Select Committee on Social Security Minutes of Evidence


Factors affecting numbers in poverty Lowest ("optimistic") scenario Highest ("pessimistic") scenario

Growth in lone parent families -50,000 +100,000
Level of unemployment -400,000 +800,000
New Deal & welfare to work -400,000 -150,000
Minimum wage (£4 an hour) -300,000 -300,000
Social security indexation to prices
Total net change in poverty numbers -1,150,000 +2,050,000

  Professor Piachaud's assumptions as follows: lone parents—assumes either 2 per cent or 5 per cent growth (both options allow for positive pre-Budget announcement of child care measures); unemployment—assumed to fall to average of 1 million or rise to average of 2.4 million; New Deal and welfare to work—assumes 750,000 pass through programme and between 30 per cent and 70 per cent get jobs they would not otherwise get, and about 75 per cent of these additional jobs reduce poverty. These estimates do not take account of the March 1998 Budget measures or the setting of the minimum wage levels at £3.60 and £3.00. The TUC has assumed that re-indexation to earnings occurs in the more optimistic scenario. (Piachaud, 1998)

  83.  In particular, it is important that the level of the state Retirement Pension should be indexed to wages, not prices. The TUC has welcomed the Government's intention to up-rate the Minimum Income Guarantee in line with earnings. We have also welcomed the introduction of the State Second Pension, and in particular its emphasis on the low paid and carers. However, we are concerned that the State Second Pension will only be uprated in line with prices. The effect will be that, within a few years of retirement, many State Second Pension holders will find themselves reliant on the Minimum Income Guarantee, which was not the Government's intention. The Government must, therefore, also uprate the State Second Pension in line with earnings, not prices.

Occupational provision

  84.  The emphasis on occupational benefits is also open to criticism. While unions are proud of their record of negotiating high quality benefits from employers, especially pensions, we are also aware of the fact that many workers are not covered by these schemes, and that those outside the labour market are, by definition, unable to benefit from them. Without statutory rights to such benefits reliance on occupational provision will produce patchy coverage which misses those who need it most.


  85.  There are also tensions between different Government objectives—particularly between the promotion of work as an alternative to welfare and the need to contain costs. The New Deal for young people indicates the cost of helping unemployed people into jobs, and helping inactive groups such as disabled people and lone parents is even more expensive.


  86.  This summarises detailed proposals presented in two major TUC reports (MacLennan 1996, 1998) 7. The TUC's most important target for NI reform is the Lower Earnings Limit. We are particularly concerned about the problems of low-paid workers, who are excluded from NI coverage because they do not earn enough to pay contributions. This exclusion affects qualification for statutory sickness and maternity pay as well as benefit entitlement.

  87.  2,500,000 people are now excluded in this way—one worker in ten. (Hansard, 1997b) Some people are particularly at risk:

    —  95 per cent are part-time workers—two part-timers in every five are excluded. (Ibid)

    —  Four out of five are women.

    —  Nearly two-thirds of the men are students or young workers just starting out on a career, but just a quarter of the women fall into this category.

    —  Black workers are more likely than White workers to miss out on NI contributions. On average Black workers have lower hourly earnings than White workers—especially those at the bottom of the earnings scale. (TUC, 1997)

  88.  Based largely on answers to Parliamentary Questions, the TUC estimated the cost to the public purse of extending entitlement to short-term NI benefits to workers earning below the Lower Earnings Limit:

Benefit Cost to the Taxpayer

Statutory Maternity Pay £13—£23 million
Statutory Sick Pay £1 million
Contributory Jobseeker's
£28 to 34 million
Short-term Incapacity Benefit £20 million
Maternity Allowance £25 million

  89.  Additionally, there are three long-term NI benefits: Retirement Pension, long-term Incapacity Benefit and widow's benefits. When the TUC report was written, the Government was fundamentally reviewing pension provision, and so it was not able to consider all the issues around Retirement Pension. It did, however, address the costs of extending eligibility to the other two long-term benefits:

Benefit Cost to the taxpayer

Long-term Incapacity Benefit £40 million
Widows' benefits Negligible

  90.  The total cost of extending entitlement to these benefits was around £140 million. Uprated by inflation, this reform would now cost around £150 million. Extending entitlement to SSP would also cost employers £78-£116 million, a small proportion of employers' SSP liabilities—currently £900 million. A rebate scheme protects employers from facing unfair SSP burdens. Extending SMP to women with earnings below the LEL could be funded by adjusting the rebate by which firms reclaim most of the SMP they pay: a 3 to 4 per cent reduction in the rebate for larger firms could cover the costs of reform.

  91.  There are a number of options for reform. Simply abolishing contributions conditions would not be a realistic way of extending NI benefits to the low paid. These benefits are intended to help workers during periods when they cannot rely on their wages, so reforms which give entitlement to people with little connection to the labour market are unfair. What is needed is a test of attachment to work which includes most low paid employees but excludes those whose attachment to the labour market is slight.

  92.  Three options for reform have been canvassed from time to time—introducing partial benefits for partial contributions, introducing a minimum hours condition in place of the contributions conditions and changes to employee and employer NICs.

Changing employer and employee NICs

  93.  In costing options for reform, the TUC looked at the benefits and problems of levying employer and employee NICs on earnings below the LEL; or of lowering the LEL. Such measures could have raised more than £400 million, but they would raise the burden of tax on the low paid: directly contrary to the government's policy of "making work pay".

Partial benefits

  94.  One possibility would be a return to something like the system of partial benefits for people with a less than adequate contribution record, abolished in October 1986. Prior to that an individual who paid at least half the required contributions qualified for half the full rate of benefit, and someone with at least three-quarters of the necessary contributions received three-quarters of the benefit rate. This ability to qualify on the basis of partial contributions was particularly advantageous to women. In 1986 46 per cent of claimants of partial unemployment benefit were women, compared with 37 per cent of those claiming full benefit. 31,000 women claimed a partial Maternity Allowance in that year. (Hansard, 1997c)

  95.  The re-introduction of partial benefits would be a valuable reform, extending eligibility to people who pay NICs but currently do not qualify for benefits, because they work intermittently, or on short-term contracts. Furthermore, a variant could be used to extend coverage to those with earnings below the LEL.

  96.  Someone earning at least half the LEL for 25 weeks could be deemed to have satisfied half the necessary paid contributions and would receive a half-rate of benefit, while someone earning three-quarters of the LEL would be entitled to a three-quarter rate. To include more of the low paid, there could also be a lower rate for those earning at least a quarter of the LEL. Any actual contributions made would serve to boost the level of entitlement, while additional weeks of employment in which earnings equalled or exceeded the minimum would count towards contribution credits. This proposal would cut the cost of reform by about half.

Minimum hours requirements

  97.  In some other countries' social insurance systems entitlement is linked to hours of work. Thus, for instance, anyone working more than eight hours in a week could be deemed to have met the contributions conditions for that week. There would be a number of possible drawbacks to this proposal. With no link to earnings, some people might become entitled to benefits higher than their normal wages, though this could be addressed by setting a maximum benefit level, equivalent to a certain proportion of wages.

  98.  A second problem would be that employers would have to keep records of the number of hours worked by their employees, which they do not have to do at present. A third problem is that any level of minimum hours would, necessarily, be arbitrary, and would tend to exclude a disproportionate number of women. On the whole, a minimum hours condition for benefit eligibility is not a viable alternative to the existing contribution conditions.

The NI trap

  99.  Until this year the NIC structure has created perverse incentives for employers to hold down wages:

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Prepared 28 July 1999