. This increase in long term unemployment has left many people outside of the labour for long periods of time—but no longer covered by social insurance protection.

  3.3  Youth unemployed—Unemployment has, of course, more generally been increasing significantly over the last two decades. This has meant that many young people leaving school have been unable to get jobs within the labour market. As a result of this they have not been able to make any contributions into the NI scheme, and, because some contributions must have been paid before any benefits can be received, they are not entitled to any protection. The numbers of the youth unemployed, aged 18-19, have also grown dramatically in the 1980s and 1990s and most of these will be excluded from social insurance protection.

  3.4  Lone parents—The numbers of lone parents have also increased significantly in recent years, in particular because of the increase in rates of separation and divorce. Family life is not as stable as Beveridge had expected it to be. Many lone parents, predominantly mothers, have not had any recent connection with the labour market because of their child care responsibilities, however, and have not made contributions into the NI scheme. They may also, because of the need to care for their children, not be deemed to be unemployed. Consequently they are not entitled to insurance benefits and around two thirds are dependent upon Income Support.

  3.5  Sick and disabled—Although social insurance schemes generally do provide for absence from work due to sickness, an increasing number of the long term sick and disabled are excluded from protection because their condition arose before they were able to enter the labour market and pay contributions. These numbers too are growing, in part as a result of improvements in medical care, but primarily because of the increase in unemployment which has made it especially difficult for the non-able-bodied to secure full-time work.

  3.6  Flexible employment—Some people who have been able to secure employment, however, are nevertheless excluded for insurance protection. The growth in unemployment has also been accompanied by an increase in the amount of part-time employment, and contract and seasonal working. Because the rates of pay for work of this nature are frequently below the threshold for payment of NI contributions, or when averaged over the year any contributions which have been made are inadequate, people becoming unemployed from such jobs are not entitled to insurance benefits, and so are forced onto social assistance. It has been estimated that as many as two million employees are excluded from NI protection in this way.

  3.7  Self employed—Self-employed people were largely ignored by the post war NI scheme in Britain, and have been to some extent ever since. The self-employed do pay special contributions, but they are specifically excluded from receiving unemployment benefit. Self-employment has grown from eight to twelve per cent of the labour force in the past two decades—from under 2 million to over 3 million. Unfortunately self-employment is no guarantee against unemployment. Many self-employed businesses fail; but their owners cannot claim social insurance protection.

  3.8  Marital breakdown—Divorced people, especially women, may be excluded from receiving insurance protection on reaching retirement. Married women who have remained at home rather than in employment, as anticipated by Beveridge, do not have contribution records of their own, and thus their pension entitlement depends upon the contribution record of their husband. When divorce takes place this is lost, and it is a significant loss, especially where the husbands entitlement includes an earnings-related element. For many older divorced women this has resulted in a move onto dependency upon assistance benefits.

  3.9  Carers—It is not only divorced women who may lose insurance protection because of their long term absence from the labour market, however. Many women, and some men, give up paid employment to care for chronically sick or disabled relatives, and the numbers of such carers are growing rapidly. Although they may get some exemption from the contribution conditions for retirement pensions under the "home reponsibility protection" rules, these carers are not paying any contributions to the NI scheme and are thus not acquiring any benefit protection to cover them whilst they are caring or, perhaps more significantly, when they cease to do so. For women in particular exclusion from insurance protection is one of the hidden costs of caring.

  3.10  Employment breaks—Carers are often excluded from insurance protection because in effect they have interrupted contribution records. Other people too may experience significant interruptions in their employment activity which means that they are not making insurance contributions—and in most cases these people do not benefit from the limited home responsibility protection either. Interruptions in employment may occur, for instance, because of absence abroad or because of entry into further or higher education, both activities which have become more frequent amongst people of working age in recent years. Interruptions due to strike action have recently been less frequent, but these periods too may exclude people from future NI protection, as some of those involved in the long running miners dispute of the mid 1980s discovered after they were later made redundant.

  3.11  Partial contributions—Interruptions in contribution records mean that claimants are excluded entirely from short term insurance benefits, such as unemployment. However, people with partial contribution records can still claim an insurance pension on retirement, but the amount of this will be reduced by the proportion of the contributions not paid. This means that only a fraction of the pension is received, and in practice this is usually not sufficient to prevent claimants having to rely in addition on assistance protection, thus removing any real value of the insurance protection. As with other gaps in insurance coverage the numbers of people receiving partial retirement pension has also been increasing in recent years.

The collapse of the male breadwinner

  3.12  Many of the gaps which have appeared in the social insurance scheme in Britain, and elsewhere, have been associated with the failure of one of the major assumptions around which insurance protection was designed—the support provided by the male breadwinner. Beveridge, and Bismarck before him, had assumed that full-time employment would be available for for all men, paying wages which, with the help of Family Allowances, would permit them to support a wife and family. In theory this meant that married women would not need, or want, to work—in Beveridge's own terms they would have "other duties".

