Select Committee on Social Security Minutes of Evidence

Examintion of Witnesses (Questions 20 - 35)



Mr Leigh

  20. Dr Lawlor has given us the history and although history is not bunk, it is history. So I am delighted that we are now talking about Dr Lawlor's ideas for the future. As I understand it—I just want to follow on this question now and get this clear in my mind—this is her sort of vision of what we are going to be doing or we should be doing, because we argue endlessly about this, how we are going to do this when we return to power in two years' time and we will start again! We immediately fall straight into the obvious traps of what you can do and achieve, but as I understand it, this is your vision, that we are all going to be contributing very much more, presumably in some private sector arrangement, a higher portion of our salary into some kind of funded scheme. Fair enough. I do not quite see how we are going to overcome the political difficulties and force people to pay effectively more tax, but you can comment on that if you want to? Do I understand that your answer to my colleague's point is this: all right, we accept that there are all these people, these single mothers, the disabled, the people who have fallen out of work, the feckless, whatever. You drive more and more of them into work and thereby you force more and more of them into work and you take then the political unpopularity of that if there is any. You treat each case individually, but you get more and more of them into work. But then of course you do accept, do you not, that at the end of the day you are still left with this great mass of people who, however hard you try, and however hard Gordon Brown tries, are still left there and are going to be the target of all these means tested benefits, so we are back to square one? I am not quite sure how you can resolve this?
  (Dr Lawlor) Your view of society as it is—I would not share it really. And I would think that part of the problem is that the government has, in muddling through various contingency problems decade after decade, created that kind of society. It has removed incentives for work. I think means testing has an extremely detrimental incentive; attempts to deal universally with specific problems by universal structure have failed. Governments are only as good as their officials or the sum of their officials, and this is not the best way to tackle problems. If you start thinking seriously about the society which we have and then what effectively government can do, government can effectively set up frameworks where people can pay in in time of earning to cover against loss of earning. It is an old principle, it works, it works now and it works in the private sector. If government wants to organise such a scheme, well and good. I would advocate choice for individuals whether they choose to pay into a government scheme or they choose to take their earnings outside, and I think that would be a sign of the modernising principles which the new Labour government wants to institute. I would also say that in respect of contributors who have contributed over a lifetime, that if they wanted they should be recompensed for their contribution, not penalised; and I think there is a very great issue of equity here. If we are removing the contributory principle from people at the lower end of the earning scale as Gordon Brown is doing now, how are they going to have any kind of contributions record in respect of themselves? And I think there are lots and lots of problems being created if you start whittling away the principle. Once you leave it there, it can be a matter for policy to decide whether it is run by the State, whether it is run by outside, whether it is another partnership scheme or whatever. Then you look at people who, for whatever reason, are not earning—and I do not necessarily accept your description of people who are not earning. There are different reasons for why people are not earning, but I would have thought that one of the principal reasons—and if you look at the European counterparts too—is where you have heavy taxation and a great deal of bureaucratic problems and expense to employment. There are different reasons for it, but although Britain is not as bad comparatively as some other countries, those problems are there and we have to get back to a better teaching system where children are educated at school, much more open employment models where there is great incentive to work. If you change the way you look at society and government makes it easier rather than harder, a lot of these problems will disappear, and then you will have the basis once again for a contribution based system. It has to pay both employers and employees to work.

Dr Naysmith

  21. I had intended to ask Professor Alcock if he would define what he thought the key strengths of social insurance were and then to go on and contrast it with the main weaknesses, but really we have covered lots of those things anyway and anyone who really wants to do that can go through what has been said already and compile a list?
  (Professor Alcock) Right.

