Memorandum submitted by Disability Alliance (CP31)
We believe that a social security system should help prevent, as well as alleviate, poverty, protect people against risks like ill-health and disability, promote social cohesion and integration, be inclusive and redistributive, encourage and support personal independence and be easy to understand and flexible in responding to changing circumstances.
Changes in the labour market, in the expectations of disabled people, in the role and expectations of women and in family structures have placed the system devised by Beveridge under extreme stress. The current social security system is expensive, complicated and failing to prevent poverty or promote independencemodernisation is needed.
The options for reform include: a contributory system, "categorical" benefits, private provision and means-testing. Despite the absence of a full and public discussion about options, contributory benefits and "categorical" benefits have been, and continue to be, systematically eroded and replaced by reliance on private provision or means-testing.
We believe that private provision is largely irrelevant for disabled people. The private sector is uninterested in high risk, vulnerable or low-income groups of potential claimants. Means-testing is intrusive, socially divisive, unpopular, creates poverty traps, undermines disabled people's independence, poor at reaching its target audience and expensive to administer. People covered by the "categorical" earnings replacement benefits could be credited into a social insurance scheme. (In practice, once severe disablement allowance has been abolished the only "categorical" benefit left will be invalid care allowance).
A social insurance system in which contributions are related to earnings but not to categories of risk is of greatest benefit to disabled people. What people need is a decent non means tested benefit paid if they are unable to work and there is no reason why a modernised contributory system cannot provide this. Cover would need to be extended with broader definitions of entitlement covering a greater variety of working patterns and acknowledging the wide range of responsibilities and barriers that prevent individuals from taking paid work.
Social insurance is a practical example of the concept of rights and responsibilities, it promotes collective provision and pooling of risk and as such combats social exclusion. There is strong public support for the concept and it fits well with the values and principles of the new Labour Government.
1.1 Disability Alliance welcomes the opportunity to submit evidence to this inquiry. We are a national registered charity with the principal aim of relieving the poverty and improving the living standards of disabled people. Our eventual aim is to break the link between poverty and disability.
1.2 We are a membership organisation with over 340 members which range from small self-help groups to major national disability charities. We are controlled by disabled people who form a majority of our Board of Trustees. We seek to represent the needs of all disabled people; those with physical impairments, those with sensory impairments, those with learning disabilities and those with mental ill-health.
1.3 We provide information on social security benefits to disabled people, their families, carers and professional advisers; undertake research into the needs of disabled peoplewith a particular emphasis on income needs, and promote a wider understanding of the views and circumstances of all people with disabilities. We are best known as the authors of the Disability Rights Handbook, an annual publication with a print-run of 30,000, but also run three telephone helplines and have an extensive programme of training courses aimed at professionals working in both the statutory and voluntary sectors. Our policy work is informed by our daily contact with disabled people and those who provide services for them.
2. OBJECTIVES OF A SOCIAL SECURITY SYSTEM
2.1 We believe that a social security system should aim to:
prevent as well as alleviate poverty;
protect people against risk, especially those arising from ill-health and disability (this would include taking on caring responsibilities), the labour market (including unemployment, job insecurity, part-time working) and changes to family structure;
promote social cohesion and integration;
be inclusive and redistributive across individual life cycles and between rich and poor, non-disabled and disabled, by pooling risks across all citizens;
encourage and support personal independence; and
be easy to understand and flexible in responding to changing circumstances.
3. THE WORLD OF BEVERIDGE
3.1 The post war Beveridge plan aimed to provide a guaranteed income when illness, disability, unemployment, old age or death deprived a family of the breadwinner's wages. The assumption was that the wages of a single male earner would be sufficient to support those in work and their families. The period in which the current national insurance scheme was developed was characterised by:
full male employment with 40 hours a week for 40 years with the same employer;
women not in paid work but raising children and looking after the home;
disabled people in institutional care or long stay psychiatric hospital, dying young, not working and not living independently;
very few lone parentsmost of them widows; and
a limited number of years after retirement.