  3.13  However, both before and after the war a significant minority of married women continued to engage in paid work; and since then the proportion in employment has grown dramatically. Much of the increase in married women's employment has been in response to demand within the labour market, and, in recent years in particular, much of that demand has been for part-time rather than full-time employment. However, women have also worked because they have needed to, because their husband's wages were not enough to support the family. Despite the high profile given in some trade union campaigns to the need to protect the "family wage", many men in low paid employment have never been in a position to provide for all of their family's needs, and women's work, whether full-time or part-time has been essential in the struggle to make ends meet.

  3.14  As low pay has become more widespread in the last decade or so—and wage differentials are now wider than at any time since the end of the last century—the incidence, and the importance, of married women's employment has increased. Married women now enjoy full insurance protection within the NI scheme in Britain, where they earn enough to pay the contributions; and equal pay legislation has reduced—but not removed—the differential between men's and women's rates of pay. Furthermore the massive increase in unemployment has meant that many men can no longer even hope to be able to provide for their families through employment.

  3.15  The male breadwinner, working to provide for his wife and children, has always been at best a blurred and partial image of the realities of our unequal labour markets; and many married women have had to engage in paid work themselves in order to ensure an adequate family income. In the 1990s, however, this image looks distant as well as blurred. Male breadwinners are not major providers for large numbers of families, and the insurance system based upon supporting this role is unable to provide for these needs too.

From Insurance to Assistance

  3.16  The main consequence, within the social security system, of the failure of the social insurance scheme has been the increasing reliance of larger numbers of people on means-tested assistance benefits. The safety net role which Beveridge envisaged for his secondary status assistance scheme has been transformed into the major source of protection for many claimants. More people get assistance benefits, because more are excluded from insurance benefits, because many on insurance benefits find that these are not sufficient to meed their basic needs, and because new assistance benefits to neet new needs have been introduced. The vast majority of unemployed claimants are now dependent in whole or in part on Income Support or means-tested JSA.

  3.17  The number and range of means-tested assistance benefits has also begun to grow. Means-tested support for rent and rates for people on low wages was extended onto a national basis in the early 1970s; and at the same time a means-tested benefit to supplement the incomes of people with children was introduced: Family Income Supplement, now Family Credit. These were not just additions to the assistance scheme, they also constituted a major extension of the role of social security into the subsidisation of low wage employment, taking social security into the labour market. Means-tested provision of school meals, and school clothing also expanded, as did the role of means-tested access to many aspects of health service provision, which otherwise would have been charged for—notably prescriptions for drugs. Many of these means-tested benefits have been further expanded under New Labour, with the new Working Families Tax Credit moving means-tested support for low wages into the tax system, whilst retaining the basic principles of protection.

  3.18  The problems associated with the growth of means-testing have, however, been compounded by the simultaneous expansion during the post-war period in the number of private schemes for social security protection. Some private benefits are organised on a commercial basis and bought by individuals as additions to their basic state benefit, as has been in particular the case for pension provision in the recent years. But most private benefits have been provided on an occupational basis by employers as part of packages of fringe protections for their employees, often negotiated for by trade unions. Occupational benefits include sick pay and maternity pay, and occupational pension schemes; and such benefits can provide additional income to supplement the low levels of insurance protection, especially for pensioners.

  3.19  Unless they do provide a very significant additional income the impact of any such additions is likely to overlap disadvantageously with the expanded assistance benefits. For instance, pensioners with a small occupational pension—and many early occupational pension schemes provide only very small payments—are likely to find that, together with their basic NI pension, this takes them just above Income Support level. The new minimum income guarantee for pensioners will ensure that all do at least reach the Income Support level; but will compound the disincentive effect of such small-scale occupational pension protection.

Structural changes

  3.20  These changed circumstances in which social insurance is now working are, of course, the result of social and economic changes which have displaced the assumptions upon which protection was intended to operate. The most important of these changes has been the restructuring which has been taking place within the labour markets of all the major Western capitalist economies. This change is sometimes described as the shift from "Fordism" to "post-Fordism"—the replacement of full-time, largely male, jobs in large scale manufacturing with more "flexible", part-time employment primarily in new service industries such as leisure and tourism. Many of these new jobs are low paid or seasonal and do not in practice provide employees with protection under social insurance schemes.

  3.21  The decline in manufacturing employment has also, of course, been the major cause of the massive increase in unemployment which has put enormous pressure on the social insurance scheme. In Britain insurance contribution rates were increased significantly in the early 1980s to cover the extra cost of this. However, many of the unemployed are the long term or youth unemployed who are not protected at all by such benefits.

