Select Committee on Social Security Minutes of Evidence

Examination of witnesses (Questions 76 - 99)




  76. Good morning, and again can I reconvene the public session this morning and welcome our witnesses from the Low Pay Unit, Bharti Patel and Catherine O'Donnell. Welcome both. As a trustee of the Low Pay Unit I have some difficulties, as indeed does Chris Pond, who is Chairman, in that although we have non-pecuniary interests as trustees, the advice that we have had is that in case we are accused of raising issues in Parliament in the situation that we are in, there may be a potential risk of a conflict. So Chris Pond and I will not be taking part in the examination or the cross examination this morning. But I know both of you will not take this as a sign of any lack of interest. Mr Pond and I are happily working with you in the valuable work that the Low Pay Unit does in this important area. You have very helpfully given us a written submission which is understandably focused in the particular areas in which the Unit is specifically concerned. It would be very helpful for the Committee if you could maybe start by explaining a wee bit more about that and saying what your particular interest is in the Committee's Contributory Principle inquiry.
  (Ms Patel) Thank you, Chair. The Unit welcomes this opportunity to give our evidence to the Committee on the contributory principle. What I am not going to be doing is looking through the historical development of the contributory principle. For obvious reasons, looking at some of the written submissions that have been provided to the Committee, that has been quite extensively discussed. We would be happy to take on some of the questions and hope where we can answer them we will certainly try and do that. But what I want to do is concentrate on the kind of anomalies that exist under the current contributory principle, the current system that exists, particularly for our client group which are the low paid, the part time workers. If we try to focus more on that then both Ms O'Donnell and I would be able to give you the kind of evidence that we have and how that can be improved by looking at some of the principles of fairness and equity within the contributory system. The Low Pay Unit have long argued that the social insurance system as it currently stands has failed to protect the very large and the growing numbers of the low paid workers and part time employees, people with interrupted spells of employment, part time workers with long history of part time working yet being denied basic rights in employment protection in terms of benefits and also denied rights from the State social security system because they are seen as participating in the labour market. So they have been falling between the stools in not being able to replace income during periods when they are unable to find employment or are unable to gain income from work. Given the introduction of the new protection for individuals at work—such as the national minimum wage, paid holiday entitlement and of course the guaranteed payment for low income households under the Working Families Tax Credit—they are all very much targeted at low paid workers, and extending those rights for part time workers. All part time workers now have a right to paid holidays. So the National Insurance system as it currently stands remains a contradiction in that individual rights for workers, particularly for part time workers and it is particularly a contradiction in the Government's move towards making households less dependent on State social security systems and contradiction in making work pay, as particularly for those on the lower rungs of the pay ladder find themselves not being able to have any replacement of income during periods when they do not have income from work. Having said that, I want to add very much that the Unit has, in principle, supported the contributory principle. We have argued for long that the contributory principle has a number of advantages and the TUC—I was listening partly to the TUC's evidence this morning—has outlined some of the advantages of it, and I just want to go over some of those to put in context for the low paid employees in particular. We have argued that it is certainly cheaper to administer. It ensures a more efficient way of protecting employees in periods of ill health, unemployment and maternity and old age. It certainly preserves the claimant's independence in a wider sense because there is no dependency relationship between the State and the claimant as insurance entitlements are built up by the claimants on the basis of their employment records and claimed as of right. I think that is quite an important principle underlying the contributory system. For the low paid there is no viable alternative, for example the private insurance is certainly too expensive and they do need to rely on and they do need to have an efficient State system but that still is not necessarily a hand-out but is very much related to their employment record. Our experience of the low paid workers' contacting in the Low Pay Unit, there is often no occupational provision. Their reliance on State provision is absolutely vital and key to that. So as our submission outlines and hopefully many of you have read that, it does indicate that the system as we know it, having accepted it, does discriminate low paid workers, especially women, leaving them in poverty during periods when they are unable to have income from other sources. The key aim we would argue is any form of reform that can be suggested either by the Committee or the Government proposals must remove the disadvantage and discrimination that exists, giving access to those on low pay or interrupted contributions records to non-means tested and income replacement benefit. I am going to illustrate the kind of anomalies that exist within the system by using an example. A woman working 16 hours a week, for example, on the national minimum wage of £3.60 an hour earns £57.60 a week. She pays no contributions because it falls below the Lower Earnings Limit and therefore receives no benefits when off work due to sickness and we are talking about statutory sickness pay here. An employee working 16 hours a week in a relatively well paid job, say £5 per hour, taking her weekly income to £80, will currently pay £1.40 in National Insurance contributions and therefore this will entitle her to statutory sick pay of £59.55 a week. With the recent budget changes to the NIC where the Chancellor raised the ceiling of the Lower Earnings Limit to the personal allowance, in the year 2001 this worker—the second worker, 16 hours per week being paid £5 per hour—will pay no National Insurance contributions; however will still be eligible for the statutory sick pay whilst the first worker on the minimum wage will not. That is the kind of anomaly that we are particularly concerned with and I do feel that that needs to be addressed.

