Select Committee on Social Security Minutes of Evidence

Examination of witnesses (Questions 40 - 59)



  40. Do you think it does have an important role to play?
  (Mr Exell) Oh, yes.

  Chairman: Thank you. Mr Pond has a supplementary question.

Mr Pond

  41. The issue you have raised about the modernisation of the system and the failures of the system, and one of them you highlight in your written evidence, is the complexity of contribution rules and you said, paragraph 7, that there is a viable case for the argument that benefit should be paid related to needs, not contributions. Now there clearly is a viable case for that, but whatever happened to the contributory principle in that case and is that still an insurance based system?
  (Mr Exell) Plainly not. If you look at types of welfare state, and there is a very common analysis of types of welfare states which sees three basic models. The Bismark model, which is the contributory principle, means testing or public assistance, and then what Esping Anderson called the social democratic model, which is non-contributory benefits, child benefit being the most obvious example in our system of that sort of benefit. Now if you related National Insurance benefits entirely to need without any reference to a contribution condition, that would effectively be getting rid of the contributory principle in our system and turning it into the social democratic model. The main difficulty with that is that it is horrendously expensive. If you look at our best example, child benefit, it has all the advantages of that model of welfare state. It is the benefits system poverty trap buster. It is really effective for helping people to move from welfare to work, but it is extremely expensive. Every one penny increase in the level of child benefit costs £5 million so you simply cannot have—in terms of current debate, we simply cannot afford to transform National Insurance into a system in which eligibility is not related to contributions. It is just not feasible at the moment.

  Chairman: Ms Shipley?

Ms Shipley

  42. Thank you, Chair. Given what you have just said, I want to take you back into the historical perspective now because I think people in Britain are very wedded to this "I paid in and can get out what is due to me" and it goes back obviously to Beveridge in 1942 and what he brought in. Indeed, the Prime Minister himself gave a pretty major speech at Oxford University on Beveridge and where we are going post-Beveridge. Now the TUC says: "Effectively there is a contract between workers and the rest of society. Our standards of living, our security, 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. 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, employers and the wider society." Now contrast that with Beveridge who actually favoured rewarding people who worked and provided for themselves over and above others and therefore the contributory benefits were something better and more worthwhile having than the means tested national assistance. That is really very important because what I would like to ask you really, and I feel something of a devil's advocate as a Labour MP asking this, but to what extent do you think that people who have been able to work and pay contributions towards benefit should be seen to get a greater benefit compared to those who had been unable to work?
  (Mr Exell) There are two points here. One is that the point of principle that you read out is part of the contract between workers and the rest of society; social contract, to use a term from the 1970s. But also we believe that the welfare state is not just about addressing poverty and redistributing income and wealth. That is an important role that it plays and National Insurance is actually a redistributive mechanism, but it is wider than that, as is well known, it is also about transferring resources across individuals' life cycles so that you pay more in National Insurance contributions during your peak earning time and you are able to make claims at other points in your life. Also we feel very strongly that when someone faces the risk of loss of income, poverty is not the only problem that we should be concerned about. We are also very worried about the catastrophic decline in income that people can face, especially if they have not been able to build up savings or take out private insurance, especially now that two-thirds of families have a mortgage and that raising children is more expensive than it has ever been before. People have long term commitments which mean that even if they are not in poverty they can face dire straits as a result of a reduction in their earnings. So National Insurance is right to pay money to workers as opposed to paying to people who are in need.

  43. But with respect, that did not really—and perhaps I did not make it clear enough—answer the question which was really, let me put it a bit boldly, should someone who has been unable to work be less well off in society than somebody who has been able to and then does not, for some reason? Should we really have that two-tier system?
  (Mr Exell) The TUC has always supported extending National Insurance eligibility to people who are not working because they are performing socially useful unpaid work. One of the big questions which is not covered by this inquiry, but one of the big questions for social security and policy is what do you do about unpaid work? We have always supported National Insurance rights for people looking after children and sick and disabled friends and relatives and provision for people undertaking voluntary work as well; that can be a useful Welfare to Work tool in addition to being socially useful. So those are measures that we will support and of course there are always the arrangements for crediting people who are unemployed, but we do think that there is a case for people who are doing work, whether it is paid or unpaid, being covered, being given special provision as opposed to the population at large.