  3.22  The other major plank of the post war insurance base, the nuclear family, has also been experiencing major restructuring. In particular, there has been an increase in the divorce rate and a growth in the number of lone parent families. As a result of this families are smaller, and family relationships frequently more short-lived. There has not been such a dramatic change in the rate of marriage; but marriages take place at a later age, many marriages are now remarriages for one or both partners, and "reconstituted families" with mixtures of step and natural children are common. The rights and protections which might be expected to arise from marriage and the nuclear family, for instance to the pension entitlement of spouses, are thus complex and fractured; and the obligations of partners frequently extend beyond the current marital bond. For women in particular this has meant that reliance on means-tested benefits has become much more widespread.

  3.23  Finally social structures are also undergoing demographic change, although of course they always are. Over recent times there has been a decline in the birth rate, an increase in longevity, and an increase in the numbers of chronically sick and disabled people. These changes are perhaps to be welcomed, but they have changed the ratio of workers to dependents within the society as a whole, and have increased the need for carers, most of whom work outside the formal labour market. For a social insurance scheme predicated upon labour market participation and family dependency, except for limited and predictable periods within the life cycle, these changes have created significant pressures.

  3.24  Of course the impact of these changes has not gone unnoticed by politicians or policy-makers. They have been only too acutely aware of the pressures which social and economic restructuring have placed on social insurance and the other aspects of the social security system. And policy changes have been introduced, in part at least in an attempt respond to these pressures. In the 1980s there was a massive expansion of means-testing following the "Fowler Review" and the 1986 Social Security Act; and in the 1990s there was the introduction of the JSA and Incapacity Benefit. However, the policy responses which have been introduced in recent years in response to pressures on the social security system have operated in practice to compound, rather than to resolve, the limitations of the social insurance scheme.

Policy Changes

  3.25  In general terms the most significant policy change made by government in the last two decades has been the abandonment of full employment as a major goal of economic policy planning. Although not directly a feature of social security policy, this has had a major impact on the demand for benefit protection, and consequently on the capacity of the benefit schemes. The pressure of unemployment has also resulted in direct changes to social security policy, however, the cumulative effect of which has been to erode the insurance base.

  3.26  The scope of social insurance has been directly reduced by the introduction of a number of restrictions in the entitlement criteria for NI benefits. The contribution conditions have been tightened. For short term benefits, such as unemployment, payments (or credits) must have been made in the previous two years, as opposed to one year before the change. For long term benefits, primarily retirement pension, the calculation of the amount of earnings-related supplement has been narrowed with effect from 1999.

  3.27  The eligibility criteria for NI benefits have also been restricted. Both the JSA and Incapacity Benefit reforms were aimed at tightening the criteria for entitlement to receipt of benefit; and the further proposed reforms in the 1999 social security bill will be likely to restrict these further, for new claimants at least. The raising of the pension age for women to sixty-five is also a levelling down move to equal treatment in pension entitlement.

  3.28  In additions to the restrictions on entitlement have been reductions in levels of benefit. Since 1980 pension rates have only risen in line with price (not wage) inflation, which has resulted in a major potential loss. In the same year the short term benefits for unemployment and sickness were also reduced in value against inflation; and, following this, the earnings-related supplement to these benefits was withdrawn and the addition paid for the costs of dependent children removed.

  3.29  The scope of social insurance has further been reduced by the "privatisation" of some of the protections previously provided within the NI scheme. In the early and mid 1980s protection for short term sickness and maternity were removed from the state scheme and transferred to employers. Initially financial support for these continued via a rebate on NI contributions for employers; but this too has now been removed. Private pension provision has also expanded significantly, with many contributors opting out of NI earnings-related pension protection (SERPS) as a consequence. The current planned changes to pension provision will also further exacerbate this trend by removing SERPS protection from middle and higher income earners.


The contingency base

  4.1  Social insurance targets benefit protection onto groups identified by criteria known to be associated with risk of poverty because of absence from the labour market, such as unemployment, chronic sickness and retirement—although in the case of retirement the link between labour market absence and pension entitlement has been clouded by the payment pensions to all over pension age regardless of labour market status. As long as the labour market remains the major means of income distribution and financial security within the economy, then such targeting is an effective means of seeking to prevent poverty.

  4.2  Establishing entitlement to social insurance benefits through membership of a contingency group is also administratively simple both for claimants and for benefit providers. Proof of status can be linked to clear eligibility criteria, such as sickness, pension age or availability for work, without the need for complex, and intrusive, needs assessments and tests of means. Take-up of insurance benefits is therefore easy to encourage, and take-up levels for such benefits are relatively high. Enforcement of eligility criteria can be used to ensure that only those genuinely absent from the labour market receive protection, although there are currently problems over the treatment of part-time workers here, which have been accentuated the massive growth in this area of employment.