  Chairman: Thank you. Edward Leigh?

Mr Leigh

  77. Would you agree with the Secretary of State when he wrote in the Guardian article on 16 June this year that today the important difference in social security systems is not whether they are insurance based or means tested but whether or not they provide enough help to get people back to work and improve their lives?
  (Ms Patel) I think that is a very important principle. What we are talking about, particularly for low paid workers, is some kind of a guarantee that during periods of unemployment, during periods of ill health, that people have some form of guaranteed income and that could be done through State help or could be done through other qualifying tests. However, I would not necessarily go to the extent where I would say get rid of the existing contributory principle because I think the circumstances would have to depend on qualifying for benefits which would have to depend on what the circumstances of the person was and if the contributory principle remains and they have made contribution then the worker should be eligible for that benefit, but if he/she fails to be eligible for income during periods of non-employment then there has to be some replacement on the grounds that there was reliance on earnings or on income for that individual for a period of time.

  78. Means testing obviously has to come in to help people who have not been able to maintain contributions, but I do not understand how you can reform a contributory principle to ensure that everybody is covered by it because necessarily it is based on contributions?
  (Ms O'Donnell) I think at the moment there is another anomaly. I think it is important to point out that the contribution principle also has expanded to recognise when people cannot work for some socially useful reason, for example to look after people who are disabled or to look after children, that they should be counted in. So I think we should not just see the National Insurance system at present as being based on contribution only because it is not and governments in the past have made exceptions for people who are out of the labour market, or come in and out of the labour market, in order to perform work which is unpaid but is work that needs to be done. So I think the contribution principle itself is not complete and total throughout the system and I think that is there for very good reasons. What we are arguing is that this can be extended to the low paid because of the changing nature of the labour market and their reliance on that income, even though it may be small comparative to average earnings. Therefore I think you can have a contributory system that would not have to change very radically but does also support other policies which we have decided are useful.

  79. So if I am saying if you are doing something which the government believes is socially useful, like you are looking after small children or elderly relatives or disabled members of your family, you think the government should maintain your contributions. Have I understood you right?
  (Ms O'Donnell) That happens at the moment, for example home responsibilities protection for women who are looking after children so that they can build up an entitlement to a State pension. I was speaking of those areas combining work and family life effectively, which is something that the Government is promoting and that we would support.

Ms Buck

  80. You mentioned earlier the scale of exclusion from social insurance and I think the TUC mentioned a figure of 2 million people. Is that a figure you would agree with?
  (Ms Patel) Yes, we would.

  81. Why has the problem got worse in recent years? What in fact lies behind that?
  (Ms Patel) I think it is the changes in the labour market and the availability more of part time jobs rather than full time jobs and it is also the increasing participation of women in the labour market itself and that is dictated by the availability of the job. The flexibility certainly again in the labour market has meant that employers are offering part time jobs during periods where there is a need in business, so that has created a very fragmented labour market. Often people find themselves in three or four part time jobs and whilst earnings may be subject to tax, they will not be subject to National Insurance because earnings are not accumulated. So it is the non-payment of National Insurance for many of the people that has led to their exclusion from the contributory principle.

  82. Talk me through the consequences of this exclusion. In what way does it actually disadvantage people?
  (Ms Patel) It would deny workers basic entitlement during periods of not being able to get an income from work. For many of the low paid workers, taking time off from work, either because of sickness or because they are having a baby, there is no additional income during that period if they are not getting any other occupational provision from their employers. So the disadvantage would, I think, be that of choice. We often have enquiries from low paid workers calling us and saying that even when they are sick they will go to work because they know they will have no other income and often that choice is made purely because of lack of money.

