Select Committee on Social Security Minutes of Evidence



Memorandum submitted by the Trades Union Congress (TUC)(CP 27)


I.  BACKGROUND

  1.  This document presents the TUC's views on the future of National Insurance in general, and the contributory principle in particular. The TUC is Britain's largest voluntary organisation, representing unions with seven million members and providing employees with an independent voice on world of work issues.

  2.  We have a well established interest in the benefits system. Beveridge called the TUC "the Godfathers of the Beveridge report" and noted that, "with the exception of one point 1 there is little difference between my proposals and the proposals of the TUC." (TUC, 1968, 126) The TUC continues to contribute to the national debate about social security, and no discussion of the future of the contributory principle can ignore the occupational benefits negotiated by our affiliated unions.

II.  WHAT IS MEANT BY THE CONTRIBUTORY PRINCIPLE?

  3.  The contributory principle cannot be disentangled from social insurance, which is notoriously difficult to define:

    "Social insurance is one of those comfortable short-hand expressions which people tend to use without close examination of its precise content . . . . There is indeed a lot of the proverbial elephant about social insurance: we may not be able to define an elephant, but we recognise one when we see it. We know what programmes people have in mind in Britain when they speak of National Insurance: for example, retirement pensions, widows' pensions, Invalidity Benefit and Unemployment Benefit. We know that it means these benefits rather than means-tested Income Support." (Atkinson, 1995, 205)

  4.  Some of the features of the "elephant" which help us to recognise it are:

    —  Compulsion and exclusion. All national social insurance schemes oblige some people to be members while others are not allowed to join. In the UK, people outside the labour market and those with earnings below the Lower Earnings Limit for National Insurance Contributions are excluded, while employees with earnings above this level are required to contribute.

    —  The absence of a means-test. There are some exceptions, but means-tests are the exception, not the rule. Take for instance the example of contributory unemployment benefit 2 in other EU Member States. UB is not means-tested in Belgium, Denmark, France, Finland, Greece, Ireland, Italy, Netherlands, Portugal, Spain or Sweden. In Germany and Austria there is some reduction to take account of the part-time or minor employment claimants can undertake while receiving benefit, and Luxembourg's system takes account of partners' incomes. (European Commission, 1998, table XI)

    —  Smoothing income over the life-cycle. Benefits are provided for workers whose earned incomes have been interrupted. Social insurance systems assume that most people should rely on earnings for most of their lives—either their own earnings or the earnings of someone in their family. Various contingencies can interrupt earnings, and social insurance addresses this by providing benefits to cover these contingencies. The contingencies covered by National Insurance—retirement, unemployment, sickness, disability, maternity and widowhood—are commonly covered by social insurance systems throughout the world.

    —  Responding to market failure. Social insurance typically provides for risks—especially unemployment—which would be imperfectly covered by private or occupational insurance. The conditions which must be met for private insurance to be practicable are discussed in more detail below, but it is worth mentioning here that some of the risks covered by social insurance face particular problems of moral hazard and adverse selection. As Churchill noted when introducing National Insurance in 1911:

    "Voluntary schemes of unemployment insurance . . . have always failed because those men likely to be unemployed resorted to them, and, consequently, there was a preponderance of bad risks . . . which must be fatal to the success of the scheme." (Atkinson, 1995, 209)

  5.  It would, in principle, be possible to design a social insurance system which had these features and was not funded by Contributions. The fact however, is that, internationally, Contributions are the normal funding mechanism for social insurance. The contingencies covered by social insurance are all employment-related, so it makes sense for the funding system also to be employment-related.

  6.  While contributory funding of social insurance has a certain inevitability, there is more room for debate about relating eligibility to Contributions. In this document we consider only benefits which have contribution conditions for eligibility. Although they have features in common with Statutory Sickness and Maternity Pay and the Industrial Injuries Scheme, we have assumed that this latter group is outside the scope of an inquiry into the contributory principle.

  7.  The Contribution rules are complicated and even specialists find it difficult to remember all of them all the time. (See Annex A) It is therefore not surprising that there have been calls for eligibility to be related to need, rather than Contributions. There is a viable case for this argument. Any eligibility rule linked to earning levels (or, as in some countries, hours worked per week) will tend to exclude workers with "atypical" employment contracts. In particular, part-time and temporary employees tend to be excluded by such rules, and the workers thus affected are more likely to be women, and, to a lesser extent, members of ethnic minorities. 3

  8.  This is an important point, but it has to be balanced against the advantages of relating eligibility to labour market participation, which we outline below. Rather than entirely abandon contribution conditions, it might be better to address those elements which exclude the workers most likely to need NI benefits:

    —  Workers who do not earn enough to pay Contributions have no rights to NI benefits. This particularly affects part-time workers, most of whom are women.

    —  Workers with partial or interrupted Contribution records may gain no benefit rights, despite paying a significant sum in Contributions. These (usually low-paid) workers are effectively subsidising their better-off colleagues.

  9.  The TUC has produced costed proposals for addressing these problems, summarised below in the section on "The Lower Earnings Limit".