Support for the Labour Market

  4.3  Because social insurance is a form of social security based on wage substitution, it provides indirect support for the operation of the labour market. Thus those in work receive wages, and those absent from work receive benefits; and since benefit levels are set below wage levels all are encouraged to work. This is logical, and popular; and it provides a natural support for labour discipline. It can be contrasted with assistance benefits which, because of their means-tested base, frequently operate as wage supplements and thus overlap with support from the labour market, with the result that income is no longer dependent upon employment status.

  4.4  The wage substitution basis of social insurance also lends itself to provision of earnings-related benefit protection, as is the case in most Bismarck schemes—and was in Britain from 1966 to 1983. Earnings-related protection means that financial obligations undertaken whilst in employment can still be met during absence from the labour market, preventing an immediate drop into poverty; and provides a more tangible return for contributions made, where these too are related to earnings. State earnings-related benefits also reduce the need for separate private protection, and are cheaper and more efficient to organise on a mass scale than private provision.

Reduction in Stigma

  4.5  Experience of stigma has often been associated with receipt of social security benefits, both in the eyes of claimants and of the wider population. Stigma is associated in particular with dependency upon assistance benefits, because of their links with the Poor Law and the unpopular public assistance schemes of the inter-war period. It was Beveridge's intention that the payment of insurance benefits as a return for contributions made would avoid such stigma here, and would encourage claimants and others in the belief that these benefits had been acquired by right, rather than through need.

  4.6  This "horizontal equity" basis of social insurance still to some extent remains, for instance in the greater political and popular support shown for pension entitlement, which is perceived as being earned by the contributions of a lifetime's work. Although in practice the link between contributions paid and benefits received is a somewhat tenuous and often arbitrary one, the notion of a right to such benefits remains a widely held, and generally positive, one.

Avoidance of Means-Testing

  4.7  The absence of means-testing in social insurance schemes means that many of the disadvantageous features of means-tests in determining benefit entitlement can be avoided. Because means-tested benefits are only paid after all other resources have been accounted for, people dependent upon means-tested benefits do not derive any advantage from savings, maintenance payments, private investments or insurance, or any other non-earned sources income - sometimes known as the savings trap. Securing protection through such private measures is thus indirectly discouraged within assistance provision, albeit that many claimants with such resources only discover too late that these will be of no overall practical benefit to them. Conversely, as Beveridge envisaged, social insurance benefits provide a platform on which additional private protection or private resources can be built without fear of financial penalty.

  4.8  Where means-tests extend to the supplementation of wages then this problem becomes perhaps even more serious, and is experienced as the poverty trap. Benefits which supplement earnings must be withdrawn if earnings rise—with the result that the recipient may at the end of the day be no better off. Wage supplement benefits, such as Family Credit/Working Families Tax Credit and Housing Benefit, are not in practice withdrawn pound for pound as income rises, and the 100 per cent plus marginal tax rates experienced by recipients in the 1970s have now been removed. Nevertheless marginal tax rates of over 90 per cent remain for some, and the new tax credit scheme will in practice spread high marginal rates over a wider proportion of the low paid. Means-tested protection thus can act as significant disincentives to-self-improvement; and such disincentives are an inherent feature such benefit protection—whereas social insurance avoids such disincentive effects because benefit entitlement is not tied directly to current income levels.

Individual Entitlement

  4.9  Entitlement to insurance benefits is established through contributions made in the labour market. Although initially designed as a scheme to support male breadwinners, insurance protection is now provided on an individual basis to those who meet the contribution conditions, and married women receive the same protection as their husbands. This contrasts with assistance benefits where couples are treated differently to single people, are assumed to be entirely dependent upon each other, and are paid at a lower aggregate rate of benefit.

  4.10  This means that with means-tested benefits there is a financial penalty for benefit claimants on marriage, or cohabitation; and that there is no incentive for the partner of a non-working spouse to undertake paid work, full-time or part-time, because this will lead to a loss of benefit for both. The effect of aggregating the income of couples to determine assistance benefit entitlement means that partners are therefore discouraged from working, and there is some evidence to suggest that in practice this has reduced the economic activity rates of the partners of the unemployed. However, social insurance benefits, which are paid to individuals to provide protection for them alone, do not penalise either marriage or working spouses in this way.

The Insurance Fund

  4.11  Although the NI scheme operates in practice on a pay-as-you-go basis and does not have an independent fund in the way that some continental, Bismarck, schemes do, the separate collection, accounting and distribution of insurance contributions does provide the insurance scheme with a kind of earmarked, or hypothecated, taxation base. It has often been argued that NI contributions are paid more willingly than other forms of direct taxation, because they are known to provide social security protection, and to provide, at least in theory, for a separate insurance fund protected from direct interference by government.

  4.12  Certainly the open existence of a hypothecated tax for social security makes the cost of such social protection much clearer and more readily subject to public scrutiny; and any additional costs imposed on the scheme by policy or structural changes can consequently be passed directly on to contributors. This in effect is what happened when unemployment levels increased dramatically in the early 1980s, and contribution rates were increased from seven to nine per cent of relevant income—at a time when the general policy of government was to reduce levels of direct taxation.

