Memorandum submitted by the Child Poverty Action Group (CPAG)(CP25)
1.1 The Child Poverty Action Group (CPAG) welcomes the opportunity to make a submission to the Select Committee on the future of the contributory principle.
1.2 The Committee's inquiry is both timely and necessary. Controversy over some of the measures in the Welfare Reform and Pensions Bill has recently focused attention on contributory benefits and the balance of means-tested and non means-tested benefit provision.
1.3 CPAG was concerned that a clear statement on the role and future of contributory benefits was omitted from the Welfare Reform Green Paper (published in March 1998).
1.4 Although we believe that a public debate should have been instigated before publication of the Welfare Reform and Pensions Bill, the debate has now become essential.
1.5 While a debate on the contributory principle is necessary, it should be acknowledged many people find an examination of social security and its potential complexities daunting. A discussion on principles and values is necessary, to set the foundation upon which practical (operational) and political questions are then decided.
1.6 The relevant measures in the Welfare Reform Bill do not appear entirely consistent with the principles set out in the Welfare Reform Green paper. For example, the Government stated that it wanted to build a "partnership" between public and private provision. The partial means-testing of occupational and private pensions may reduce incentives to take out private provision.
1.7 In the foreword to the Green Paper, Tony Blair said that the Government wanted to reform the welfare state on the basis of "a new contract between citizen and state, where we keep a welfare state from which we all benefit, but on terms that are fair and clear". In his Beveridge lecture at Toynbee Hall, Tony Blair declared that he wanted to make the welfare state popular again: "The Welfare State was popular in Beveridge's day. Because Beveridge made it popular" [emphasis added].
1.8 The principle of social insurance is popular. It is based on the idea that "contributions" are made in order to draw out when in need. A right to claim is established, even if the precise contribution rules are unclear.
1.9 CPAG would like to see the contribution principle in its current form updated to reflect the concept of an "insured person".
1.10 Social insurance does not seek the same objectives as private insurancethe former has important social goals. Because social insurance has social objectives (such as redistribution, collective provision against risk), it should not be seen as a "failure" if schemes based on contributions require additional government funding.
1.11 Private insurance has to be governed by "market" factors (ie the assessment of risk against financial cost), which is why its scope will always be limited. People should have the option to take out private insurance, but it would be wrong to restrict contributory benefits in the belief (or with the intention) that private insurance will be availablethe demand for private insurance may increase, but the supply may not.
2. THE ROLE OF SOCIAL SECURITY
2.1 Before addressing the contributory principle, a more fundamental issue should be addressed: the role of social security.
2.2 A problem with any debate on social security is that it is usually driven by a concern about cost. That social security spending has increased is beyond dispute, but CPAG does not believe that we cannot "afford" a more generous system, let alone the current one. As a percentage of Gross Domestic Product (GDP) social security spending has fallen from nearly 13 per cent in 199394 to slightly over 11 per cent in 199899.
2.3 The risks that Beveridge identified are still very real: unemployment, sickness, disability. Changing employment patterns have increased the need for insurance against risk of loss of income.
2.4 Social security has been compared to an ambulance "picking up casualties of social, economic and ideological change. It would be perverse to blame ambulances for motorway accidents, even though they always appear at them".
2.5 CPAG believes that social security should prevent poverty and not just intervene to alleviate itthe concept of social insurance implies the maintenance of an adequate living standard, not merely support at what many would see as a subsistence or "safety net" level.
2.6 We believe that it is possible to support social insurance and redistribution from rich to poor. The better off feel that they have a stake in the system (even if the "contribution" is greater than what they may take out), while at the same time the idea of collective provision is supported.
2.7 We believe that the social security system should:
provide collective security against risks such as unemployment or sickness or disability;
share some of the additional costs that some groups experience, for example through caring for children or adults; and
redistribute incomes across a range of groups, including between generations and from the better off to the poor. The contributory principle strengthens this redistribution by enabling the better off to receive benefit. Without this participation in the scheme, there may be less support for funding through taxation, even if benefits are more targeted through means-testing.
2.8 We believe that a system of social insurance helps meet these objectives. The contributory principle is consistent with these objectiveswe would like to see the contributory system improved.
2.9 CPAG believes that contributory benefits should be at a sufficient level to minimise the need for means-testing. One of the advantages of contributory benefits is that because they are not means-tested they provide an incentive to save (means-tested benefits provide a disincentive).
2.10 We would like to see contributory and non-contributory benefits set at a level which would reduce the number of claimants who need to claim a means-tested top-up. However, even if an adequate level to avoid means testing for all cannot be achieved, the provision of a reliable source of income topped-up by a means-tested benefit does not undermine the importance of contributory benefits.