Public awareness of and attitudes towards National Insurance and the contributory principle

  10.  An important Government focus-group study (DSS, 1998a) found that most of the people participating had "little direct experience of benefits, and only a hazy perception of the structure of the National Insurance scheme" and tended to regard Contributions as just another tax. Nonetheless, most strongly supported the contributory principle, opposed the means-testing of NI benefits and accepted that NI should pool risks and redistribute among contributors. Indeed:

    —  Those who supported the Government's emphasis on the importance of work and the need to eliminate fraud from the system were most likely to support the contributory principle.

    —  Most supported the expansion of NI to cover carers and people with incomplete Contribution records.

  11.  These findings were echoed by research carried out for the Fabian Society and Swiss Life (UK) which found "widespread support for the principle of social insurance, involving both pooled risk and an element of redistribution" with two thirds of the people surveyed being willing to pay an extra 1p in the pound in income tax to pay for the benefits of people who cannot make their own contributions, including carers, disabled people, people on low incomes and lone parents looking after young children. (Fabian Society, 1998, 2)

  12.  The TUC's own campaigning experience suggests that, when they understand the issues at stake, most workers strongly support National Insurance. In our campaign against the introduction of Jobseeker's Allowance, we found that the proposal to halve the duration of contributory benefit for unemployed people without any compensating reduction in Contributions was the issue most likely to make people support the campaign. People were angry that something they had paid for was being taken away from them. This mirrored the arguments which emerged from the DSS survey:

    "if an individual had paid their National Insurance contributions then they were entitled as a `right', to receive an insurance benefit in full. The entitlement to benefit was personal—the earnings of others within a household were seen as irrelevant. Moreover, as people were compelled to pay National Insurance they should receive their individual entitlement:

    `I think [for] most people, the first reaction is to say we've paid it so we want it.'" (op cit, 27, ital. in original)

  13.  On the other hand, the complexity of National Insurance and the widespread ignorance of its main features meant that one of the main obstacles faced by our campaign was that the significance of this problem was not immediately obvious. It was difficult to attract "passing trade" when the main point of the campaign needed a comparatively complicated explanation to introduce it.

  14.  Ignorance about how National Insurance works and what is paid for has repeatedly been uncovered by surveys of public attitudes to the benefit system. 4 The DSS research found that, although "payment of National Insurance contributions was seen as important in legitimating a person's right to claim insurance benefits" (op cit, 19) "generally, the respondents saw no real distinction between paying National Insurance and tax." (p 18) The Fabian survey found:

    "There is a widespread sense of confusion about the present welfare system, both what the state will pay in different eventualities and how far people are expected to make provision for themselves. People have little confidence either in the information they have to make decisions or in many private providers. There is a general desire for clarification of how the system will work in future." (op cit, 2)

  15.  The DSS survey found that the people it surveyed knew very little about what National Insurance pays for:

    "When asked `what do National Insurance contributions pay for?' respondents in all the groups said hospitals or the health service. Respondents in most of the groups also identified state pensions and, what was usually called `sickness pay' as being funded by National Insurance. Only one group mentioned, unprompted, unemployment as a risk covered by National Insurance; it was also this group which was the only one to identify `maternity benefit' as a contributory benefit." (op cit, 19, ital. in original)

  16.  The TUC's campaigning experience and the research discussed above therefore suggest that the contributory principle is attractive to laypeople, but that their support is limited by their ignorance. The complexity of National Insurance's rules undoubtedly makes it more difficult to explain just what people get for their Contributions.

  17.  Another factor limiting support is the fact that NI is a declining asset. Each cut in the level of benefit paid, and each restriction in eligibility makes National Insurance less worth defending. The Conservative Government, over many years, followed a policy of switching the emphasis of the social security system from National Insurance to means-tested benefits. For instance, measures by which eligibility for Unemployment Benefit was restricted and the level of benefit cut included:

    —  1980 child additions reduced

    —  1982 Earnings Related Supplement abolished.

    —  1982 UB made liable to tax.

    —  1984 child additions abolished.

    —  1989 recipients banned from part time work earning above the Lower Earnings Limit for National Insurance Contributions.

    —  1996 Jobseeker's Allowance cut the maximum duration of contributory benefit for unemployment from 12 to 6 months.

  18.  With Sickness and Invalidity Benefit there was a "big bang" approach, but with the same effect when the benefits were replaced by Incapacity Benefit in 1994:

    —  The age related additional allowance was cut for most claimants.

    —  The adult dependant allowance was abolished for most claimants.

    —  The earnings-related supplement was abolished.

    —  The benefit was made taxable.

  19.  The restrictions and cuts in Retirement Pension and SERPS are well known, and the 1980 decision to limit benefit increases to the rate of inflation, rather than the increase in average earnings affected all benefit recipients.

