Memorandum submitted by Fran Bennett (CP
28)
THE FUTURE OF THE CONTRIBUTORY PRINCIPLE
SUMMARY
1. There is an urgent need for a debate
about the future of the contributory principle. The contributory
principle is broader than actuarial insurance, and can be applied
in a more or less inclusive way. One of its advantages is that
it does not separate welfare donors and recipients. It can help
fulfil a range of functions, only one of which is redistribution
between different income groups.
2. Current developments affecting the
future of the contributory principle include changes in the
nature of risk, the labour market and the family, and an ageing
population. However, these developments have not led inevitably
to a decline in social insurance in other countries, in part because
of the wider range of social groups with an interest in it. National
insurance has been undermined recently in the UK, but may still
have been more robust than alternatives. Another recent development
is the spread of financial services, including private insurance.
Recent policy developments bringing national insurance contributions
and income tax closer together have also been interpreted as heralding
a challenge to the contributory principle.
3. Recent research on public attitudes
suggests enduring support for national insurance and the contributory
principle, despite the erosion of benefits. Contributory benefits
are seen as too low. There is support for risk pooling, and for
including carers, disabled people and those with incomplete contribution
records within the scope of benefits. The public opposes means
testing of national insurance benefits. There is mistrust of private
providers, despite concern about declining state provision. There
is little knowledge or experience of the benefits system, with
views therefore strongly influenced by the media.
4. The perceived advantages and weaknesses
of the contributory principle can only be identified in the
context of views about what functions a benefits system should
serve and what goals it is trying to fulfil. The contributory
principle is currently being questioned both by those who would
like to see means-testing extended and define only a narrow goal
of poverty relief for the benefits system, and by those who want
to extend non-means-tested benefits beyond those with good employment
records.
5. A social security system should fufil
a range of different aims, and its redistributive effects should
not be judged only by benefit receipt at one point in time.
The contributory principle should have a future under this
government because it chimes with many of its own objectives,
both for welfare reform and more generally. In particular, it
should help to recreate a popular welfare state based on a welfare
contract; it embodies the centrality of paid employment but can
incorporate other forms of contribution to society; and it can
accommodate partnership between private and public provision.
Many of these advantages would be shared by non-contributory non-means-tested
benefits; but these are not securely embedded enough to form the
cornerstone of the system by themselves at present. A basic income
is currently unlikely. Means-testing all benefits would affect
willingness to pay, and would not be capable of responding to
the modern challenges of the "risk society" and women's
aspirations for autonomy; it would also undermine the reciprocity
of the contributory principle. If the bulk of the population insured
themselves privately, the outcome would be likely to be less redistributive
than the current benefits system; the role of private insurance
is inherently limited.
6. The contributory principle could
be modernised to make it more inclusive, lessening its reflection
of patterns of labour market advantage and disadvantage by including
carers and the low-paid, extending rights for the self-employed,
and allowing benefit for those with incomplete records. A broader
range of contingencies could also be covered, including longer-term
unemployment, part-time benefits and parental leave. The sense
of a "stake" in the system could be encouraged by allowing
contributions towards higher benefits and/or by introducing some
arm's length management of funds; but more important would be
governments' actions in safeguarding benefit rights and conveying
the positive value of social insurance in helping to generate
social cohesion. Changes to the financing side could include using
the Treasury contribution more imaginatively; in addition, the
public would not necessarily resist paying more for improved benefits.
Lack of public understanding of the financing side argues for
greater transparency and/or less emphasis on strict contribution
rules.
1. WHAT IS
MEANT BY
THE CONTRIBUTORY
PRINCIPLE?
1.1 The need for a debate about the future
of the contributory principle has been widely recognised:
"We need to have a debate about the future
of the national insurance contributory principle. It is clear
that the principle commands widespread public support, which I
endorse, but the system has been badly distorted in recent years."
(Chris Pond MP, House of Commons Hansard,
28 January 1999, col. 540).
The previous government and the current government
embarked on social security reform programmes without instigating
comprehensive reviews into the operation of the contributory principle
as an integral part of such programmes. Recent policy changes
in this area have not always been consistent. The inquiry by the
Social Security Committee is therefore very welcome.