  44. So that would be a two tier system then, would it not?
  (Ms Hawkes) May I bring Ms Segars in?


  45. Ms Segars?
  (Ms Segars) Just to add to that, in that context the TUC has very strongly welcomed the new provisions in the Welfare Reform and Pensions Green Papers on the State second pension which will allow carers to start to accrue some kind of pension over and above the basic State pension. So they will start to accrue a second pension; they will be treated as if they earned £9,000 a year and that is, as Mr Exell said, a reflection of the fact that they are doing something which is not paid work but is nonetheless socially useful.

Ms Shipley

  46. I am very aware of what the carers are being offered by Government, but what I am trying to get at is does the TUC basically believe that people who have been workers should end up with a better deal than people who have not been?
  (Mr Exell) Yes.

  47. May I go on then to ask about your views around Beveridge's belief that a flat rate benefit which did not stifle thrift and self help through means such as private insurance is a good idea. Now what is your view on that in the TUC? Do you agree with it?
  (Mr Exell) One of our objectives for reform of National Insurance, but we accept that this would be long-term given the cost of it, is to relate benefits to previous earnings, as is done in most other European countries. Our concern with the decline in income you face during an interruption in earnings as well as the risk of poverty suggests a strong need for earnings related benefits rather than flat rate benefits and our policy on pensions in particular has reflected that concern.

  Chairman: Dr Naysmith has a quick supplementary.

Dr Naysmith

  48. Given what you said I just wonder whether you would take it that there should be separate benefits for those in work and those who have never had a chance to contribute? Would you see it as a logical extension of that, to go back to having separate funds for the contributions to go into? That is going back into the history of the whole thing, the ideal, it never really worked through properly, but that would be a logical extension of it, would it not?
  (Mr Exell) Yes. One problem with having a separate fund for National Insurance is just how you manage the transition to it. There is a common problem faced by doing that or trying to switch to a fully funded system of National Insurance or some of the proposals there have been for getting rid of National Insurance altogether, which is what happens to the people who have benefit rights now once you have made that switch. Because if we switch to a separate fund for National Insurance, if we wanted that to be reasonably secure, we could not use that fund to pay for existing benefits, but at the same time you have to find a way of paying for them and proposals of that nature face the problem of having to pay two sets of benefits out of them at the same time. A country with a very high proportion of young people in it, like Ireland say, probably could finance the switch from pay-as-you-go to fully funded benefits or reforms of that kind. Unless you have that sort of demographic profile the difficult truth is that once you have a pay-as-you-go system you are stuck with it.

  49. If it were possible—I realise all the difficulties—would it be the thing to go in for?
  (Mr Exell) It would certainly give the National Insurance fund more credibility in current circumstances, but ultimately all forms of funding are at risk in one way or another. A lot is made of the fact that governments can effectively raid contributions in a pay-as-you-go system by holding benefits down and raising contributions and as you will have seen from our submission we are rather annoyed about that having happened over the last two decades.

  50. People have some very confused ideas about that?
  (Mr Exell) Yes, but any system is open to that risk. Governments have raided separate National Insurance funds, we have seen the Maxwell case and what can happen with private provision. You have to find a way of promoting social security in a world in which there is no final and ultimate security at all. It is a matter of eternal vigilance. I do not know if Ms Segars wants to comment on this?
  (Ms Segars) No. I think Mr Exell has covered all the main points. Clearly there are problems with funding and I think you were suggesting having possibly separate funds for separate sections.

  51. That is what a lot of people think is the present situation, when of course it is not.
  (Ms Segars) No, absolutely, and there is considerable misunderstanding about what the National Insurance system is and whether or not there is in fact a fund.