  83. So that is looking at it from the point of view of the individual's perspective, the work perspective. In what way does it interact with the labour market? Is it having an actual distorting effect on the labour market?
  (Ms Patel) I think with the evidence that certainly we have looked at and looking at other reports, the way that the system operated up until the budget changes, because of the entry fee on the Lower Earnings Limit, as soon as you hit the Lower Earnings Limit there was an entry fee of 2 percent and then you start paying 10 percent on earnings over and above the LEL for employees and there was also a tiered employer contribution system which in many ways distorted the labour market in the way that the employers provided the hours of work and also in the way that the employers set the rates of pay. Before the minimum wage came into place there was a lot of evidence from the Low Pay Unit where employers were keeping the wages always just below the Lower Earnings Limit deliberately, often reducing the hours in order to keep the wages just below it and I think that distorted the labour market in many ways. The creation of several part time jobs often could be the case. Ms O'Donnell, do you have anything to add?
  (Ms O'Donnell) Although the minimum wage has taken a lot of people—and this was one of the positive things, that it was going to take people above the Lower Earnings Limit and therefore into the contributory system, the evidence that we have from the many, many calls we have had to the Unit is that people are actually having their hours cut, so they are going back under again. That is unfortunately something which is happening, so it again reinforces the evidence that hours and pay were kept artificially low in order to be below the limit.
  (Ms Patel) I think just before the Chancellor introduced the changes in the National Insurance system, particularly raising the Lower Earnings Limit to the tax threshold, there was a fear that this would deny workers basic rights to the contributory related benefits. He, however, guaranteed in the reforms that people will be protected. It was also indicated by the Chancellor that this would be an incentive for employers to create more low paid jobs. However it might be at a slightly higher level than the £66; employers would create jobs at around £76 per week, but there is still a worry on that.

  Chairman: Mr Dismore?

Mr Dismore

  84. Yes. Very much on the sort of things you talked about earlier on and the importance you put on maintaining a National Insurance contributory system despite its various problems, why is it important that people do get access to contributory benefits when means tested benefits are higher than contributory benefits? Take the minimum income guarantee for pensioners; that is going to be related to earnings rather than prices.
  (Ms Patel) I think it is the way that people conceive the contributory benefit. Although, as the TUC reported, when people are asked about the contributions that they are making and what they are getting out of it they may not be directly aware of it, but when pushed they know they are paying some kind of stamps which will enable them to claim some sort of benefits later on. The means tested benefit has all the issue of stigma attached to it and often people do not claim the benefit. I think it is more about adhering to the system because you feel part of the system and you are not asking for a hand-out. This is a replacement of earnings because you have paid into the system and it is more preferred.
  (Ms O'Donnell) I think it is also very important to look at this in the perspective of most of the people who would be affected by this would be women and I think the means testing is based on household income and therefore they may well not under that system, the means tested system, have their income from work replaced, depending on their spouse's income and the income of others in the household. The National Insurance benefit is their individual income replacement. It does not depend on household income. I think that is a very important principle to maintain. On top of that, means testing is administratively complex. If you are going to be off sick for three days or four days—obviously you have to be out of work for a number of days before you become eligible—you will be having to means test households for effectively what might be three or four days of benefit.

  85. If you look at your written evidence on the level of benefits, this is your idea for low paid workers where you talk about low paid workers being credited into the NI system, entitled to the same level of benefit as other workers unless that would result in them getting more benefit than they actually earn, in which case you peg it to the level of earnings, if I understand the proposal correctly. But presumably in that arrangement, bearing in mind that a lot of the people in their circumstances would probably be getting Working Families Tax Credit anyway, are you not still going to need effectively a continuation of means tested benefits to give them on top of that earnings related benefit enough to live on?
  (Ms O'Donnell) As I understand it you are saying that the National Insurance benefit, because it is flat rate, may not compensate them for—

  86. No, that is what you are saying, not what I am saying. In your written evidence, what you are saying there is you want to credit low paid people into the system to get the same level of benefits. But if the level of benefit is higher than their income loss—as I understand your proposal—their level of benefit would be pegged on the contributory basis to their actual income loss and you refer to SSP for example there. However that presumably may not generate enough for them to actually live on. In their low paid job they may have been, for example, getting Working Families Tax Credit to make it worthwhile for them to keep their job and give them enough to live on. Under your system effectively you are still going to have to have some top up potentially to enable them to survive beyond the lower rate that you suggest they should receive equivalent to their actual earnings. So are you not effectively also still perpetuating a means tested arrangement side by side with an adjustment to the contributory scheme? Is not that also going to be relatively quite complicated?
  (Ms Patel) I think, if I understand the system as it works now, that if you have low earnings at work and you are working the 16 hours you will receive the Family Credit; you will also receive Working Families Tax Credit when that comes into place, so the top up will be there. And that is paid for six months irrespective of the changes in your earnings. So when you take time off sick, what the employee will lose is the earnings rather than the top up. So at the moment the system works that low earners receive a top up benefit—Working Families Tax Credit or Family Credit—which is given to you for six months irrespective of their earnings and any changes in circumstances—they will be able to continue to receive that and what we are saying is that the loss in earnings should be replaced—the loss in earnings as a result of taking time off sick—through the statutory sick pay system which is a proportion of your average earnings or even a full replacement.