2.11 Non-means-tested benefits should not be eroded by a failure to index linkthere must be a commitment to maintain their value.
2.12 CPAG has supported calls for benefits to ensure an income based on an acceptable minimum income standard, for example at least to the level of the "low cost but acceptable" budget developed by the Family Budget Unit. Ideally, a level of income should be provided without means-testing.
2.13 Means-tested benefits can be updated and improved, but should not be an alternative to contributory or non-contributory benefits.
3. DISADVANTAGES OF THE CONTRIBUTORY PRINCIPLE
3.1 Beveridge failed to predict the significant changes in the labour marketfor example, long-term unemployment, greater part-time and casual employment and the increased participation of women. Income inequalities have increased.
3.2 The existence of relatively long periods of unemployment for many, particularly during the 1980's and early 1990's, lead to a need for vertical redistribution from people with relatively secure and better paid employment as well as the horizontal redistribution originally envisaged.
3.3 Male workers were assumed to be the heads of stable, nuclear families. Since the 1940's, this has increasingly not been the case. (Although the availability of means-tested benefits has been blamed by some for the increase in lone parenthood, the same commentators have not sung the praises of contributory principle based, as it was, on expectations of a stable family unit). Beveridge failed to predict the growth of the female workforce (now almost 50 per cent of the workforce).
3.4 The levels of contributions cause problems. Firstly, those who have not paid are not entitled to the benefits. Although this may be consistent with the idea that the benefit is linked to employment participation, excluding groups of people (ie people with disabilities, the low paid) undermines the potential strength of contributory benefits as being inclusive and a collective provision against risk. Other groups are excluded for not having made the right number of contributions at the right time, for example women who leave work to bring up children or people who give up work (or who reduce their hours to work part time) to care for relatives.
3.5 Because the lower earnings limit (LEL) is increased by inflation (and not by the increase in earnings), if all else were constant, over time more people should become liable for contributions (ie their earnings increase above the LEL). However, changes in the labour market have lead to a growth in the number of part-time, low paid workers whose earnings fall consistently below the lower earnings limit for contributions. This particularly affects women. In 1994 three million employees paid no contributions at all, two-thirds of them were women. One million paid irregular contributions. The introduction of the minimum wage will help raise the level of earnings where contributions begin to be paid, but many continue to be excluded from the scheme.
3.6 Governments encouraged the growth in private insurance protection amongst higher earners, although the concerns have shifted from fears of old age and unemployment to provision for ill-health. The ideological commitment to private provision undermined the Beveridge vision of the contributory principle promoting social cohesion. One reason for the decrease in concern about old age among higher earners has been the expansion in private and occupational pensions. Much of this growth has been on the back of a stock market that has been on a continuous rise since the early 1980's. Should this rise stop (or go into reverse), even in the medium term, anxiety about private provision may increase.
4. STRENGTHS OF THE CONTRIBUTORY PRINCIPLE
4.1 Entitlement to social security payments based on national insurance contributions has a number of advantages:
there is a greater sense of "ownership" of entitlement, with the right to benefit being "earned". This can apply even where entitlement is also determined by creditsit being recognised that people can contribute to the common good by means other than paid employment. The erosion of contributory benefits risks further undermining support for social security, with the better off taking the view "what is in it for me";
there is less stigma attached to contributory benefits, with need based on circumstances (ie ill-health, unemployment) without a means-test. Social inclusiveness is supported;
benefits based on national insurance contributions are generally less costly to administer. For example, the absence of a means-test requires less fact finding, fewer (if any) reviews following changes in income and less scope for error in calculating payment. Assessments tests, for example of incapacity, also apply to means-tested benefits and are not particular to contributory benefits;
the absence of a means-test means there is less scope for fraud. CPAG has questioned the reliability of estimates of social security fraud and has been critical of some anti-fraud measures. However, means-testing does increase the scope for error and fraud;
take-up of benefit is higher than for means-tested benefits. DSS estimates suggest that up to £3.5 billion a year in means-tested benefits may go unclaimed. Low take up is not, however, restricted to means-tested benefits. Provisional estimates of take up of DLA are 30 to 50 per cent for the care component and 50 to 70 per cent for the mobility component; and
the support for payment of national insurance contributions (there is no obvious support for replacing the liability by taxation) is evidence of the continued support for the principle of social insurance. It is acknowledged that some believe that national insurance contributions help pay for the NHS. The principle has been discredited in part because of the perceived negative attitude of previous Governments. As Ruth Lister has noted, the notion of willingness to contribute has never been fully tested due to the fact that contributions are compulsory.