4. THE WORLD TODAY
4.1 The world of millenium Britain is very different to the world for which Beveridge designed his system. It is characterised by:
a flexible labour market with by high levels of unemployment, many job changes over a life-cycle, an increase in casual and temporary jobs and in part-time employment. Many more disabled people both in work and wanting to enter the labour market. Yet disabled and those with health-limiting conditions are more likely to be affected by unemployment, and to be found in low paid and casual work or to work part-time;
the majority of women in paid work but most working part-time. A substantial number of people 2.45 million (80 per cent of whom are women) in paid work but earning below the threshold for contributory benefits;
much higher levels of self-employment;
increased divorce and separation with a corresponding increase in both lone parents and second families;
rising expectations amongst disabled people to enjoy the same standard of living as non-disabled people. Over the last 20-30 years the whole pattern of life for disabled people has changed as the old institutions and psychiatric hospitals have closed down and disabled people have moved to independent living in the community;
longer life expectancies and better survival rates for people with severe disabilities;
rising expectations amongst older people and longer life after retirement; and
the growth of private sector provision for pensions and other forms of insurance cover.
4.2 There have been a series of ad-hoc changes to the social security system in response to these major changes to the labour market, to family structures and the expectations of disabled people. But such ad-hoc responses have, in general, failed to make the system fair or prevent poverty and have merely served to make it more complex and difficult to understand and administer. In addition, changes often pulled in different directions. The introduction of disability living allowance and attendance allowance made an enormous and positive difference to the lives of disabled people. Yet, at the same time, invalidity benefit (later incapacity benefit) was severely cut back, reducing the incomes of disabled people.
4.3 There has been no full and public discussion about the future of the contributory system yet a series of changes have been steadily eating away at the covering provided by the national insurance scheme. The value of contributory benefits has been eroded substantially since the link with earnings was broken in 197980 and this has been compounded by the abolition of the earnings-related (SERPS) elementsto benefits for incapacity from 1991 and unemployment from 1996.
4.4 The result is a system under stressexpensive, complicated and failing to prevent poverty or promote independence.
5. WHAT IS MEANT BY THE CONTRIBUTORY PRINCIPLE?
5.1 Under our existing system the contributory principle means that entitlement to particular benefits, intended to replace earnings for those unable to work because of unemployment, disability/ill-health or retirement, is conditional on payment of insurance contributions. Obviously each benefit also has other conditions of entitlement which have to be satisfied. Contributions are paid by employers, their employees and by the self-employed. Contributions are compulsory for those in paid employment, earning above a certain threshold, the lower earnings limit (LEL). The amount of contribution made by each individual is related to their earnings, not to their category of risk. As some of the benefits, eg Incapacity Benefit and Jobseekers allowance, are flat-rate the scheme involves a transfer of cash from high to low earners and a pooling of risk across the work force.
5.2 The scheme is run on a Pay As You Go basis with current contributors financing current beneficiaries. It is not an accumulating fund. This has led to criticisms that it is not a contributory insurance scheme and should not be described as such. Critics argue that it is really just another form of taxation. In practice it is a hypothecated tax and is recognised and supported as such.
6. ADVANTAGES AND DISADVANTAGES OF THE CONTRIBUTORY SYSTEM
they help prevent poverty;
are relatively simple and cheap to administer;
contributions match earnings not category of risk. The system covers all contributors equally and pools risks. This protects those, disabled people for example, who are more at risk of unemployment. It protects those in high risk occupations and people with a pre-existing medical condition or disability who the private sector would not touch;
contributory benefits can provide a secure income regardless of changes to an individual's circumstances, unlike means-tested benefits where every minor change in income, savings or family composition must be immediately reported;
as individual benefits they provide independent incomes for men and women. One partner's benefit is not affected by the other partner entering or leaving the labour market. This allows one partner to work, perhaps part-time, while the other is on benefit and prevents the creation of workless households. Means-tested benefits have the opposite effect. For example, take a couple with children where both parents work, the man full-time and the wife part-time. If the husband has to stop work following the onset of a severely disabling condition he will get incapacity benefit (IB), his wife can continue to work without his benefit being adversely affected. As the children grow up she may well increase her hours to full time work. If the only benefit available to the husband is means-tested then it is unlikely the family could survive on the wife's part-time earnings and she would have to give up work;
are not withdrawn as families change;
seen as being "by right" and therefore no stigma attached to claiming;
have higher rates of take-up and are therefore more likely to reach those for whom they are intended;
are well targetedgoing generally to those on low and middle incomes; and
are inclusivethe national insurance scheme encompasses most of the population at some point during their lives. In 199495 24 million people contributed to the scheme (DSS 1997) and beneficiaries included 10.6 million pensioners, 2.4 million people getting sickness/disability related benefits and 2.1 million unemployed people.