  4.13  The contributions made by employers to the benefit fund on behalf of their employees are also a particular feature of social insurance protection. In addition to giving employers a financial stake in the public social security system, these reinforce the notion of their general obligation to provide support for the wider labour force from which their current workers are drawn. It is because of the continued existence of a reserve labour force that employers are able to expand and contract as the markets for their products allow. There is both logic and justice in spreading the cost of supporting this reserve force across all employers in proportion to the extent to which they draw upon it. An insurance fund into which employers, as well as employees, pay thus creates a link between social security and the labour market in fiscal policy which mirrors the reinforcement of labour discipline which insurance benefits provide at the individual level, as discussed above.

Administrative Convenience

  4.14  Because of their relatively simple benefit base and entitlement criteria, social insurance benefits generally have high levels of take-up amongst claimants, especially when compared to means-tested benefits. This is an advantage for users. The simple administration of the scheme is also an advantage for providers, however. Social insurance benefits are relatively cheap and easy to deliver. The administrative costs of insurance benefits are around 3 to 4 per cent of the overall budget, compared to around 11 per cent for Income Support and 15 per cent for Housing Benefit—and for discretionary provision such as the Social Fund the proportion rises to around a third. In terms of cost effectiveness within public expenditure this is a significant difference.


Socio-Economic Context

  5.1  In their different ways both Bismarck and Beveridge schemes for social insurance are predicated upon the existence of a labour market in which (near) full, and full-time, employment is expected to provide the primary source of income for all who are able to undertake it. The restructuring of the labour markets on which these expectations were based has discredited this expectation, and undermined the ability of a labour market based social insurance scheme to provide comprehensive social security protection.

  5.2  Many groups of unemployed workers are excluded from insurance protection: the long term unemployed, the youth unemployed, the low paid, part-time workers, seasonal and casual workers, the self-employed, and others. It is a long list, and the numbers on it are growing all the time. Unless social insurance can adapt to restructuring within the labour market it will be unable to occupy a central role in social security provision.

  5.3  Linked to this labour market restructuring are changes in family structures and the demise of the male breadwinner model. The shift of insurance protection in Britain onto an individual model of protection for both men and women, has been a partial response to this; but the continued failure in practice to recognise new patterns of employment and new family structures and obligations means that many individuals, and their families, remain excluded from insurance protection.

Contribution Conditions

  5.4  Although in principle the contributory basis of social insurance protection provides the guarantee of a benefit as of right at times of need, in practice the contribution conditions in operation prevent many people in need from receiving benefits. Tight contribution conditions aim to ensure that only those who have paid towards the cost of their benefits receive them; but in a pay-as-you-go scheme, such as Britain's, the logic of the actuarial insurance link is fictitious, and the contribution conditions become arbitrary and exclusive.

  5.5  This lead to gaps in insurance protection resulting from the exclusive nature of contribution conditions as discussed earlier. In particular contribution conditions exclude women who have given up work in order to care for children, partners or other relatives, who, if they are not supported by partners, end up on assistance benefit. They also exclude students and those who have been abroad, who have paid insufficient contributions; and those in low wage employment who are earning below the threshold for contribution liability.

  5.6  It is sometimes argued that, despite the arbitrary and exclusive nature of the contribution conditions for short term benefits, they do have a more logical link to entitlement to pension protection. This is true to an extent, as the length and size of contributions made do affect pension entitlement. However, for the basic pension the lower rate paid to those with inadequate contribution records is generally not sufficient to lift them above dependence on Income Support, and so in practice this is of little real value to them. This is likely to be compounded by the introduction of a universal income guarantee for pensioners. Within the earnings-related scheme contributions do determine entitlement; but here their effect, ironically, is to make it more of a contribution-related scheme than an earnings-related one. And the restrictions upon when contributions can be counted, especially after 1999, mean that for many contributors payments made at crucial stages of their working life are in practice ignored.

Contingency Benefits

  5.7  Insurance benefits are paid to people in contingencies likely to be associated with risk of poverty. This helps these benefits to act to prevent poverty; but only in so far as the contingencies covered are closely, and exhaustively, linked to poverty risk. However, there are some contingencies with a high risk of poverty which are not included within insurance protection, such as carers and lone parents. These were circumstances not recognised as important or significant at the time when the NI scheme was established in Britain, and nothing has been done to rectify this since.

  5.8  Conversely, however, there are some contingencies which are protected by social insurance benefits even though, according to some at least, many of the recipients of those benefits would not without them otherwise be poor. This, for instance, may apply to many of the married women who, having paid contributions whilst in employment, are therefore entitled to benefit once they are unemployed, even though their husbands may still be in employment and thus willing and able to support them. Of course this does assume that working men are willing support their dependent wives; and this is an assumption which, in some circumstances at least, is open to question.