  22. I was then going to say, having read your memorandum to the Committee, I had anticipated that one of the things you were going to say was that social insurance is administratively simple to establish entitlement to, and I am not sure that is true. People come to my advice sessions in the constituency and try to establish entitlement to incapacity benefit, which then leads to the all work test and then we get to appeals and all sorts of things. That does not seem very simple, and then Jobseeker's Allowance, supposedly a contributory scheme, leads on to all sorts of things to do with earnings, part-time earnings and pensions and so on. It is not simple at all?
  (Professor Alcock) Fair point. My initial reaction to that point is that perhaps one should recognise that the word `simple', like many other things, is a relative concept. It is simpler than some other systems and it is simpler in some ways. It seems to me that the administrative strength of a contribution based system, particularly in the context of social security, is the avoidance of the means test and it seems to me that that is the administrative gain which is quite significant, both in terms of the processing of applications—and not just the initial processing of course but the continual monitoring which is required with a means testing system—and also the accompanying kind of emotional and practical and political consequences which go with that kind of administration, the sort of intrusion, the questioning and the suspicion and the stigma and so on that goes with it. So it seems to me that in that sense it is simpler. But I agree with you, it is not the case that entitlement to current national insurance benefits is particularly simple and certainly it is not simple across two dimensions. One dimension is the continuing use of the contributory principle to determine entitlement and the rules about contribution tests. The amount of contributions you have to pay are still relatively complicated, in fact if you teach social security to lawyers and welfare rights workers you have to go through it about four times before they understand it and then you give them a little example to work it out and they all get it wrong. So in that sense it is very complicated; it does seem to me that that is something to address. Then there is the second dimension to the complexity which is the dimension around the entitlement criteria, issues like the all work test and incapacity benefit, the availability for work tests within employment. But it does seem to me that they are questions that you have to address quite carefully. If you have a contingency based system and in essence that is what we are saying is the strength of the insurance system, you do have to have a means of determining whether people are in the contingency or not and what the consequences of being in a particular contingency are. It does seem to me that if we want to operate with a kind of welfare to work, labour market based social security system, which we do, you do have to have some kind of test to determine whether people are available for work, whether people are incapable of work, whether people are engaged in caring activities, for instance, if you want to make that a contingency—it seems to me there would be a lot of support for so doing—you do have to have those tests. They may be complicated and they may create problems, but it seems to me that is an administrative issue that you have to face up to. If the alternative is to go down the means testing road then it seems to me you open up another whole can of worms which actually would leave you with bigger administrative problems.

  23. One of the other problems with entitlement is that people themselves are not very clear about whether they are entitled to benefits or not—we have touched on that already earlier on—and employers have this bureaucratic system that they have to operate. There is lots of lack of clarity about the whole system.
  (Professor Alcock) Sure, but if the question is whether the current administration of national insurance benefits is administratively efficient and simple to users and providers, if that is the question we are addressing it seems to me there are various things we could do to make it better, but it seems to me that if that is the particular question you are asking then there is a particular road or set of roads that you go down and a set of hurdles or—mixing my metaphors here!—a set of crossroads that you encounter in doing that. But that is rather different to saying that because of these administrative problems the contingency based insurance benefits are not worth the candle.
  (Dr Lawlor) It is a problem of transparency really, how you make a system more transparent.

  24. Yes, I was just going to ask one more question of Professor Alcock, then perhaps, Dr Lawlor, you could come in as well. In your memorandum, it looks as if the whole of the contribution base is fictitious in just what we have been talking about. Do you think there is any benefit of maintaining this fiction? I am not talking about the system; I am talking about the fiction that some people believe they are contributing to benefits when they are not and other contributing to benefits and then they do not get them for various reasons?
  (Professor Alcock) Certainly one element of the fiction I think definitely should be openly challenged and abandoned is the notion of a fund, the notion of some personal kitty or even a collective kitty. We have always had a pay-as-you-go system in this country and it seems to me that that actually is a great strength of it, not a weakness, and we should celebrate that fact and if people think that the money that they paid in in 1959 is sitting there in some government bank account waiting for them to claim it, that fiction should be addressed and de-mystified. The notion however that people have contributed into some collective fund, which is there as a fund, which provides for the kind of circumstances which they may not be in at the moment but they may be in at some future time, and that that fund has some sort of political transparency seems to me to be something which we should maintain. You could argue that it is a form of hypothecated taxation rather than insurance fund and we could get into debate about how we might present that and what kind of principles would be politically most desirable and most practical, but it seems to me that the notion that you are moving this money around within the social security or social insurance system is something which is important to retain, as opposed to just moving entirely to mixing it in with taxation so that everybody just pays their money in taxes as they do now and the social security takes its share of that alongside the health service, the education service; you know, all of those other things. The notion of a bounded system seems to me to have great attractions.