1.2 The contributory principle represents
a broader principle than actuarial insurance. It embodies the
idea of "something for something", but can include the
possibility of contributing in different ways and to varying degrees;
it can therefore be put into practice in a more, or less, inclusive
way. It combines collective insurance and individual provision.
The idea of a return on paymentssome connection (however
flexible in practice) between what is paid in and paid outis
central; this means that there is a claim on the future, and a
stake in the system, and has led to national insurance contributions
being described as a form of hypothecated taxation. The contributory
principle also conveys the idea that today's contributor could
be tomorrow's beneficiary, rather than "welfare" being
seen as a matter of donors and recipients as separate social groups.
1.3 These inherent attributes of the contributory
principle mean that it can be used to help fulfil a range of functions
which should be performed by a comprehensive social protection
systemespecially redistribution over the lifecycle, as
well as between groups with different degrees of risk, and the
promotion of personal independence, as well as social cohesion.
As John Hills and colleagues have argued (see, for example, The
Future of Welfare: A guide to the debate, Joseph Rowntree
Foundation, 1997), this means that redistribution between rich
and poor is only one of the aims of the welfare state, including
the social security system, and its various aims must be taken
into account in judging its performance.
2. CURRENT DEVELOPMENTS
AFFECTING THE
FUTURE OF
THE CONTRIBUTORY
PRINCIPLE
2.1 Current developments affecting the future
of the contributory principle have been highlighted by commentators
as:
changes in the nature of risk (due
in particular to increasing inequality in the labour market, leading
to more concentration in the risk of loss of earnings on particular
groups, rather than common risks being shared by all);
changes in the labour market (such
as more self-employment; and more "flexible" labour
market conditions, making regular contributions more difficult
for many, and "normal" earnings less clear);
changes in the family (making a full-time
breadwinner and dependant model less relevant); and
an ageing population (making pension
provision increasingly central to the national insurance scheme,
and leading to debate about the pros and cons of pay as you go
versus funded insurance arrangements).
2.2 However, Clasen and Erskine note that
these developments have not led inevitably to a decline in social
insurance provision in other industrialised countries; the UK
is unique in the extent to which its social insurance scheme has
"withered" in recent years ("Meltdown inevitable?
National insurance in Britain", Benefits, issue 23, September/October
1998, p. 4). They attribute this difference to political and institutional
causes, and highlight the wider range of social groups with an
interest in the social insurance schemes in other countries, resulting
in part from the multiplicity of transfers within those schemes.
This wider involvement results in such schemes being more robust
in facing current challenges. An international seminar organised
by the Joseph Rowntree Foundation found that in other EU countries,
social protection was seen as relevant to everyone, rather than
just to the poor; public insurance payments were not seen as a
tax, but as paid for particular purposes; and social insurance
was part of an accepted notion of social responsibility and social
solidarity (Donald Hirsch (ed.), Social Protection and Inclusion:
European Challenges for the UK, York Publishing Services Ltd.,
1997).
2.3 In contrast, the UK's national insurance
scheme has suffered cutbacks in recent years, in terms of restrictions
in the numbers entitled to benefits, cuts in the value of benefits,
and less generous uprating arrangements. What is not clear, however,
is what would have happened to benefits had they not been contributory;
Clasen and Erskine's thesis seems to suggest that benefits would
have been even less well protected.
2.4 Another development is the spread of
financial services, including private insurance. Private pension
provision has enjoyed favourable tax treatment for a long time.
But recent measures have also privileged in fiscal terms the creation
by individuals of their own savings accounts (e.g. ISAs) for wider
purposes. And one of the key principles of the new "welfare
contract" between citizens and government listed in the 1998
Green Paper on Welfare Reform was:
"Public and private sectors should work
in partnership to ensure that, wherever possible, people are insured
against foreseeable risks and make provision for their retirement".