  5.9  The other contingency covered by insurance which may include significant numbers of non-poor is those over pension age. Although research has always revealed the elderly to be one of the major groups of the, the wider investment in occupational and private pension protection has meant that for some more recently retired people, with extensive pension cover, retirement no longer marks a drop into poverty. And for these new pensioners insurance protection acts in practice as additional income rather than basic support. However, although they may be growing in number, it should be noted that these relatively well-off older persons (WOOPIES) still only constitute a minority of those over pension age and are concentrated in particular amongst the younger pensioners in certain social groups.

Family Protection

  5.10  The individual basis for determining the entitlement of insurance benefits may mean that some individuals are entitled to protection even where their families may be able to support them. It can also mean, however, that some individuals receiving the flat rate benefits provided within the insurance scheme find that these are not sufficient to support the families which depend on them. This has particularly become the case since the withdrawal of the additions for dependent children from NI benefits in the 1980s and the fall in value of Child Benefit.

  5.11  The Family Allowances introduced in the 1940s were only intended to make a contribution towards the costs of children. This partial coverage remained a feature of the new scheme for Child Benefit and was accentuated in the 1980s when the benefit was not increased in line with inflation. Child Benefit is thus some way below the basic minimum support for children provided by means-tested provision. Insurance claimants with families are thus likely to find that their individual insurance protection still leaves them in need of means-tested support and thus they will have to claim both, nullifying the advantages of the separate insurance scheme.

  5.12  The flat rate insurance protection is also not sufficient to meet the housing costs of most claimants, especially those with families and therefore larger houses. Although the original NI benefits did include a standard notional amount for rent, this was quite inadequate to cover the real rental costs of many, and since then as housing costs have risen this problem has become worse. However, the full costs of rents, and mortgage repayments, are met by Income Support; and Housing Benefit also assists with rental costs for those above these levels. Insurance beneficiaries end up claiming such means-tested support therefore, and once again are thrown into additional dependency upon assistance benefits.

  5.13  In part, it might be argued, the overlap with assistance benefits here is a result of the fact that, relatively speaking at least, insurance benefit levels are too low. However, the problem is in reality more complex than this. It is a result of the interaction of the individual benefit base within insurance protection with the family and other responsibilities of individual claimants. If the support provided for these other needs is in practice part of social assistance protection, then insurance beneficiaries will inevitably be drawn into dependency upon this and the comprehensive nature of insurance protection undermined.

Contribution Base

  5.14  Although the contribution base might appear to be the essence of insurance protection, in a pay-as-you-go, Beveridge, insurance scheme such as Britain's this contribution base is really largely fictitious, and may even serve to disguise real policy issues, and practical problems, within insurance protection. It was Beveridge's belief that payment of contributions for insurance protection would be a popular means of providing for social security, and this belief has been maintained by others since. However, since payment of contributions is compulsory, this belief has never been securely tested; and what limited survey evidence there is on attitudes to contributions is rather inconclusive.

  5.15  Whether or not the belief is widely shared, however, it is certainly largely a myth. The link between contributions made and benefits received is in principle a tenuous one, and in practice relies upon future government policy to maintain future levels of contribution sufficient to meet benefit needs. Insurance contributions are thus hypothecated taxes rather than funded investments. And, as was revealed in the 1980s, the levels of these taxes can be adjusted by government in order the meet broader fiscal goals. Contribution levels were raised early in the decade, at a time when benefits were being cut, and later were maintained so that the Treasury supplement to the NI scheme could be reduced.

  5.16  If insurance contributions are not supporting a separate fund for future benefit provision, however, then the purpose of maintaining them as a distinct form of direct taxation comes into question. As a form of taxation upon employees they have been considerably more regressive than income tax with liability starting at much lower rates of earnings and reaching a ceiling well below the higher tax band level for income tax. Crossing the lower limit also subjected all income to contributions; it acted as step, rather than a threshold as in income tax, and was consequently a severe disincentive to self-improvement for the very low paid. And, because liability for NI contributions is calculated weekly, then those in fluctuating and seasonal employment are required to make contributions whenever they exceed lower limit, whilst their liability for income tax only arises when total annual earnings are above the (higher) income tax level. For the low paid, in particular, therefore NI contributions can be a relatively punitive form of direct taxation, which may also provide little in the way of benefit protection in return. These issues have been addressed to some extent by recent reforms introduced in the 1998 and 1999 budgets, with the intention of aligning NI contributions with Income Tax liability. And this is being complemented at an administrative level with the transfer of the Contributions Agency to the Inland Revenue. Such changes, however, will operate to remove the distinctive character of NI contributions and may therefore have the effect of further undermining the policy and popular logic of the contribution base.