6.2.1 The main disadvantage of the contributory system concerns the position of those who are unable to count as contributors. The current system excludes: disabled people who have never worked or whose work record is intermittent, most lone parents, those people (mainly women and disabled people) who work part-time and earn below the lower earnings limit (LEL), those (mainly women) caring for children or adults and people recently arrived in the UK (including refugees, a high proportion of whom will be disabled or in poor health).
6.2.2 It is argued by some that one of the disadvantages of the contributory system is that benefits are paid to people with high incomes. However, all contributory benefits are taxed and in practice only a very small proportion are paid to people who are well off. For example, 78 per cent of incapacity benefit recipients are on below average incomes. This figure is set to fall in future years as the people on protected higher rates of benefit (those who were on invalidity benefit before 1995, who are on average £21.25 pw better off and whose benefit is not subject to tax) leave the benefit and are replaced by post 1995 claimants. The percentage of IB recipients above twice the average income is too small (below 1 per cent) to register statistically.
6.3 Difficulties with the contribution conditions
6.3.1 Under the current contributory system it is possible for someone to have more than one job and to work full-time hours but fail to meet the contributory conditions because each job pays below the LEL. The current system does not allow the individual employee to make voluntary contributions and if earnings are low there is no employer contribution. It is mainly women who get caught by this rule since it is women who combine childcare with jobs like domestic or office cleaning, bar work, school meals, school crossing patrols, child minding, home working or shift work in fast-food outlets and supermarkets.
6.3.2 Changes to the labour market mean more short-term contracts and casual jobs and more part-time working and this has created huge difficulties for people in meeting the contribution conditions for jobseekers allowance (JSA)which is still designed around the Beveridge norm of a life-time full-time job. Disabled people who are concentrated in this more insecure sector of the labour market are disproportionately affected The reduction of entitlement to contributory JSA to six months also hits disabled people as they face additional difficulties in re-entering the labour market. The changes to the contribution conditions for incapacity benefit proposed in the Welfare Reform and Pensions Bill are expected to push 170,000 disabled people out of entitlement to the contributory benefit.
6.3.3 The alternative earnings replacement benefits available to those who do not meet the contribution conditions fall into two categories. Those that are non means tested and are paid provided the recipient passes the appropriate entitlement condition eg severe disablement allowance (SDA) or invalid care allowance (ICA), and those that depend on a household means-testincome support being the most important. There are problems with both these alternatives.
6.4 The alternatives: Severe Disablement Allowance (SDA)
6.4.1 For disabled people the most important of the non-contributory benefits is SDA. The history of SDA starts with the non-contributory invalidity pension (NCIP) which was introduced in 1975 to provide an earnings replacement benefit for severely disabled people who were unable to work and therefore could not make the contributions necessary to access Invalidity Benefit. In 1977 the benefit was extended to disabled married women and was replaced in 1985 by SDA. One of the problems associated with SDA is the very low level at which it is paid70 per cent of SDA recipients have to top-up their benefit with income support.
6.4.2 Therein lies one of the major problems with benefits that are outside the contributory systemhistorically they have been paid at very low levels, it being felt essential to reward those who had made contributions with a higher level of benefit. The effect of this has got much worse over recent years as the move from a link with earnings to a link with prices has pushed down the value of contributory benefits, and consequently of the non-contributory benefits.
