Select Committee on Social Security Minutes of Evidence

Memorandum submitted by Fran Bennett (CP 28)



  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.


  1.1  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 payments—some connection (however flexible in practice) between what is paid in and paid out—is 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 system—especially 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.


  2.1  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.


  3.1  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 standards—but 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 public—but 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).


  4.1  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).


  5.1  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 aim—but (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;

    —  but—as shown clearly in the recent public opinion research—it 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" taxation—which 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 alternative—a negative income tax approach—would 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 side—that 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 challenges—of 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 disability—including 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 circumscribed—at 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.


  6.1   "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 forms—to 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 benefits—or (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 ways—to 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.


  7.1  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 benefits—and 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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