  5.17  Employers' contributions to the insurance scheme are an important source of revenue; but they are expensive to collect, especially for small employers, who have to create and retain separate NI records for the whole of the workforce. It is possible that these costs may act as a disincentive to employers taking on new workers in marginal cases. It is also quite likely they the act as an inducement to keep low paid and part time workers below the NI contribution levels, indirectly suppressing their overall earnings.

Administrative Costs

  5.18  If the administration costs of NI contributions are significant for the employers who pay them, they are also a major undertaking for the insurance administrators who collect them. The work is done by the Contributions Agency and is to be transferred to the Inland Revenue. Computer based data storage has made this administrative task easier to manage; but it is still a mammoth exercise providing records of contributions, benefits and liabilities for virtually the whole of the population over working age, When these are merged with taxation records within the Inland Revenue, questions may well be asked about the purpose and value of retaining a separate database for a largely fictitious NI fund in order to determine entitlement to benefit for a declining number of claimants.

  5.19  Furthermore this duplication is repeated at the level of benefit delivery, with NI entitlement having to be calculated and administered separately from means-tested benefits. Where claimants are in practice receiving their total benefit income from these two (or more) sources, the administrative distinctions are more likely to be a source of confusion than confirmation of entitlement criteria—where, that is, this distinction is noticed at all. From the claimants' point of view in particular, it is at the least doubtful whether the less than comprehensive benefit coverage now provided by the insurance scheme fully justifies the continued separate existence of the large scale administrative structure which accompanies it.


  6.1  Social security provision has been developed and maintained within social security provision largely because of the popular support which it has been assumed to draw for the principle of benefits as rights earned by contribution and the broader legitimacy which this provides for the social security system as a whole. Especially when viewed in the wider European context, this has ensured that social insurance has been able to retain a large measure of political support. Despite the practical weaknesses therefore support for social insurance should not be under-estimated, nor should the implicit appeal to social integration on which this is based. The attraction of social insurance is this idea of collective protection. Private insurance markets could not provide individuals with the kind of all-embracing protection in times of need which a social insurance scheme can, as recent research at the LSE has confirmed—to say nothing of the economies of scale which one national scheme enjoys.

  6.2  Linked to the value of collective protection is the horizontal redistribution which this implies. Social insurance helps us, collectively, to spread the costs and benefits of living across our life course; and in our different ways as children, workers, parents or pensioners, we all expect to pay and to benefit at different times. Horizontal redistribution appeals to a "one-nation" concept of social solidarity and to the notion of a quasi-contractual link between rights and responsibilities in social security. This contrasts with the stigma associated with assistance benefits, in which vertical redistribution means that some pay in order for others to benefit. Vertical redistribution and means-testing involve a potentially much more divisive approach to social security in which those who pay may resent supporting those who receive—and those who receive may feel alienated and excluded from those who pay.

  6.3  Over the last two decades or more, however, means-tested benefits have been assuming a greater and greater role within British social security provision, as both a substitute for, and a supplement to, NI protection. This trend was accelerated by the Conservative governments of the 1980s and 1990s; and it has been continued to some extent by New Labour, in particular in the planned Working Families Tax Credit and the threats to means-test Child Benefit. More generally New Labour has adopted the lexicon of "targeting" and spokespersons talk openly about the need to concentrate benefits on those who need them most. If this is taken to mean moves to further the replacement of NI with income-related benefits, then there is a serious danger that the advantages of social insurance as the key integrating principle of social security will be lost and that means-tests will become the defining feature of social protection.

  6.4  As discussed above the advantages of social insurance protection are not shared by means-tested provision—indeed in many ways the great strength of the insurance approach is that it avoids the pitfalls of means-testing, as Beveridge openly argued over fifty years ago. Moves towards greater use of means-tested benefits would entrench the impact of the poverty trap and savings trap, would extend the complexity of benefit delivery and reduce levels of take-up, and would accentuate the divisions within society between those who pay for social security and those who receive it. As the old adage goes—benefits for the poor can quickly become poor benefits.

  6.5  Recognising the undesirability of means-tested support and aware of the weaknesses of social insurance outlined above, some commentators have argued that both should be abandoned in favour of the payment of a "basic income" to all members of society on a unconditional basis, with all other income and savings acting as a top-up to this. This is not the place to discuss pros and cons of the basic income idea. However, it is important to note that much turns upon whether such an income is intended to provide sufficient for subsistence for all citizens (in effect equivalent to at least Income Support level) or merely a contribution to this. If the former, then the cost (or redistributive effect) of the scheme would be enormous; if the latter, then existing benefit provision would still have to be maintained for some. Therefore basic income is an idea whose time is yet (if ever) to come.