6.5 The alternatives: means-tested benefits
6.5.1 Claimants of means-tested benefits like income support (IS), housing benefit and council tax benefit are subject to a household means-test. The income of the claimant, their partner and children are all taken into account as are any savings or capital held by the household. IS begins to be reduced if savings over £3,000 are held. Problems with means-tested benefits include:
they are necessarily complex and difficult, expensive to administer and have higher inaccuracy rates than non-means tested benefits;
they create poverty traps as benefits are withdrawn sharply as incomes rise;
they create savings traps and penalise those who have saved;
they cannot help the near-poor with incomes just above the qualifying threshold. In fact, those just above the threshold may have less disposable income then those on means-tested benefits once lack of access to things like free prescriptions are taken into account;
they reduce the independence of disabled people as they are based on a household's income and make assumptions about income sharing within households. Similarly for women within claimant couples;
they are stigmatising to claim and to live on and are socially divisive. The media and public opinion draw sharp distinctions between benefits that have been "earned" in some way or are provided "by right"for widows or disabled peopleand those where receipt implies being part of the "dependency culture", or the "something for nothing society", claimed by scroungers and the feckless and paid for by tax payers. The widow on widow's benefit who takes a holiday is viewed with sympathy, the lone parent on income support who does the same is pilloried as a "benefit mum on holiday". It matters enormously to disabled people that they feel that their main benefit is provided as of righteven where it is topped up by income support. It is this which allows them to live as normal a life as a limited income and disability unfriendly environment allows. To be able to spend money on entertainment, make-up, holidays, computer games, alcohol, meals out without fear of condemnation and exposure of the "Shock of benefit man out clubbing every weekend" type is crucially important;
they are more susceptible to fraud and wrongful payments. This is not surprising, the more rules there are the more likely it is that people will find themselves on the wrong side of them;
such benefits often do not reach their targets, the combination of stigma and complexity means that a sizeable minority of people do not claim their entitlement;
they do not provide a secure income as they have to be reassessed every time circumstances change. The complexity of the means test makes it difficult for individuals to predict what their entitlement might be after a change such as a child leaving home or returning home, earnings from one day's casual work, a Lottery win of £500 which takes the household just over the £3,000 limit etc;
they relieve rather than prevent poverty; and
means-tested benefits lack general public support because more affluent people do not benefit from them. There is a very real danger that if the majority of the population were expected to rely on private provision and all benefits were means-tested that benefit levels would be further depressed as better off people became unwilling to fund them. This is a point made by the Social Security Advisory Committee in their Twelfth Report (1999) "Precisely where the balance should be drawn between a contribution-based and a targeted approach is never going to be a simple judgement, nonetheless we believe that there is merit in the assertions of some commentators that the maintenance of a contributory element within the benefits structure means that all citizens, however well able they may be to provide for themselves, have a stake in that structure as potential recipients of benefit. Without this the national insurance contribution may become seen by the affluent simply as a synonym for direct taxation. A the same time the principle of inclusive social insurance can be said to play a part in engendering social solidarity and cohesion."
7. IS PRIVATE PROVISION THE ANSWER?
7.1 It is sometimes suggested that we must move towards more private provision because the state cannot afford the current, or an improved, level of support. However it is important to be clear that if there is to be better provision for retirement and other contingencies including long-term care, then overall, we must pay more regardless of whether this is through state or private provision or whether finance is on a pay-as-you-go basis or through funding. Private provision can give individuals more choice as to the type of provision they make and people may be more willing to increase their contributions if they believe that will benefit directly. On the other hand state schemes are relatively cheap to administer, promote social cohesion and redistribute over lifetimes and between different groups. Disabled people are likely to be particularly disadvantaged by any move to further private provision as they are considered high risk by insurance companies and may have limited opportunities to save due to limited earnings capacity.
7.2 Provision for incapacity: Research carried out by ourselves and the Disablement Income Group examined the role of the private sector in providing permanent health insurance (PHI) and occupational pensions. The research was prompted by the claims about the availability of private insurance made by the then Government when justifying reductions in incapacity benefit in 1995. The research found that disabled people, women, people in manual occupations, part-time or casual work, or with interrupted work records, were the least likely to belong to an occupational scheme. Those with a pre-retirement disability tended to get less occupational pension than non-disabled colleagues. PHI schemes tended to exclude or load people with a pre-existing disability or record of ill-health. Policies are more expensive for older people and women (on average 50 per cent higher). The people most at risk were the least likely to obtain affordable (or any) private cover. In fact Invalidity Benefit (now Incapacity Benefit) was well targeted. Many of the people on the benefit had backgrounds in manual work and the majority did not receive occupational health insurance payments. Figures for Incapacity Benefit show that the benefit is still well targeted with 78 per cent of IB recipients living in households with below average incomes.
