Select Committee on Social Security Minutes of Evidence

Examination of witness (Questions 178 - 200)


MS FRAN BENNETT was examined.


  178. Good morning, ladies and gentlemen. May I declare the public session on the contributory principle open and welcome Ms Fran Bennett, who is a Social Security policy analyst and a former Director of the Child Poverty Action Group, and well known to us all. Welcome, Fran. It is very good of you to come. Thank you very much for your written memorandum, which is a very valuable introduction and has a lot of very high quality evidence, which is also helping in our inquiry. I wonder if I could start with a question I have been posing to all our witnesses, to try and set the scene, by asking if you could describe what you believe the contributory principle means. What are the attributes and functions which it performs within a system of social protection? If you could say a word about that, expand your thoughts on that generally, as an opening answer, this would be very helpful to us.
  (Ms Bennett) I think the contributory principle is based on paid employment and income replacement, and based on paying in and getting out; but that it is capable of, if you like, its boundaries being stretched to encompass a much broader and more inclusive kind of contract than is possible, for example, in private insurance. So the contributory principle, within social security, is not based on either actuarial risk or the amount you pay in being equivalent to the amount you get out, but is potentially a much more flexible social policy instrument than that.

  Chairman: Thank you. Can we turn to the different models of provision. I will ask Chris Pond to take the next question.

Mr Pond

  179. Fran, one of the issues that interests me in this whole debate about the contributory principle, is whether or not we are all singing from the same song sheet in terms of what we mean by it. Phrases are bandied around like social insurance, national insurance, contributory principle. Do you think they all mean the same thing or is there a difference in those models, particularly the Continental or European approach, to the approach which has traditionally been adopted in the United Kingdom?
  (Ms Bennett) The Continental approach is rather different. It is very difficult to generalise about the Continental approach. There are lots of different models and there is no such thing as the European social model either. But, in general, you could say that it separates social insurance more from taxation. There is more ownership and management by those involved in the social insurance provision. It tends to be closer to an individual insurance model, hence more emphasis on earnings relation than there has been in the United Kingdom system. The United Kingdom system has been, if you like, "more minimum rights for the many", (I am quoting a well known source), rather than having much more maintenance of living standards as opposed to just prevention of poverty as its goal.

  180. Given this individual rights-based approach, the link between contributions and benefits, is there not a case for saying that perhaps social insurance should be, as is often part of the language of Europe, based on solidarity? In other words, that everybody pays in when they can and takes out when they need to, without necessarily a very firm link between individual contributions and benefits received. Therefore, a bit like a health service approach.
  (Ms Bennett) There is a case for that. I certainly think that if we want to rejuvenate the contributory principle, it will need to be reinvigorated and almost reinvented. One of the ways in which it could, and I believe should, go is to become more inclusive. In fact, if you consider it as an instrument of social insurance, there are arguments for saying that if society believes that it ought to be more inclusive than it currently is, and should reflect labour market inequalities less than it currently does, then there is certainly a case for it going further towards that kind of social solidarity model.

  181. In your memorandum, which is very helpful and thanks, you are pretty sceptical about the arguments that inevitably there has been a paring down of the national insurance system in this country because of the changes in the labour market, the changes in the economy, etcetera. At paragraph 2.1 you list the sort of changes which are cited, including demographic changes and the changes in family structure. You make the point that those have been used as excuses in the United Kingdom for paring down the system, which has not happened in other Continental countries. So why do you think it is that we have seen more of an erosion of that system in this country than elsewhere?
  (Ms Bennett) I think it goes back to the history of the national insurance scheme and to its connection with poverty. In this country we tend to have a conception of social security benefits which finds it difficult to accord them multiple roles, as opposed to a single role of relieving poverty after the event. National insurance has also tended to be assimilated to that kind of model. Therefore, I believe it has always had a pressure upon it to become only a poverty relieving, or at best, poverty prevention model. So when the chips are down, when the costs are hard, when there appears to be greater tax resistance, when there is an ageing population, it is trimmed back with that kind of history and culture very much in the background. It also applies to other benefits. Even child benefit is defended on the grounds that it goes to more poor people than any benefits specifically for poor children, which is absolutely true and is one of its wonderful advantages, but is not actually its major function, which is about horizontal redistribution.

  182. If we take the vertical redistribution element, we know that under previous Conservative administrations in this country there was a considerable move towards means-testing. The jury is still out as to whether or not there is an explicit move in that direction under the current Government. Some people say it is a move towards means-testing, and some say it is a move towards the contributory principle. Could you just explain for the Committee why an emphasis on means-testing is problematic as the main model of social protection.
  (Ms Bennett) I think it is problematic for lots of different reasons. One of them, which is particularly important, is that it tends to separate the population into donors and recipients—that it, therefore, adds to social exclusion in a way which I do not think this Government would want to happen. There are other problems, which are much more well known, about disincentives both to save and to work or work harder. Those boundaries are becoming very blurred, at the moment, in the sense of what is happening to means-tested benefits, alongside what is happening to national insurance benefits. I can go into that in more detail if you want. So disincentives to save or work or work harder are better known; but, of course, there are also the issues about the unit of benefit assessment and the unit of benefit receipt. Both of those are important for different reasons and it is very difficult, if not impossible, to move within a means-tested benefit system towards the kind of individual entitlement to benefits which is, for example, urged upon us by the European Commission. So there are all sorts of disadvantages of means-tested benefits. I have not gone into the fact that they are only about poverty relief rather than poverty prevention, so they only have very minimal goals. There is, of course, the well-known problem of low take-up. However, I actually think some of the other problems are more interesting and less commonly explored.