  87. So you still have your mixture of means testing and contributory benefit?
  (Ms Patel) I think for many of the low income households, because earnings at the moment do not pay enough for people to live or make ends meet for the family, they do need to claim State benefits. The ideal situation would be to be where you have decent earnings from work and not have to rely on any other means tested benefit and when you take time off from work those earnings are replaced.

  88. I understand that, but I am probing your suggestion that somehow your suggestion is better, because if people are still going to have to claim means tested benefit anyway, what is the difference between it all being means tested rather than part of one and part of the other, apart from additional administrative complications?
  (Ms O'Donnell) Of course that means tested in work benefit only applies to families at the moment obviously so the principle that it is an individual right to all workers is not the same. I do take the point though that if statutory sick pay does not replace all their earnings there is going to be a gap between the sick pay and their Family Credit; there is going to be a gap in the middle of earnings that has not been replaced and I think that that is something that if minimum guarantees are a guarantee is something which will have to be looked at. It is not something we have addressed in the paper though, but I think if there is a minimum income guarantee for low paid workers who are not presently in the system, or if they are then credited in, at least this would be a halfway house. At the moment they do not get any earnings replacement. Our proposal would give them what other people are entitled to but then there would be a gap—you are right—and then maybe we would have to have the next stage, in which case the guarantee is maintained.

  89. Going back to something I think you were saying that benefits as of right through contributions are better or more desirable than other tax benefits. Why do you think that is the case?
  (Ms Patel) I am sorry, can you repeat that?

  90. It is something you said earlier on. Basically the question is this; Beveridge's view was that benefits paid through contributions from work are intrinsically more desirable than paying any sort of benefit whether means tested or whatever. I presumed from what you were saying that you agreed with that, saying that benefits as of right were better than those where you have to qualify through a means test. So I was just probing with you why you think that is the case?
  (Ms Patel) I think partly because that is an individual right while means testing is, as the current system stands, very much a family income means tested and therefore as Ms O'Donnell pointed out earlier, it is possible for a woman in particular to have sometimes regular income of her own from employment because she is regularly participating in the labour market, then if she finds herself out of employment for whatever reason is not being able to have any of her income in her own right because she is having to rely on a means tested system which will take into account her partner's earnings, so she loses her own independence. I think again I said at the outset that the reason that we like the contributory principle is because it does preserve that claimant's independence in the wider sense and for that reason we would like to maintain the replacement of the earnings from the contributory system than relying on the means testing. Unless of course one can come up with an argument about having a means tested system which is individual and not a family related one which is more moving towards the basic income type of issue.

  91. May I put to you one of the proposals which we heard the TUC mention today? I do not think you were here for that point, but they suggested that we could have a system of partial benefits funded by partial contributions. What do you think of that idea?
  (Ms Patel) We have not thought that through in any way, but I think again if partial contributions and partial benefit provide a more inferior system for the lower paid then that would be slightly worrying because you end up still having a two tier system. If it is based on principles of paying contributions, on the basis of the tax payment at the moment, the ability to pay where you pay a proportion of contributions according to your earnings and the benefits are basically proportionate to your earnings rather than partial up to a flat rate, then I think that could be accepted. But our concern would be if it ends up that the lower paid, because of their inability to pay more of a superior National Insurance contribution, end up having inferior benefits. That would be worrying.

  Chairman: A supplementary from Ms Buck and then Ms Shipley?

Ms Buck

  92. One step back to the Working Families Tax Credit. I just wonder if you could tell us how you see that fitting in? Does it fit into the category of desirable and as of right benefit or is it an extension of means testing?
  (Ms Patel) I think the tax credit system—certainly there is still the element of means testing which remains in the tax credit system because it is very much calculating your entitlement according to your means and there is a cut off point above which you receive no tax credit. It does not rely on your contributions at all, it is an allowance threshold, so in that respect one can welcome it. However, given that the Working Families Tax Credit and the tax credit currently continues to have the high marginal tax rate still attached to it, it still is not the ideal way that we think one could move forward. It is still very much a means test in terms of taking into account the family circumstances, but as I understand it there may be scope of extending the Working Families Tax Credit into employment tax credit where individuals would be receiving tax credit, similar to the Working Families Tax Credit, that still takes into account people's income in earnings and would still be means tested, with the high marginal tax rate, if that issue can be addressed—particularly the high marginal tax rate because of the interaction with other benefits—then I think one could look at that in quite a serious way to replacing the contributory system.