  25. I am sorry I interrupted you earlier; I just wanted to get to that point.
  (Dr Lawlor) No, no. It just occurred to me that what Professor Alcock is really pointing out is a very good example of a system which has been built up piecemeal to meet specific challenges, so you have endless—well really pretty endless—new conditionality, new sorts of means testing, new rules and you keep building them up and, in a way, I would suggest that that is a problem of how the system has developed and moved away from its original aims, rather than an argument against contribution in itself. I think that what Professor Alcock brings out is a great case for greater transparency and in a sense greater universality and less means testing. When both Miss Kirkbride and Ms Buck said "How on earth could you pay?"—well perhaps this was implied in your question—for a contribution based system for everybody, particularly non-working. You see, but we are already paying, but we are paying in a very muddled way and your question brings out lots of the muddles and the cost of administration in terms of time and officialdom in getting the rules clear. Would it not be so much better that instead of this confused overlapping via the tax system and via all kinds of other things that we had the very clear system of contribution where instead of putting the money into one kitty, maybe hypothecated—we simply said this is an insurance premium we are paying for you, which we are paying for and that is what it entitles you to.

  26. If I may just interrupt. How do you deal with those who cannot afford to contribute?
  (Dr Lawlor) That is right. Well, at the moment we are dealing with them. We are trying to help them by trying to fund not very much more above subsistence, if subsistence; there is an argument about that. But as a decent society we pay for those in need, but we are doing it in such an inefficient, I think rather dismal and undignified way, which is very expensive in terms of time and cost. Why not simply say: "Let us stop doing it through redistributive taxation with targeting", because all tax funded benefits inevitably brings targeting of some kind or another or means testing or all kinds of things. But instead of doing that, let us simply clean the system up and say: "The amount of money we are spending on people, let us put it into an insurance premium for them and let us start moving towards a clearer and more transparent system, because in the end this lack of transparency does not benefit anybody".

  27. We heard already about the 20 years; that the pension originally was meant not to apply for 20 years, but you would run into exactly the same problem then?
  (Dr Lawlor) You would have to start building up again and also you would have to tackle this thing: "Are we going pay-as-you-go, are we going to try and build up a fund?". That is the first thing. Second of all, do you want a nationalised state scheme or do you want to encourage people to take out voluntary or mutual or private pensions truly and look into these things? But you will never look into them if you think that your contribution system is dead and gone and all you have to do is patch it up with sticking plaster whenever there is a problem about the tax system.

Ms Shipley

  28. This is a supplementary based somewhat on what Professor Alcock was saying. To put it crudely, it sounds as if it would cost a lot, what you were saying. Do you have any notion of how much and have you any feeling for whether there is a popular will to sustain such contribution?
  (Professor Alcock) The honest answer is I do not have the figures and I am not sure how easy it would be to work out the figures, although that is something that perhaps might be worth setting in train. It is possible to do some calculations there are computer based systems for calculating the potential of tax and benefit changes which could be used here. But I am not convinced that the costs are quite as significant as some people seem to be concerned that they are, because in many cases what you would be doing, if you were to move towards a more comprehensive insurance system, would be replacing existing means tested benefits with contributory benefits. I do not think there are an awful lot of people who would be getting contributory benefits who would be in addition to those people currently getting means tested support. But in a sense, at the level of broader principle, before coming on to the pounds and pence at the moment, it seems to me that it is much easier to tackle that question of how much it costs and who should pay for it and whether people are willing to pay for it, if it is administratively and politically transparent and it is interesting that during the early 1980s, at a time when the Conservative government of that time was pretty critical of the problem of the increasing tax base on British society and was arguing very strongly that taxation should be reduced, particularly income taxation should be reduced, it actually increased national insurance contributions on employees in order to meet the increased costs on the national insurance scheme of higher levels of unemployment and growing numbers of pensioners. Now if a Conservative government in the 1980s worried about direct taxation in the way that it was felt able to increase national insurance contributions, that is evidence perhaps that there is some kind of political agreement around the notion that redistribution within a social security system, particularly one that is based upon the broad notion of insurance, may be acceptable in the way in which increases in taxation are not because you can see what it is paying for.

Mr Pond

  29. May I say, contributions went up and benefits were cut very dramatically, so maybe that political settlement fell apart?
  (Professor Alcock) Yes, it did, but that in a sense makes it all the more surprising because there clearly was no popular revolt about the fact, so actually if you did the sums from an individual point of view you were paying more and potentially getting less. Costs went up because there were more people claiming those benefits.