Mr Pond

  52. Let us take that further, seamlessly, and given that almost Maxwellian approach by the previous government to National Insurance—very significant increases in contributions as you have highlighted in your submission while at the same time benefits which they paid were cut in a number of ways—how is it that there is still this public faith in the concept that somehow there is a contract between the State and the individual? Is it still a very resilient belief that that contract will be honoured by Government?
  (Mr Exell) We have identified in our written submission a couple of surveys showing the extent of that belief and that has been our campaigning experience as well. It seems to be a matter of it being a system that chimes with basic assumptions about what is fair. People can make sense of a system which "I pay in, so I have a right to claim, but it is helping those who are weaker than me a bit more than it helps me". Most people want to see a bit of redistribution but they want to see themselves having some rights as well and in a rough and ready way National Insurance is, I think, appealing to basic beliefs about social justice. You are right; I have sometimes been surprised in campaigning that I find talking to audiences of trades unionists and a lot of older people as well in particular, a lot of the Labour Party's core vote, that this is the sort of thing that people will sometimes spontaneously raise as being their appreciation of the benefits system. You know: "I have been paying these contributions all these years; therefore I have rights to the benefits". Now all the distinctions about it being a pay-as-you-go system so that they are not actually paying for their own, they are paying for a previous generation's benefits, the fact that it does not pay for the National Health Service which is the commonest misapprehension, go over people's heads to a large extent and we think that there is a good case for helping people to understand what rights they have and do not have from the National Insurance system. Private pension providers are required to provide contributors with a statement of what their pension rights are. It should not be beyond the wit of government to provide a similar statement of what your prospective National Insurance rights are.

  53. Then square this for me, given all the confusion and misunderstanding that you have outlined for us and that certainly came through on the DSS study which you refer to in your submission, which says that people only have a hazy perception of the structure of National Insurance and tended to regard contributions as just another tax, but you go on to say that most strongly supported a contributory principle. How do these two sit together?
  (Mr Exell) I think it depends on whether people are thinking about their pay package or the nature of the welfare state. When people are thinking about their pay package, they think about that list of deductions they have on their pay slip and National Insurance nearly always comes immediately after income tax on that list and we even get Union members who regard their union dues where it is deducted by the employer as being another item on that pay slip. But, when people think separately about a fair system of welfare, then they think contributions equals rights.
  (Ms Hawkes) And it is almost linked to their thinking about the work ethic too, which is what I mentioned in passing in the introduction. So you are thinking, particularly when you refer to core voters if you like, they have thought very carefully about this. It might still be quite hazy, the detail—it is to most of us if we are honest—but nevertheless it is part of that package of almost social inclusion.

  54. Okay, so there is a lot of public support for the idea so I would like to just pursue it for a bit. But let us be realistic; does it work in a world which no longer looks like the world in which Beveridge lived where you have fragmentation of the labour market, where therefore the funding base for National Insurance is quite severely eroded, the growth of part time, casual, short term jobs? Is it really realistic any longer?
  (Ms Hawkes) I will let Mr Exell answer, but I would simply say that I believe an attempt ought to be made to make it work. Now that is more complicated than some of us comprehend. Mr Exell may want to elaborate on that, but that is the core of what we believe.


  55. Mr Exell?
  (Mr Exell) Undoubtedly it is more difficult to raise the funding for National Insurance benefits with the growth of atypical work. The problem is not so much the growth of part time and temporary employment—that is actually not the most important change to the labour market over the last generation. It is far more the growth of self employment—self employment is the most notable change in the labour market over the last quarter of a century—and that raises difficulties for both funding and eligibility for benefit. Nonetheless, it is still possible to levy contributions on the still considerable majority of people who are in employment that is liable to National Insurance contributions and if we extend eligibility in the ways that we are suggesting, in particular to part time and temporary workers, then National Insurance will necessarily become more fitted to a changed labour market. We would emphasise that coverage of low paid, part time workers, is for us the most important reform of the National Insurance.