  20.  These cuts have had an inevitable impact on assumptions about National Insurance's future prospects. The DSS report revealed "a widespread belief that there would be no Retirement Pension in the future or that it would be of little value to recipients." (op cit, 11) The Fabian survey found:

    —  "There is widespread belief that current welfare benefits are too low. 88 per cent of the sample believe that the basic state pension should be raised, 70 per cent that Incapacity Benefit should be raised and 58 per cent that Jobseeker's Allowance should be raised. A majority in each case (85 per cent, 68 per cent, 72 per cent respectively) believe that present weekly amounts are `not enough to live on.'

    —  "There is widespread pessimism about what the state will provide over the next 10 years. A majority believe that the state pension will either fall in value (23 per cent) or be abolished altogether (28 per cent). Over a third believe that Incapacity Benefit will fall in value (20 per cent) or be abolished (14 per cent). Over 40 per cent believe that Jobseeker's Allowance will fall in value (20 per cent) or be abolished (22 per cent).

    —  "Two thirds of people (68 per cent) believe that over the next 10 years welfare benefits in general will become less widely available." (op cit, 1)

  21.  During the period when the benefit cuts which produced this pessimism took place the National Insurance Contributions which pay for these benefits were (for most employees) increased from 6.5 per cent of salary to 10 per cent—a rise of more than half.

  22.  The level of support for the contributory principle is remarkable given the level of ignorance about a complex system. It is even more noticeable given the fact that, over a long period, workers have been paying more and more for less and less. This suggests some principles for reforms:

    —  To have maintained this level of popularity National Insurance probably appeals to deep assumptions and concerns about equity and security. A welfare system which maintains public support will build on this strength.

    —  National Insurance reform should be designed to make individuals' NI entitlements clear.

    —  If public pessimism about future welfare prospects is not to become a self-fulfilling prophecy the sad story of cuts must be brought to a close. National Insurance must be worth having.

IV.  THE ADVANTAGES AND DISADVANTAGES OF THE CONTRIBUTORY PRINCIPLE AND THE BENEFITS TO WHICH IT GIVES RISE

  23.  The TUC has been, and continues to be, a strong supporter of National Insurance and the contributory principle.

Work and benefits

  24.  The first reason for this is that this system foregrounds work. Unions are opposed to grand schemes of benefit reform predicated on the assumption that we now live in a "post-employment society" or that "full employment is dead." Work isn't only a source of income, it provides individuals with a role in society—many studies have shown the importance of work for psychological well being. 5 A benefit system which does not assume that work is the norm for most people would take social and labour market policy in the wrong direction.

  25.  Instead, benefits should encourage people of working age to enter and remain in employment. This can be achieved by a system of contributory benefits, which are designed to provide for contingencies when workers' earnings are interrupted, and which are funded from the world of work.

Maintaining support for the welfare state

  26.  One of the advantages of National Insurance is that it helps to maintain a higher level of public support for benefit provision. The fact that NI benefits are not means-tested guarantees that the better-off contributors receive benefit rights in return for their Contributions—they get "something for something", not nothing for something. The NI system does in fact re-distribute from richer members to poorer, but those who are net contributors are less likely to feel aggrieved as a result. As the Commission on Social Justice chaired by Sir Gordon Borrie concluded:

    "Social insurance is a contract between individuals and society. When we are earning, we accept the responsibility of paying in; when we are not, we have the right to draw out. Where means-tested benefits divide society into two classes—those who need to claim and those who are forced to pay—social insurance is based on an ethic of mutuality . . ." (Commission on Social Justice, 1994, 231–2)

  27.  A purely means-tested system would create a social division between those who paid for it and those who benefited. It seems unlikely that such a system would be as popular, and the electoral pressures on Governments to hold down benefit levels might be irresistible. This point was made by the people surveyed by the DSS research into attitudes to the contributory principle, who "tended to assume that [means-testing contributory benefits] would lead to cuts in benefit for the better-off, without the resources released going to the most needy." Interestingly, the middle class people in this survey were less likely to believe this than working class people "although even among middle class respondents this was a minority opinion." (DSS, 1998a, 25)

Supporting workers is reasonable

  28.  Effectively there is a contract between workers and the rest of society. Our standards of living, our security and our future prospects all ultimately depend on the efforts of workers. Workers are paid for these efforts, but face various risks of lost earnings—old age, unemployment, illness and so on.

  29.  It is reasonable that workers should be insured against these risks, and that the cost of this insurance should be borne by those who benefit from their work—workers themselves, employers and the wider society. In other European countries this is recognised by involving the social partners in the administration of social insurance. This has the advantage that trade-offs in decisions about benefits and their funding are discussed openly, and negotiated—leading to a wider consensus about the results. In Germany, for instance, when social insurance provision for long-term care was being introduced, the employers were reluctant to see their contributions increased, but the unions won their support by agreeing to the abolition of a public holiday in compensation. (Hirsch, 1999)

  30.  The table below shows how, over the years, the funding burden has shifted from employers and general taxation to workers, and a fairer distribution is now needed. Despite this, unions are still the strongest supporters of the contributory principle, because we believe that its advantages in promoting social cohesion outweigh this problem.


 
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Prepared 28 July 1999