4.2 Perceptions of the public's view of contributory benefits must be seen against the background of years of change in eligibility rules. Confidence in the reliability of provision may have been undermined, but that does not mean that the principle is wrong or outdated.
4.3 A consequence of restricting entitlement is the perception of a "moving of the goalposts" in the national insurance "contract". This whittling away of eligibility undermines confidence in the insurance principle.
5. CAN WE AFFORD CONTRIBUTORY BENEFITS?
5.1 A crucial touchstone for the effectiveness of a social security system is its capacity to prevent poverty.
5.2 One of the arguments against contributory benefits is that they go to people who do not "need" themthe argument goes that benefits can be increased if they are better "targeted" (ie through means-testing).
5.3 The view that benefit sometimes goes to people who may not need them lies behind the proposal to partially means-test occupational and private pensions. The Disability Benefits Consortium, in its responses to the Welfare Reform Bill, has shown that with the partial means-testing of incapacity benefit, benefit will start to be reduced when income from incapacity benefit and an occupation or private pension goes over £116.75 a week. No incapacity benefit (intended to be an "insurance" against the risk of loss of employment due to sickness) is paid if a person has a pension of more than £9,542 a year (or £183.50 a week). As the Consortium points out, this is less than half average gross earnings from employment.
5.4 It is worth noting, that actual expenditure on incapacity benefit (or invalidity benefit, which it replaced) has fallen by an average of 2.9 per cent a year in real terms over a five year period up to 199899. Over this period, the expenditure on invalidity benefit/incapacity benefit as a proportion of spending on disabled people fell from 41 per cent to just under 30 per cent. The DSS estimates that expenditure on invalidity benefit/incapacity benefit in real terms (at 199899 prices) will fall from a high of £8.97 billion in 199495 to £6.72 billion in 200001 and £6.83 billion in 200102.
5.5 Benefits that are not means-tested are received by people across all income groups, but as the latest Social Security Departmental Report shows, there is still a "bias" towards low income householdsthe bottom 40 per cent of households receive around 50 per cent of all non-income related expenditure.
5.6 The difficulty with any assessment of "need" is that social security fulfils a number of different functions. We do not accept that it should exist solely as a "safety net" where entitlement to benefit is dependent on falling below a means-tested subsistence level. Such a system is not inclusive, can increase stigma and would not prevent poverty.
5.7 The "we cannot afford contributory benefits" argument rests on the view that there is a limited, fixed pot of money. The judgement on affordability is, of course, as much political as economic.
5.8 Contributory benefit expenditure is met largely from the National Insurance Fund. When expenditure exceeds contribution, the cost is made up by a payment from general revenue. The requirement to "top-up" the Insurance Fund should not be seen as a failure of the contributory principle (although the amount of contributions and the level at which they are paid is clearly important).
5.9 DSS expenditure plan estimates show that for 199899 and 19992000 no top up to the Fund from general revenue is required. Indeed, since 199798 it appears that net contributions to the Fund have exceeded contributory benefits expenditure. Unless unemployment rises, it appears that this trend can continue. In the longer term, it is expenditure on state pensions which is predicted to increase.
5.10 There should be a restatement of the importance of supporting and strengthening the tools to maximise mutual support and protection. The value of investing to minimise risks for all even if the contributions of some are greater. The best guarantee is a form of collective provision.
5.11 There is a need for redistribution as a means to ensure social cohesion and prevention of poverty. Contributory benefitsthe principle of insurance for allhelps achieve this aim and, as important, maintains support for it.
5.12 The contributory principle could not survive a system that is based mainly on means-testing and "targeting" according to incomes. The funding of social security through taxation would risk alienating the better off. There would be less protection against risk. No matter how "generous" a means-test may become, it would be perceived as unreliable.
5.13 The requirement to make contributions guarantees a source of revenue. A review of the contributory principle puts this revenue at riska direct transfer to income tax may be politically unpopular. A transfer to indirect taxes may be regressive.
5.14 As the Welfare Reform Bill shows, the "savings" from cutting contributory benefits are not necessarily redirected to poorer claimants.
5.15 While national insurance is in place, the existence of an upper earnings limit should be addressed. It is recognised that benefits are not paid to reflect the amount paid in. The failure in the past to raise the upper earnings limit in line with the increase in earnings has meant that the highest paid have contributed less. The lifting of the upper earnings limit would raise a significant amount of additional revenue (estimated at up to £4.2 billion a year) which could fund improvements in an updated social insurance scheme (see below).