Mr Pond

  56. And I presume too of the contributions. It is a highly regressive form of taxation on the contribution side?
  (Mr Exell) Yes, and if you consider it just as a form of tax rather than as contributions then it is very hard to justify the upper earnings limit and as we said in our submission, it is the last element of the flat rate Beveridge system that is left in National Insurance.
  (Ms Segars) If I could just pick up on that point? Because the UEL is increasing in line with prices, then within a very short period of time the UEL will be around about average earnings, so the number of contributors is going to decline very significantly which then does raise some very important issues about whether higher earners will continue to be prepared to pay for what they might well see, certainly in the pensions context, as being a second class benefit paid to all as a second pension and so on. I was also just going to follow up on the self employed point if I can and that is about the changing nature of self employment as well and that really needs to be taken account of quite significantly within the benefits system.

  57. On that last point, the declining value of the Upper Earnings Limit is perhaps an unintended consequence of the break of the link between pensions and earnings in terms of up rating. Is that how it came about?
  (Ms Segars) It certainly is an unintended consequence; I agree with that.
  (Mr Exell) Yes, it goes back to 1980 when the Upper Earnings Limit and the Lower Earnings Limit were both linked to the rate of retirement pension.

  Chairman: Ms Buck?

Ms Buck

  58. Thank you. We have covered quite a lot of the ground, but let me pick you up on a couple of points and moving on from where we were. What in your estimate would be the cost implications of ensuring that currently the various elements of contributory benefit were raised to a level where for the majority of people or all people would not have to be dependent on means tested benefit? Have you done that part of the calculation?
  (Mr Exell) We have not done that across the board and this is why we say introducing an earnings related supplement is definitely something for the long term. We did work out a couple of years ago that raising contributory Job Seeker's Allowance for people with children to a level where they would not need to make claims for means tested benefits unless they had needs other than their family structure was going to cost something like £5 billion. So we specifically avoided in our written submission arguing for substantial increases in National Insurance benefits.

  59. It is sort of the logical implication of a lot of what you are saying and I just think that in a sense part of the—people, as we have said, do like the idea of getting back what they have paid in at the individual pot and so forth and yet, when all the implications of that are spelt out in terms of what the investment would have to be to lift most people out of dependence on means tested benefits the question has never been put, how much would this cost? What would contributions have to rise in order to fund what people think that they want and how would that be paid for, because if that was coming from a rise in National Insurance contributions, as Mr Pond says, regressive as a form of taxation and what would be the implications particularly for people on very low incomes? I just feel that it is incumbent upon people who are strongly supporting the principles of the contributory benefit system to spell all of that out and tell us how they would resolve that problem?
  (Mr Exell) Well, first of all what we could see is the contributions of the other partners in contributions being raised to the level that is levied from employees. But here you come to what we see at the moment as being, in the non-pension sphere, the prime task for the TUC in terms of changing decision makers' attitudes because it is a misapprehension to believe that we have a Government at the moment that is unwilling to spend extra on social security. The Working Families Tax Credit, the substantial increases in Child Benefit, both prove that that is not the case. What is true is that we have a Government at the moment that has to be persuaded that any given increase is going to be worth spending. They are willing to raise the benefits but they are not willing to waste money raising benefits; it has to be designed to achieve their objectives. So we see as our key task persuading the Government that National Insurance can help it to achieve some of its objectives and that is why—I decided you had probably had enough by page 37—we have very skimpily outlined in our written submission about activating National Insurance benefits. Making them more clearly designed to help people into work or into education and training, to work whilst being disabled, or carers, would give National Insurance the kudos and the usefulness in achieving central government's objectives, eventually to then make it seem worthwhile spending the extra money on raising National Insurance benefits. Then we could get into a virtuous circle in which people would then value their National Insurance benefits more, therefore object to increases in contributions less and therefore it would become politically easier to maintain an adequate level of contributions to fund an adequate level of benefits. But as I say, that has to be long-term; it is a strategic approach rather than dealing with the issue of the moment.

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