The relationship between state and private provision
for risks and savings is therefore also changing, with potential
implications for the contributory principle.
2.5 Recent policy developments on the financing
side have been interpreted as challenges to the contributory principle.
National insurance contributions are increasingly described as
a form of taxation. The transfer of the Contributions Agency to
the Inland Revenue from the DSS, the raising of the lower earnings
limit to the personal tax allowance level and the increase in
the upper earnings limit have all been interpreted as heralding
a possible move to merge national insurance contributions with
the income tax system. The creation of a "phantom" lower
earnings limit, with earnings above this counting for benefits
but not attracting contributions until they reach the personal
tax threshold, may suggest a longer-term intention to introduce
employment and earnings tests rather than contribution tests for
benefits (see Maternity Alliance journal, Maternity Action
84, April/May/June 1999, p. 9. However, it has been argued
by some commentators that a full integration of national insurance
contributions and income tax is unlikely, given the greater willingness
of the general public to pay national insurance contributions,
and the reliance on this by successive governments.
3. PUBLIC AWARENESS
AND ATTITUDES
TOWARDS NATIONAL
INSURANCE AND
THE CONTRIBUTORY
PRINCIPLE
3.1 Research has recently been carried out
on public awareness and attitudes towards national insurance and
the contributory principle. The main findings seem to demonstrate
enduring support for the principle, despite the erosion of national
insurance benefits in recent years. The national insurance scheme
does not seem to be criticised for not being limited to those
on low incomes alone; but there is a public demand for those who
receive benefits to be seen as "deserving".
3.2 Research commissioned by the Fabian
Society (Public Attitudes on the Future of Welfare: Research
Findings, October 1998) found general attachment to the contributory
principle, and a widespread belief that contributory benefits
were too low. There was support for redistribution, in particular
towards those such as carers and disabled people who could not
make contributions. Participants had limited confidence in private
providers. But the uncertainty, confusion and pessimism about
what the state will provide in future led the Fabian Society to
conclude that "the public is losing confidence in the national
insurance system", and to call for more clarity from the
government about what benefits people can expect to receive in
future.
3.3 The government's own research largely
confirms these findings (Bruce Stafford, National Insurance
and the Contributory Principle, In-house Report 39, DSS, 1998).
The public believed they had a right to benefits in return for
contributions, and that such benefits should provide for a greater
degree of risk-pooling and some redistribution. They accepted
that there should be some social protection for non-earners, and
wanted to widen national insurance to carers and those with incomplete
national insurance records. They strongly supported the contributory
principle and were against means-testing of national insurance
benefits (with some arguing that benefits should be earnings-related,
with the higher paid receiving higher benefits).
3.4 There was a widespread belief that the
state pension would be non-existent or nugatory in future, and
a concern about future ability to maintain living standardsbut
distrust of private providers still meant that people preferred
state provision of benefits. The author therefore identified a
complex combination of views, which bring together individualism
and social solidarity, and which contain more support for risk-pooling
than straightforward redistribution.
3.5 The DSS research also showed that participants
had little personal experience or direct knowledge of the benefits
system. Both studies found that the financing side of the contributory
system was particularly obscure to the public. The DSS research
revealed that people saw no real distinction between deductions
for national insurance contributions and income tax, because what
they focused on was the level of their net pay. The national insurance
"fund" was seen as only notional, and many people thought
that the financing of the NHS by national insurance contributions
was much more significant than it actually is.
3.6 Other public opinion research appears
to convey similar messages. For example, a survey commissioned
by The Observer from MORI Financial Services found that
whilst over seven in ten people believed that in future people
will have to provide more for themselves in retirement, over half
said they would rather pay more tax than have to arrange insurance
against illness or a pension for themselves (reported in The
Observer, 11 April 1999).
3.7 Because the majority of people had little
knowledge about, or direct experience of, state benefits, their
views could be strongly influenced by the media. The image of
social security and its functions which is conveyed by the government
is therefore critical in terms of its impact on public support
for the benefits system. Moreover, as participants in the government-commissioned
research became more informed and thought more about the issues
involved, they articulated support for the contributory principle.