5.16 CPAG would not object to the idea that a higher rate of benefit is paid to people with high earnings (as with the intention of SERPS additions, for example for invalidity benefit prior to 1995), if this meant that the social insurance principle was strengthened. The case for considering higher rates could, however, only be feasible if the upper earnings limit were lifted or significantly raised.
6. "MODERNISING" CONTRIBUTORY BENEFITS
6.1 It is recognised that the contributory principle is limited by the necessary connection with paid employment. We believe that the contributory principle continues to have a role, but changes are required to reflect employment patterns and unpaid roles. The current scheme (but not the principle) is outdated. Society and the economy have been transformed since the 1940's.
6.2 There is a strong case for recognising the value of unpaid care and voluntary work by extending creditsthis would be consistent with the principle that people "pay into" the system by contributing to it, even though they do not make a direct financial contribution. It would be an explicit way of recognising the importance of unpaid work.
6.3 The following groups should be included in the scheme or the existing provision of credits should be improved:
the self employed. The system of contributions for self employed people should be simplified;
people participating in training and education;
carers (including periods of respite care);
recognised voluntary work (people who work overseas for VSO currently receive credits); and
people in low paid work earning below the lower earnings level. This could be achieved by a banded credit system between, for example £30 a week and the lower earnings limit or by extending to people who work a minimum number of hours a week (ie a minimum of eight hours). Beveridge did not envisage that contributory benefits would provide support for people in employment but who are low paid, but including the low paid in the scheme would update the contributory principle by ensuring wider participation and protection against risk.
6.4 Entitlement should be extended to include employees earning less than the lower earnings limit. The Chancellor plans to raise the LEL to bring it in line with the personal allowance for income tax, but has stated that entitlement to contributory benefits will be protected for people who will no longer earn above the limit. Extending provision in this way maintains the link with paid employment, but provides additional security and may increase labour market participation in part-time and casual employment.
6.5 The scheme needs to be "modernised" to ensure wider coverage and participation.
6.6 The Government's reforms of the national insurance contribution scheme will help reduce the barriers to workfor example, by the lifting of the lower earnings limit and the removal of liability for contributions for earnings below the level once the limit is exceeded.
6.7 The transfer of responsibility for collecting national insurance contribution from the Contributions Agency to the Inland Revenue need not presage a hidden agenda in the eventual abolition of national insurance and the replacement by taxation.
Tax and benefit integration
6.8 CPAG supports the improvement in in-work support that will be provided by the new working families tax creditan existing means-tested benefit. The "poverty trap" (the rate at which payment is reduced as earnings increase) is lessened and the maximum payment is more generous. However, there will still be a poverty trap and some (although less than before) will still face a marginal tax rate of 95 per cent, where there is also entitlement to housing benefit and council tax benefit.
6.9 The Chancellor has stated that there may be a case for providing support for "in work support for mortgages" (possibly funded by abolition of MIRAS).
6.10 Tax and benefit integration need not be at the cost of undermining the contributory principle. There is a difference between improving means-tested provision and extending it by erosion of contributory or non-contributory benefits.
Financial support for children
6.11 CPAG has welcomed the commitment to review the financial support for children. The aim to create a "integrated, seamless payment" for children, that is universal and paid to the mother provides an excellent opportunity to improve the financial support for families with children.
6.12 CPAG would like to see the creation of a guaranteed income for childrenbuilding on the best of child benefit. A form of guaranteed income for children should be non-means-tested and should be at a level to reflect the direct and indirect costs of children. We would like to see financial support for children taken out of the means-tested system. There will continue to be a role for means-testing (until such time as contributory and non-contributory benefits levels are improved), but the means-test should apply to other members of the household (ie additional support is built on the guaranteed payment for children).
6.13 The child dependent additions currently paid with some contributory benefits (ie incapacity benefit) could be included in the payment.
6.14 The guaranteed income for children would obviously not be based on the contributory principle, but we believe that, together with a modernisation of the contributory principle, support for social security and the wider objectives of redistribution would increase.
20 May 1999
1 Social Security Departmental Report, The Government's Expenditure Plans 19992000; March 1999; Cm 4214 London TSO. Back
2 Martin Evans, in The State of Welfare, CASE brief 5, 1998, Centre for Analysis of Social Exclusion, London p4; quoted by Ruth Lister, in the Foreword to the Social Security Consortium's response to the Welfare Reform Green Paper. Back
3 Social Security Departmental report, p82; the estimates are based on the 1996/97 Family Resources Survey. Back
4 Social Security, The Case for Reform, CPAG 1975. Back
5 Social Security Departmental Report, p85. Back
6 Social Security Departmental Report, p119. Back
7 Social Security Departmental Report, p81. Back