  6.6  The pitfalls and problems and means-testing and the impossibility of basic incomes have thus frequently led commentators back to the social insurance principle as the core value of social security protection. The practical advantages of contingency based entitlement and the ideological integration provided by the collective contractual nature of the contribution base make social insurance still the "natural" form of public protection in welfare capitalist economy. Labour markets have changed, and so have family structures; but both are still be core social relations within British society. Perhaps the key question for social insurance therefore is not whether (or why) it has not been able to adapt to respond to changing social circumstances, but rather how it could be adapted to do so in the future. This is a question which, thus far, has not been directly addressed by policy-makers in Britain.


  7.1  Modernising social insurance would inevitably require a strategy to reform which would build on the strengths of the insurance principle and seek to overcome or marginalise its weaknesses. In essence this would involve recognising the changed social circumstances in which NI protection now operates and seeking to adapt the contribution conditions and entitlement criteria in order to reflect this.

Building on Strengths

  7.2  The strengths of social insurance are the contingency base for entitlement and its link to labour market participation, the individual basis of the contribution contract, and the notions of horizontal redistribution and income protection. These could be strengthened in a number of ways:

  7.3  Entitlement could continue to be linked, as appropriate, to absence from the labour market and willingness to seek appropriate employment and training opportunities. Such entitlement would need to take account of part-time and seasonal work—probably through the use of "part-time pay/part-time benefit" provision and fast-track re-claiming after short spells of employment.

  7.4  Entitlement could continue to be based on individual rights, linked to individual taxation and direct support for family costs through Child Benefit support. Any additional costs resulting from increased benefit entitlement could justifiably be met by increasing the contribution rates for those in employment.

  7.5  Horizontal redistribution could be extended by ensuring that all life cycle events leading to labour market absence were covered by insurance. Income protection could be enhanced by (returning to) the notion of earnings-related benefit payments—at least for short periods of labour market absence.

Eliminating Weaknesses

  7.6  The weaknesses within social insurance protection are the regressive nature of the contribution base, the effect of strict contribution conditions in excluding some from protection, the failure of insurance benefits to meet the full costs of family support, and the archaic nature of the contribution system. These could be challenged in a number of ways.

  7.7  The regressive nature of the contribution base could be removed by aligning NI contribution thresholds with Income Tax and moving both onto an annual accounting base. Moves towards this goal have already been made by the New Labour government. However, if the upper earnings limit were removed completely, significant additional resources could be generated to support extensions to the conditions for entitlement outlined below.

  7.8  Relaxing contribution conditions would bring more people into entitlement for NI protection. This could apply both to short term benefits (notably the JSA) and the long term basic pension. Permitting the substitution of paid contributions with credits could bring marginal workers, those in education or working abroad, the youth and long term unemployed into protection. The extension of the home responsibilities exemption could bring in those excluded from the labour market by caring responsibilities. The existing long term unemployed could also be protected by removing the six months limit to contributory JSA.

  7.9  The failure of insurance benefits to meet the full costs of (especially large) families is in part a product of inadequate support for child care costs elsewhere in the social security system, and of the high housing costs faced by such families. Changes here would require changes in other aspects of public and social policy. However, extending individual entitlement to NI protection and increasing levels of Child Benefit would certainly help here; and any such move would help to undermine the disincentive to undertake paid employment currently experienced by the partners of unemployed claimants of means-tested benefits.

  7.10  The current contribution conditions are understood by very few claimants - and possibly few politicians and policy-makers too. The legitimacy which they lend to the use of social insurance to provide income support is based more upon the principles of the contractual model of contribution and earnings dependency than any detailed knowledge of individual criteria for entitlement. Given this the alignment of NI contribution thresholds with income taxation and the move to make the NI fund more like hypothecated taxation for social security makes practical sense. It would also therefore be rational to relax contribution conditions and link entitlement more closely with membership of the labour market, job availability, or justified absence for care duties, education or other reasons. Such reforms could also encompass a continuation, or extension, of earnings-related benefit payment in certain circumstances—employing taxable earnings, rather than NI contributions made, as the base for determining levels of entitlement.


  8.1  The contribution principle and the notion of social insurance have been at the heart of the British social security system throughout most of the twentieth century, and especially since the Beveridge reforms of the 1940s. They also dominate much of the social security protection provided by our neighbours in continental Europe. However, the comprehensive nature of NI protection in Britain has been undermined in recent years by structural weaknesses in the contribution base and by its inability to adapt to changing social and economic circumstance, compounded by a massive increase in the use of means-tested benefits to meet a range of social needs. Nevertheless NI benefits continue to comprise the majority of social security expenditure; and means-tested benefits import a number of problems and disincentives into the social security system. If the decline in NI entitlement and the expansion of means-testing were reversed as a result of the adoption of a modernised approach to social insurance protection, then social security could begin again to fulfil the integrating role in British society that Beveridge envisaged for it over fifty years ago.

Pete Alcock

Professor of Social Policy and Administration, University of Birmingham

6 May 1999

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