This suggests that the national insurance scheme has not been
sufficiently explained to the general publicbut also that
when this is done, there is a considerable degree of public support
for the contributory principle. This support seems to be remarkably
resilient, persisting despite the recent erosion of contributory
benefits. These findings hold important messages for any government
which, in the Prime Minister's words, wants to "make the
welfare state popular again" (Rt Hon Tony Blair MP, The Beveridge
Lecture, 18 March 1999).
4. THE ADVANTAGES
AND WEAKNESSES
OF THE
CONTRIBUTORY PRINCIPLE/BENEFITS
4.1 The perceived advantages and weaknesses
of the contributory principle have been set out by John Hills
with others (The Future of Welfare: a guide to the debate,
Joseph Rowntree Foundation, 1997). The crucial point made in this
summary of the debate, however, is that the contributory principle
is questioned both by those who would like to see means-testing
extended, because they see only a narrow goal of poverty relief
for the benefits system, and by those who want to extend
non-means-tested benefits beyond those with good employment records.
The former would emphasise the receipt of national insurance benefits
by those who do not "need" them, and the latter the
fact that the contributory principle excludes some groups.
4.2 Thus, the "advantages" and
"weaknesses" of the contributory principle can only
be identified in the context of views about what functions a benefits
system should serve, and what goals it is trying to fulfil. These
issues are dealt with elsewhere in this memorandum (and in more
detail in Fran Bennett, Social Insurance: Reform or Abolition?,
Commission on Social Justice/Institute for Public Policy Research,
1994).
5. DOES THE
CONTRIBUTORY PRINCIPLE
HAVE A
FUTURE? ARE
THERE OTHER
MODELS OF
WELFARE DELIVERY
WHICH BETTER
REFLECT TODAY'S
SOCIAL REALITIES?
5.1 Again, opinions on this question will
differ depending on what view is taken about the functions of
the benefits system. If a broad view is taken, a social security
system should aim to:
help prevent poverty, as well as
trying to relieve it after the event;
redistribute resources over individuals'
and families' own lifecycles;
represent a compact of support between
the generations;
protect people against risks and
insecurities;
encourage personal autonomy and independence;
and
help promote social cohesion, by
binding people together in a system of mutual support.
Redistribution between rich and poor will also
be an overall aimbut (as John Hills and colleagues have
pointed out) this should be measured not just by benefit receipt
at one point in time, but also by the system of financing and
the differential distribution of risks and contingencies.
5.2 From the current government's point
of view, the contributory principle chimes well with many of its
own objectives, both for welfare reform and more generally:
the government is committed to the
idea of a welfare state which "isn't just about a few benefits
paid to the most needy", but wishes to "keep a welfare
state from which we all benefit" (foreword by Prime Minister
to Green Paper, New Ambitions for our Country: A New Contract
for Welfare, Cm 3805, March 1998);
the contributory principle is the
clearest example within the benefits system of a "contract",
the matching of rights and responsibilities, which is the key
concept in the recent Green Paper on welfare reform, and was re-emphasised
by the Prime Minister in his recent Beveridge lecture;
butas shown clearly in the
recent public opinion researchit also brings together self-interest
and pooling of risks, rather than separating them (unlike individual
private insurance arrangements); this contributes to the goal
of increasing social cohesion;
paid employment is the main, but
not the sole, anchor of the contributory system; reforms have
already extended benefits to people with low earnings, and carers.