Ms Shipley

  93. If I could turn to the zero rated system which you favour and your memorandum points out problems with it, pension problems, and really could you explain it to us as you see the problem and perhaps, more pertinent, how you think it could be overcome?
  (Ms O'Donnell) Which particular aspect?

  94. Well, it is the zero rated system, how it incorporates low paid workers into the National Insurance system and you point out in your memorandum that there are potential difficulties of employees proving that they fall within the zero rated band of pay because the DSS will have no earnings records for them and many low paid workers do not get proper pay statements. So that in a nutshell is the problem and how do you see a way through that?
  (Ms O'Donnell) I think that is not an alternative system. As I think we say in the submission, the onus should remain on the employer I think to provide the information because otherwise you would then disadvantage this group who if they have to provide the proof, actually the documentary evidence, because so often there is no documentary evidence of people working in low paid jobs. People under the Lower Earnings Limit we found this is so for virtually 100 percent in the people who call us. It is almost as if employers believe they do not have to provide them because they are not making deductions; it is a simple as that. The other documentary proof of employment, written contracts, again very widely are not provided when they should be among this group of workers, so those kind of provisions firstly are not there and secondly then there would be the burden on the low paid worker to prove to the DSS that this was the case which would not be the burden on other workers and that I think would be discriminatory and unfair. There should be—and I am not an expert on the way in which employers pay tax—but if they are paying for most of their employees and they are giving details for most of their employees already, there is no real extra burden in giving details of another one or two or however many employees are also employed and earning a certain amount of money.

  95. Is not the seed of the problem in what you have said in that, basically, bad employers do not provide contracts, do not provide written job descriptions, etcetera, so if they do not exist anyway—which is what you said—how can we expect them to provide them?
  (Ms O'Donnell) Well they are already having to comply, as I understand it, with other official requirements relating to tax and the National Insurance they pay for other employees. Of course there may be those people who are completely outside in the grey economy; I do not know how much we can do about that apart from greater inspection.
  (Ms Patel) I think the kind of things that we are seeing here is that any kind of system where there is a requirement on employers to provide proof of earnings such as a pay statement. The rights to this must be adequately enforced.

  96. If I understand you—and I just want to draw you out to actually state it—we have numbers of bad employers who simply are not providing workers with their rights and they are just flouting the law really and they need to be addressed?
  (Ms Patel) Absolutely, I think again all the evidence—

  97. This cannot be effective without that.
  (Ms Patel) Very true. I think again evidence at of the Low Pay Unit shows that despite employers deducting tax and National Insurance often from employees' wage packets, employers often deny them the basic rights to statutory sick pay, statutory maternity pay it is important to stress the obligations of employers if it is going to be paid through the employers' system.


  98. Is there anything else that you think we should be looking at?
  (Ms Patel) I think we have sort of covered most of the points that we wanted to. I do however want to stress that the final point, which is on the zero rating, I do think that given that the Chancellor has introduced the zero rating system into the NI payments, there is now scope to extend that. There is a real scope to extend that to all workers irrespective of their earnings or their hours of work, although one could decide to draw a line somewhere as the Chancellor has done on the maternity payment. He decided that a woman earning more than £30 per week should be entitled to statutory maternity allowance. This could be a figure that could be taken into account, without that the kind of anomalies that I raised with those two cases will continue. Even if it is a measure that is seen as a short term measure I think that is something that could be taken forward quite seriously.

Ms Buck

  99. May I just ask one quick question? Have you done any assessment of what the revenue implications would be of raising or abolishing the Upper Earnings Limit?
  (Ms Patel) Yes, I think if you completely abolish it it is £4.2 billion and if you raise it to the top tax threshold, which is one of the steps that could be taken, it would raise £1.8 billion and that could fund the extending the contributory benefits to part-time employees.

  Chairman: Thank you very much indeed. That has been very helpful and we are particularly grateful because I know personally how stretched you are in the office in dealing with these things and it is extremely useful to have your written memorandum as well as your oral evidence this morning. Thank you very much for coming. I declare the public evidence session closed.

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1999
Prepared 28 July 1999