Examintion of Witnesses (Questions 20
- 35)
WEDNESDAY 26 MAY 1999
PROFESSOR PETE
ALCOCK AND
DR SHEILA
LAWLOR
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
itI just want to follow on this question now and get this
clear in my mindthis 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 isI
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 earningand
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 reasonsand
if you look at the European counterparts toois 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 applicationsand not just the
initial processing of course but the continual monitoring which
is required with a means testing systemand 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 contingencyit seems to me there
would be a lot of support for so doingyou 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 notwe have touched on that
already earlier onand 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 ormixing
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 endlesswell really pretty endlessnew
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 questionfor 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 hypothecatedwe 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.
Chairman
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 thatthere are all sorts of reasons, but let us not
go into them because I guess that they are probably widely sharedand
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 benefitsincapacity
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
furtherthen 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.
Chairman
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 treatinglet us
call it the national insurance fund for the moment, but one could
rename itbut 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 surpluswhich
is effectively what you would be doingin 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 thinkthere 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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