This could be said to mirror the primacy of paid employment in
the government's goals for welfare reform, but also its concern
to recognise the value of other contributions to society;
the transfer of resources over the
lifecycle effected by the national insurance system fits well
with the government's emphasis on tackling lifetime (rather than
snapshot) inequality;
in principle, contributory benefits
do not penalise those with savings or private insurance arrangements;
they thereby embody the "partnership" between public
and private provision envisaged in the welfare reform Green Paper
(even if, in practice, some rules introduced by this and previous
governments have offset one form of provision against the other);
the same feature means that contributory
benefits are more in line with the government's emphasis on promoting
equal opportunities (rather than the "equal outcomes",
at minimum benefit levels, implied by means-tested benefits);
contributory benefits are earned
by individuals in their own right, and so fit with the government's
emphasis on equal treatment for women, its commitment to the principles
agreed at the Beijing Summit, and its agreement with the European
Union's objectives about securing equal rights for women; and
the contributory principle is the
most obvious example of a form of "hypothecated" taxationwhich
is currently being proposed by various commentators as a way of
"reconnecting" taxpayers with the public goods they
pay for and benefit from.
In addition, social insurance has a long history
and a wide international base, being governed by standards laid
down in international conventions. Article 9 of the International
Covenant on Economic, Social and Cutural Rights (1966), for example,
gives a right to social security, including social insurance.
5.3 Many of the above advantages of the
contributory principle would be shared by other forms of non-means-tested
benefits. In recent years, there has been an expansion of non-contributory,
non-means-tested benefits (sometimes called "categorical"
benefits). Some are intended primarily to help meet additional
costs, such as child benefit and disability living allowance/attendance
allowance. Some appear to be intended as income replacement benefits,
such as invalid care allowance and severe disablement allowance.
However, the latter have usually been paid at the same rate as
the dependants' additions to contributory benefits; they therefore
often need topping up with other income or means-tested benefits,
and/or imply at least partial dependence on another household
member. Non-contributory benefits have usually been introduced
for groups who tend to be seen as "deserving" in public
opinion surveys (carers and disabled people); nonetheless, this
has not protected them completely. The current proposal to abolish
severe disablement allowance for most future claimants suggests
that non-contributory non-means-tested benefits are vulnerable.
Non-contributory benefits can and do provide valuable rights to
income for those who have not been able to earn full rights to
contributory benefits, in particular many women, and there is
a strong case for extending their coverage and increasing their
value. But at present it seems unlikely that they would be more
robust than contributory benefits in the face of current pressures.
5.4 The government is currently extending
the use of the tax system to provide an alternative route for
additional support to certain groups of people in paid employment.
However, the integration of tax and benefits for those out of
work is unlikely to provide the basis for an alternative system
of benefit entitlement, given the lack of "fit" between
taxpayers and benefit claimants (see, for example, David Clinton
et al., Integrating Taxes and Benefits?, Commission on
Social Justice/Institute for Public Policy Research, 1994). The
introduction of a "basic income", or "citizen's
income", seems to be unlikely at present, given the government's
stress on paid employment and the emphasis on responsibilities
in return for rights in the new welfare contract. The other alternativea
negative income tax approachwould in practice result in
a form of means-testing for all benefits (see below).
5.5 Restricting all or most state benefits
to the poorest via means-testing is advocated by some people,
including many of those who criticise the national insurance system
for giving money to those who do not "need" it. These
critics tend to assume that the funds available for benefits represent
a fixed pot of money, which can be distributed in a variety of
ways. They argue that if contributory benefits were abolished,
this would result in additional resources which could be directed
to those on lower incomes. However, it is likely that in practice
alterations to the payments side of the equation would also affect
the financing sidethat is, if social security were no longer
seen as a contract in which most people had a stake themselves,
contributors' attitudes towards payments would be likely to be
different. The willingness to pay towards social security benefits
would be likely to diminish. Alternatively, or in addition, contributors
could ask for compensation. For example, even when rumours about
"affluence testing" (means testing at a high income/capital
level) abounded, in advance of the government's Green Paper on
welfare reform, various newspaper editorials immediately put the
case for granting tax relief on the premiums for private insurance
cover which better-off individuals would purchase to replace their
entitlement to state benefits. The results would be likely to
be less fair in total than the current distribution.