  30. I am interested in following this thought that the work has not been done to cost, but it is an absolutely crucial part of the balance of the argument, is it not? Do you have any idea, if it is not who have got the time, and it would indeed need government money to research and finance the research, who would be the kind of person who would be able to do that kind of work, even just to establish a scope within which the expenditure envelope would fall?
  (Professor Alcock) I do not know what capacity government has. There is a computer based benefits system which was developed originally at the LSE which Holly Sutherland, who is now at the University of Cambridge I think, is still running. Now the reason why they developed that was to try and provide a computer based system for calculating the costs of various changes in tax and benefit systems. It can, for example, calculate the cost of an extra £1 on or off income tax and/or additions to particular benefits. Whether it is sophisticated enough to make these kind of calculations I do not know, and one of the problems with these computer based benefit systems, as I am sure Holly Sutherland would be the first to admit, is that there are so many different contingencies and if you change one bit of the jigsaw then of course it affects other bits of the jigsaw. So whether you can get reliable costs out of those systems I am not entirely sure. It is certainly worth asking the question.
  (Dr Lawlor) The Social Security department does not keep accurate records. I remember we were interested in finding out, in respect of national insurance contributions of beneficiaries, what proportion of people who paid contributions do benefit or were subjected to means tested benefits and what proportion of beneficiaries were non-contributors or had never been. And a lot of these records have not been kept.

Mr Pond

  31. Where do tax credits fit into all this?
  (Professor Alcock) In one sense I am not sure that they do, but it seems to me that particularly the new Working Families Tax Credit which will come in later this year, could do. There was a time when I think people would have argued that that was in essence a form of means tested benefit and really was incompatible with social insurance, but I am not sure that that is the case. It does seem to me that the Working Families Tax Credit, more transparently perhaps than some of the previous forms of income support, is actually a means of subsidising low wages and it is saying that we wish, as a government, in order to make employment attractive for particular employees and indeed for particular employers, we want to use government resources to supplement low wages. Now it seems to me that the reason for doing that—there are all sorts of reasons, but let us not go into them because I guess that they are probably widely shared—and they will therefore make paid employment more attractive for certain people. It seems to me that that is a good thing in principle, but it also helps to balance the relationship between paid employment and receipt of insurance benefits when you are not in work, because it means that entering a labour market will be more attractive. It seems to me there are other problems with the Working Families Tax Credit to do with the sort of income flattening effect that they have for people on low incomes, but that is a different sort of issue really which is a different kind of debate than the one about the relationship which it has with the benefits system for people who are unemployed. It seems to me there is a compatible relationship between tax credits for people in work and benefits for people out of work.

  32. If that is the motivation, why would the Government also have introduced the minimum wage?
  (Professor Alcock) Because the minimum wage can work in tandem with the tax credit because it is a way of requiring and encouraging employers to meet at least a reasonable standard of pay for the workers that they employ. It seems to me that one of the ways in which you make employment attractive is by making sure that people get a reasonable standard of pay for the work that they do. That can partly be met by making sure employers pay enough and it can partly be met by subsidising employers through some simple tax credits and implicit, I think, in recognising the need for tax credits is that it is not reasonable to expect all employers or all of their employees to meet all of the wage costs which may be needed to make work attractive at the moment.
  (Dr Lawlor) I would suggest you have to bear in mind that it does make for greater confusion, greater lack of clarity and greater lack of transparency between two systems which eventually do different things: a tax system which on the whole is non-intrusive and which is there to tax, and a benefits system which has grown up really in another way entirely which is to give benefits. I think this is another example of possibly a well intentioned scheme and we have had its predecessors in the 1970s and indeed attempts I think in the 1960s, but all the time there has always been strong opposition even from the very groups that it was designed to help, that these measures will make for a lack of clarity and transparency and in the end will be counterproductive and so expensive to administer and put two systems into confusion rather than one.

  Chairman: Two very quick supplementaries and then I know our two witnesses have other engagements. Miss Kirkbride and Mr Flight.