7.3 Although people on higher incomes may wish to ensure that they receive higher income replacement provision than that provided by the state through incapacity benefit this will not be possible for the vast majority. The most vulnerable groups of sick and disabled people will need to rely on state provision which has the advantage of pooling risk across the whole population.
7.4 The Social Security Advisory Committee came to the same view. "Unless the insurance industry provided a package which in effect replicated the wide coverage of risks accepted by the state scheme, we see little prospect of a greater involvement of the private sector in provision for sickness, disability and unemployment in such a way that it could supplant state provision for the majority of the population and for high risk, vulnerable groups in particular."
8. HOW COULD THE CONTRIBUTORY SYSTEM BE MODERNISED?
8.1 We believe that the national insurance system could be modernised to meet the needs of today's labour market, expectations, family structures and life styles. It would need to be extended to more people than are currently covered and would need broader definitions of entitlement which cover more working patterns and acknowledge the wide range of responsibilities and barriers that prevent individuals from taking paid work. Ideas that could be developed include:
people out of the labour market because of severe disability could be credited into the system, as the Government is proposing (in the Welfare Reform and Pensions Bill) to do for 16-19 year olds (and some under 25s);
people with a broken contributions record could still be eligible for reduced benefits. This would be of particular benefit to disabled people with fluctuating conditions (such as mental ill-health) whose work record can be intermittent;
people earning below the LEL (mainly carers and disabled people) could be brought in to the systemwith eligiblity for reduced benefits. As the Government has recently done in relation to maternity benefits;
people out of the labour market because of caring responsibilities could be fully credited into the national insurance system, with caring for children or adults recognised as an equally valuable "contribution" to society. The level of ICA could then be raised to match that of Incapacity Benefit/Retirement Pension since all are long-term earnings replacement benefits;
contributory benefits need to be raised to a level which minimises the number of people who have to top-up with income support or other means-tested benefits. This would reaffirm their role in preventing poverty and would have the advantage of administrative savings; and
there would need to be a promise of security in the longer term so that current and future Governments were not able to move the goalposts (as is currently being done to incapacity benefit within the Welfare Reform and Pensions Bill).
9.1 In answer to the questionis the contributory principle past its sell by date? I would argue that if we take the contribution principle as a concept rather than as a technical description of a particular funding mechanism then not it isn't and yes it can be modernised to fit today's and tomorrow's societies. Social insurance is a practical example of the concept of rights and responsibilities, it promotes collective provision and pooling of risk and as such combats social exclusion and involves some modest redistribution. There is still very strong public support for the concept and it fits wells with the values and principles of the new Labour Government. What people need is a decent non-means tested benefit paid if they are unable to work and there is no reason why a modernised contributory system cannot provide this.
8 National Insurance and the Contributory Principle. Stafford DSS research 1998. Back
9 House of Lords Hansard 7 June 99 Col WA134. Back
10 Regulatory Impact Assessment Welfare Reform and Pensions Bill. Back
11 I have not included a reference here to either of the extra costs benefitschild benefit or disability living allowancesince these serve a different purpose within the social security system. Namely, compensation towards the extra costs associated with raising a child or with having a disability. As such they are a form of horizontal redistributionfrom those without children to those with, and from non-disabled to disabled people. Back
12 SDA is to be abolished by the Welfare Reform and Pensions Bill. This will leave invalid care allowance as the only non-means tested non-contributory benefit in the system. Back
13 "There May be Trouble ahead" Howard & Thompson, Disability Alliance and DIG 1995. Back
14 House of Lords Hansard 7 June 99 col WA136. Back
15 "Review of Social Security, Paper Two, State Benefits and Private Provision" Social Security Advisory Committee 1994. Back
16 National Insurance and the Contributory Principle, Stafford, DSS 1998. Back