5.6 At lower income levels, means-testing
all benefit payments would be likely instead to discourage saving
towards risks and/or old age, since resources must be run down
to a certain level before benefit can be awarded. Because means-tested
benefits are based on family/household income, means-testing also
denies entitlement to benefit to individuals (usually women) whose
partners have sufficient earnings, other income and/or capital
to keep the family above the defined benefit level; this effect
is contrary to women's aspirations for greater financial independence,
and the principle of individual entitlement to benefit supported
by the European Commission. Thus, if moves to abandon or further
dilute the contributory principle result in a greater emphasis
on means-testing, the social security system will not be responding
adequately to major modern challengesof how to ensure security
for all in the "risk society", and support autonomy
for women. These issues are explored further in section 6 below.
5.7 More fundamentally, the abolition of
non-means-tested benefits would also mean dividing the population
into donors and benefit recipients. This division would undermine
the reciprocity embodied in the contributory principle, and erode
the principle of a "welfare state from which we all benefit".
The recent public opinion research demonstrated the strength of
feeling amongst participants against means-testing contributory
benefits (Stafford, 1998). More selective benefits systems have
not in practice been notably successful in tackling poverty or
inequality. Means-testing has increased significantly within the
UK benefits system in recent years, from 16 per cent of the total
in 1979 to 34 per cent in May 1997 (Social Security Oral Answers,
House of Commons Hansard, 24 May 1999, col. 4); yet the
poorest 20 per cent receive a lower share of social security benefits
than they did in 1979 (DSS, Case for Welfare Reform, 1998).
5.8 It is possible to envisage a system
in which the bulk of the population would have to insure themselves
privately, rather than being eligible for national insurance benefits.
It is likely that those excluded from benefit under such a system
would not simply allow their living standards to be undermined
at times of risk. Instead, they would be likely to try to make
up for the loss of state income by applying for private insurance
cover. However, as recent research has shown, shifting from public
to private finance for welfare provision is regressive and, in
many cases, is likely to result in only limited savings for government,
which will be outweighed by the additional costs to individuals
(Tania Burchardt et al., Private Welfare and Public
Policy, YPS Ltd. for Joseph Rowntree Foundation, 1999). Many
commentators have described the limitations of private insurance
in covering risks such as unemployment and/or disabilityincluding
adverse selection, administrative costs, exclusions etc. The insurance
industry itself is open about what it can and cannot achieve,
pointing out that it can only pool risks within a fairly narrow
range, rather than across broad populations. The conclusion of
most informed commentators is that the role of private insurance
is inevitably circumscribedat least in the absence of compulsion,
controls and/or subsidies of a kind which would render its "private"
nature virtually meaningless. It is not therefore likely to be
a viable alternative to contributory benefits for the bulk of
the population.
6. COULD THE
CONTRIBUTORY PRINCIPLE
BE MODERNISED?
6.1 "Most of the contributory system
for those of working age now pays for incapacity benefit. By no
stretch of the imagination would that be the only thing that we
would want to insure against, if we were starting from scratch"
(Secretary of State for Social Security, House of Commons Hansard,
28 January 1999, col. 495).
"Of course, the British idea of national
insurance has changed over time. But noone can deny that by sharing
risks among 58 million citizens and by the strong helping the
weak it makes us all stronger" (Rt Hon Gordon Brown MP, Chancellor
of the Exchequer, The Guardian, 12 November 1998).
If the contributory principle is retained as
a significant element of the benefits system in the UK, it should
be modernised to take account of today's challenges. Reforms could
take different formsto make the contributory system more
inclusive; to cover a broader range of contingencies; to give
individuals more of a sense of a "stake" in the system
and a return on their contributions; and to modify the financing
system.
6.2 One potential direction for change is
to make the contributory scheme more inclusive. Current policy
changes are on the one hand including more people within some
benefits (eg the introduction of a maternity allowance for low
earners), but on the other hand tightening contribution conditions
for others (eg the restriction of incapacity benefit to recent
contributors). Changes in the labour market have increased the
number of people who are self-employed and excluded from benefits
during unemployment etc., and/or who are part-time or low-paid
workers and earn below the lower earnings limit (temporarily,
or over the longer term). The nature of the contributory system
also means that contributions insufficient to give rise to any
benefit entitlement are "wasted". As the Commission
on Social Justice recognised, these characteristics mean that
the system is "limited and cumbersome", when it should
instead be "tailored to changing employment risks and family
needs" (Commission on Social Justice, Social Justice:
Strategies for National Renewal, Vintage/IPPR, 1994).