Miss Kirkbride

  33. Two things then. One is that trying to think through how going to an entirely contributory system would actually work, two things crossed my mind. One is that if we are making contributions to people who are not in the labour market then why is that any less of an incentive? What exactly are the incentives? You are saying that the present system destroys incentives, well if you are still working you are plugged into the system by something that the State is paying for you. What difference to incentives? Second, if we were going to go towards that system where everybody has their social insurance based on a contributory principle, presumably that would mean that the restrictions that had been put as a means test on the existing contributory based benefits—incapacity benefits, unemployment benefits, things that have been curtailed over time, by both of us before I get shouted at, then are we going to say: "Well, no, that is no longer going to apply" in which case are we just going to blow the lid on the cost of it?
  (Professor Alcock) Let us take the first bit of the question first of all. It seems to me that if you are going to credit in people who are currently not making contributions, and to some extent of course we do that for people at the moment who are on Jobseeker's Allowance -it seems to me that that is not a new principle; it is a question of whether we take that principle further—then it seems to me that there are advantages in doing that and one of the ways in which you might restrict the potential disincentive effects of that is to say that you only get credits if you fall into certain agreed contingencies. For example, you are unemployed and seeking work, for example, you are incapable of work because of illness, for example, you are engaged in caring activities. So it would leave the possibility for some people to decide, for example, somebody with a large private income perhaps or a sugar daddy who provides for them, to say: "Well, I am not interested. I do not want to work. There is nothing wrong with me, but I have no intention to work and I have enough money to live on, thank you very much" and they would not then get their credits because they would not be part of the system. But the important point is that if you are in a contingency and say, for example, you are caring for a chronically ill relative which is preventing you from entering the labour market because it is a 24 hour job, then it seems to me that giving you a credit which maintains a link with the social insurance system would be a desirable and a viable way of protecting such people.


  34. At a cost?
  (Professor Alcock) Yes, it would cost money, that is the short answer.

Mr Flight

  35. That is exactly what was done for spouses until recently. My question is, you dismissed out of hand the concept of a separately funded fund. Many other countries do operate on that basis, or some do. Could you elaborate?
  (Professor Alcock) If you mean my dismissing out of hand, what I do not see any value in, in treating—let us call it the national insurance fund for the moment, but one could rename it—but in treating that as an investment over time, I cannot see any value in doing that. It seems to me we could get into an economists' argument about whether any investment over time is really guarantee against anything. However, at the end of the day, all of your investments, or all of our investments, all of society's investments are contingent upon a continuing level of economic performance and all sorts of things in the future. So there is no guarantee wherever one puts the money, whether you put it in government bonds, whether you put it in the NatWest Bank, there is no guarantee that that money is going to be there if the economy does not perform on a particular level. But if we are talking now about a collective fund on a national basis, which is providing protection for people as a result of the contributions they have made, I cannot see the point of building up a surplus—which is effectively what you would be doing—in order to invest in, say, manufacturing industry for instance. I cannot see the point in doing that. You are better off, it seems to me, meeting the contingency that you need with the money that you have now and guaranteeing to meet future contingencies with future benefits and if you want to support industry or whatever you use other resources to do that.
  (Dr Lawlor) On Miss Kirkbride's question, the question of how do you maintain the incentive if you provided contributory based insurance premiums for everybody. You could do it by conditionality I suppose. I think that is never very effective. One could look at the levels at which it is set and traditionally there has been a difference in levels between those who were earning and paying for themselves and those who were being paid for. Now this is politically a hot potato and I know it is very difficult for politicians to think about different levels, but that traditionally has been accepted on the grounds of equity, and equity has been very dear to the hearts of people in this country. So that is the first thing I would say about levels. Two, with regard to costs, remember a great deal is being spent now and probably inefficiently. I would suggest that the very first step if one were thinking about such a system would be to translate what we are spending now into a model for contribution and see how the figures work out. To see where we are now and see what that would add up to. And then you can have a debate about whether more is needed, less is needed, people need to add more for themselves if they can or not, but until we do think in that kind of way we will not get there. Finally, your question about the social insurance. It was hard. I just do not think—there is nothing as you say in principle against a social insurance fund. For instance, the Government Actuary, as far as I recall: would believe in a mixture of schemes, and different people believe in different ways of doing it, and in this country there has been a mixture but what we have not had was the development of the social fund, and it may well be a pity that that has never been properly explored.

  Chairman: Colleagues, I gave both our witnesses an undertaking that they would be out of the door before one o'clock and we have just managed to do that. It has been a fascinating session. You have given us a lot to think about. We may need your help again in the future, but thank you both not just for appearing this morning, but for the very interesting submissions by way of written evidence and I apologise again for keeping you waiting at the beginning of the session. Thank you very much for coming and I declare the public session now over.

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