6.3 The recent public opinion research suggested
extending the national insurance scheme to include carers of sick
and disabled [and elderly] people; and giving people with incomplete
national insurance records partial contributory benefits (Stafford,
1998). The first of these possibilities is already in effect,
at least to some extent. Credits and home responsibilities protection
give access to national insurance benefits for some carers, although
the "gateway" could be widened. The current proposals
for pension reform also recognise periods spent caring and out
of the labour market. The government has also proposed extending
entitlement to allowances during maternity to employees earning
£30 or more per week, even if their earnings do not reach
the lower earnings limit, and to self-employed women with a small
earnings exception from payment of contributions. This type of
provision could be extended to other groups in relation to other
benefitsor (as proposed by the Commission on Social Justice)
an hours threshold could be applied instead. The inclusion of
low-paid groups within the scheme, and the extension of entitlements
for the self-employed, should be examined with urgency, given
current labour market developments.
6.4 The second possibility (giving people
with incomplete records entitlement to partial benefits) could
also be pursued. An entitlement to half or three-quarters rate
benefit for those with partial national insurance records would
help individuals who have either been in and out of employment
or whose earnings have fluctuated above and below the lower earnings
limit. Unemployed people who only work on certain days each week
should also be able to claim benefit for those days on which they
would have worked but are now unemployed.
6.5 In addition, contributory benefits could
be extended to cover a broader range of contingencies. The first
priority should be to extend coverage during unemployment. The
limitation of insurance coverage to six months under jobseekers'
allowance, together with the proposed abolition of incapacity
benefit for many people who fall ill or become disabled during
unemployment, represent a significant erosion of entitlement to
social insurance benefits in the UK, and put us increasingly out
of line with many countries in the European Union. The Commission
on Social Justice also suggested that people who had contributed
for longer could be entitled to more than a year's benefit during
periods of unemployment. If the government's proposals to help
people move "from welfare to work" are successful, such
a provision should not be required in as many cases. It would
prevent the move on to means-tested benefits which currently heralds
an erosion of savings for too many people, leading to a poverty-stricken
old age. More radical moves, also proposed by the Commission on
Social Justice, would include introducing a part-time benefit
system for part-time workers, and extending social insurance to
cover parental leave.
6.6 Another direction for change is to increase
the sense of an individual "stake" in the system. Some
participants in the recent public opinion research suggested introducing
earnings-related benefits (Stafford, 1998). Earnings relation
is more widespread in European Union insurance schemes, which
have proved more durable. However, in the UK the national insurance
system initially gave flat-rate benefits in return for flat-rate
contributions; it has been suggested that this characteristic
meant that it has always been associated with minimum rights,
rather than maintenance of living standards. Earnings relation
was subsequently introduced into both contributions and benefits.
Earnings-related benefits have been severely restricted in recent
years, but earnings-related contributions have continued; it may
be that this process cannot continue indefinitely, especially
if the government continues the practice of uprating the upper
earnings limit by more than inflation. There is an obvious tension
between reducing the link between contributions and benefit entitlement
(as in the policy directions suggested above) to make the system
more inclusive, and increasing it (as with earnings relation)
to increase the sense of a "stake". Perhaps for this
reason, the Commission on Social Justice suggested only that the
better-off could be given the option of making "additional
voluntary contributions" in return for higher benefits. This
could be one way of keeping pace with the aspirations for improved
state provision which come with increasing income levels.
6.7 The report of the Joseph Rowntree Foundation's
inquiry into the costs of continuing care suggested a new compulsory
insurance scheme, to ensure that those with sufficient income
put money into a fund to pay for their future care; this fund
would be managed in the independent/private sector (Meeting
the Costs of Continuing Care: Report and Recommendations,
Joseph Rowntree Foundation, 1996). The widespread view that trust
in governments to give welfare state provision "from cradle
to grave" has been eroded has led to recommendations such
as this, which locate responsibility for the funds at arm's length
from the government. However, in practice the generosity of provision
for future needs will depend on the productivity of future generations,
and the contract between workers and dependants at that time;
the policies of future governments could affect the return on
invested funds as well as the level of state benefits. In any
case, public opinion research suggests as much mistrust of private
providers as of government. There are therefore arguments for
maintaining such a fund within the state sector, as well as arguments
for it being managed privately.
6.8 Some other European Union countries,
with long traditions of separate social insurance funds for different
contingencies, have similar mechanisms; but these may be managed
by the "social partners", rather than by the private
sector. A rejuvenated social insurance scheme in the UK should
find ways to reconnect contributors and beneficiaries with their
collectively insured funds. A greater sense of ownership and involvement
would contribute to increasing the popularity of the welfare state,
as desired by the government. Perhaps the single most important
way to increase the sense of a stake in the contributory benefits
system, however, is for governments to stop changing the qualifying
rules and/or amounts of benefit in ways which restrict entitlements
and undermine the contributory principle. In addition, they could
increase the amount of information they give about the contributory
system, and convey a sense of the positive value they place on
the social cohesion it helps to generate.
6.9 The recent public opinion research demonstrated
the extent of public ignorance of the financing side of the national
insurance system. It is highly unlikely that most of the general
public knows how their rights to benefits are worked out. This
finding could be interpreted in two waysto argue for more
transparency in the scheme itself, with more information for the
public, and/or to argue for moving the emphasis in the scheme
away from strict contribution conditions towards entitlement via
earnings and employment status. Changes to the financing of the
contributory benefits system could include changing the balance
between employee, employer and the Treasury contribution, and/or
making further changes to the lower and upper earnings limits
and contribution rates affecting employees and the self-employed.
The first of these options is important in giving potential flexibility
to governments in financing the national insurance scheme, and
has been made use of in recent years; it can also be used to alter
the incidence of the cost of national insurance, either between
employers and the workforce, or between contributors and taxpayers
(see House of Commons Hansard, Written Answers 25 May 1999,
col. 102). The change within the scheme itself recommended by
many commentators in recent years is to phase out the upper earnings
limit for employees (it has already been abolished for employers)although
careful thought would need to be given to the implications for
contracting out arrangements, as well as to the implications of
the difference in the "tax base" for contributions and
income tax. The recent public opinion research revealed some public
acceptance of the idea of increasing national insurance contributions
and/or taxes to pay for improvements to the contributory benefits
scheme to make it more inclusive.
7. CONCLUSION
7.1 The national insurance system seems
to be under severe scrutiny at present, being criticised in particular
because it is said to be insufficiently redistributive, and/or
because its structure has not been modernised. However, those
who criticise it for these reasons often do not say what alternative
benefit principle they are recommending. This is the crucial issue,
however.
7.2 For example, if the insurance function
is left to private insurance alone, it is likely to be less redistributive
between different income groups overall, as well as being less
capable of redistributing in the various other ways performed
by social insurance. If benefits are wholly means-tested instead,
they cannot form the basis of a partnership between private and
state provision encouraging people to save for foreseeable risks
(unless their function and distributional impact are considerably
distorted by generous disregards, tapers etc.); they cannot meet
women's aspirations for greater independence; and they cannot
fulfil the government's wish to create a popular welfare state
based on a new welfare contract between citizens and government.
If benefits are non-contributory and non-means-tested, they would
be capable of being more inclusive than contributory benefitsand
those that currently exist should be improved and built on; but
there is not enough evidence as yet to suggest that if they were
to form the basis of the benefits system, they would be likely
to be paid at an adequate level and/or be any more robust in the
face of pressures. There is a good case, therefore, in addition
to other benefit reforms, for modernising the contributory principle
to include a wider spread of contingencies, expanding it to include
a broader range of beneficiaries, and adapting it to ensure a
more secure sense of ownership by the public.
May 1999
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