  183. So there may be an element of gender discrimination in this form of social protection?
  (Ms Bennett) Yes. I do not know whether it is technically or legally classed as such, but certainly if you move from a basis of non-means-tested to means-tested entitlement, you are more likely to cut women out from entitlement altogether. When, for example, some Ministers say that the distinction between national insurance and means-tested benefits is not so important these days—what is important is helping people make the best of themselves and getting back to work and so on—I cannot see that this is the case with regard to women in particular, because many married women especially would just not qualify for benefit if it were means-tested. That is not to deny that there are obviously problems with the contributory system, in that if it reflects labour market inequalities it also reflects labour market inequalities between the genders. This is because it was originally based on a full-time, full working life, male model of employment, so it is also more difficult usually for women to get contributory benefits based on the standard model of contribution. However, that is why we have changed some of the contributory rules, and/or introduced some non-contributory benefits,. to underpin the contributory system by making up for some of its defects.

  184. Finally, there is much talk about partnership between the private and public sector in provision of welfare, certainly in the Green Paper. You referred to it in your memorandum. What do you think the role is, if any, of private insurance in the reform of the contributory principle?
  (Ms Bennett) I do not know that it has a role in the reform of the contributory principle. What Beveridge said was that the state should not stifle incentive, opportunity and responsibility. If you wanted three words which summarise the aims of the current Government, it would be: incentive, opportunity and responsibility. So the public/private partnership, in that sense, chimes very well with what the Government is trying to do. I think the problem in what is actually happening is that sometimes those things are working against each other rather than in partnership. It seems to me that if you do say that somebody with an occupational or personal pension who then gets incapacity benefit is actually going to lose some of that incapacity benefit because of the private provision, that does not seem to me to be the best way to encourage a partnership between public and private provision. What I referred to just now, in terms of means-tested benefits, is also important in that increasingly there is talk of (and sometimes actual policy) disregarding private savings or weekly income from means-tested benefits. You can quite see why that may happen because means-tested benefits provide a disincentive to save, and because people on means-tested benefits are poor governments want to help them to have some benefit from the savings which they have made. However, if you simultaneously disregard private provision from means-tested benefits, but you take it into account for national insurance benefits, it seems to me you are getting into quite a muddle in terms of the relationships between means-tested, universal, and private provision.

Dr Naysmith

  185. I wanted to pick up from some of the questions already aired and look at the current Government's attitude to the contributory principle. In your memorandum, (I agree with Chris that it was a very, very useful memorandum,) you outline quite a long list of reasons as to why the contributory principle chimes in with a lot of the things that the Government is saying and doing. Public/private partnership is one example. Things like social cohesion, the supremacy of paid employment, there are lots of other things where you say the Government ought to be embracing this principle really because it is fitting in with other things it is doing. How would you describe the present Government's attitude to the contributory principle? They often talk about being pragmatic in this area. What do you think they actually think about the contributory principle?
  (Ms Bennett) I find it quite difficult to gauge that because I think there are signs which lead in different directions. There are some signs which seem to convey that the Government wants to build on the contributory principle and to extend it and, if you like, loosen it and make it more inclusive in some of the ways which I said I would welcome. So, for example, you have the maternity allowance being made available to women below the lower earnings limit, as long as they are earning at least £30 a week; you have severely disabled young people being passported on to incapacity benefit and so on. So there are some ways in which the contributory principle is being made use of and, in fact, I would say improved in those kinds of ways. You also have Alistair Darling saying, in introducing the pension reforms, that these build upon the contributory principle because the Government believes in a reward for a lifetime of work. So you can point to quotes and measures which would indicate support for the contributory principle. You can point to the opposite. You can also point to places where Ministers have indicated that it is a problem that people who are not poor receive benefits from the state. You have certainly got statements which say, as I have quoted just now, that there is not much difference between means-tested and national insurance benefits; people do not mind which they are when they get them; what is important is whether they can be helped back to work—an active welfare state, if you like. There are examples, in some of the things which we have just been discussing where the cuts in national insurance benefits will lead to more dependence on means-tested benefits, where I find it very difficult to gauge the current Government's view. That is why I think it is very important both that Alistair Darling initiated another national debate on welfare reform the other day and that the Committee is holding this inquiry, because I think it is an area where we have not yet put in enough serious thought—either the Government or, to be honest, lots of the rest of us.

  186. In this context, do you think national insurance contributions are like income tax, and do you think that greater integration of tax and national insurance contributions is possible? In fact, is it desirable? You point out that national insurance contributions are increasingly viewed and described as a form of taxation. Do you think this is something which should go further?
  (Ms Bennett) Yes—that is another thing the Government has done: to say that everybody paying national insurance contributions will get a tax cut. They are and they are not like income tax. The public opinion research tends to suggest that people do not see national insurance contributions as any different, in terms of a deduction from their pay packet, from income tax. So in terms of public perceptions, it looks as though they are seen very similarly. In terms of their structure, of course, the tax base, the period of assessment, and the band of earnings on which they are based—or the band of income on which they are based—are actually rather different. Politically they are very different. This may be one of the interesting areas, in terms of the future of the contributory principle, in that if the Government did not have national insurance contributions, it would presumably have to have income tax or some other form of taxation to raise an amount of revenue, unless it was going to means-test all benefits. But if it was going to continue with some form of non-means-tested benefits, it would have to have an alternative to national insurance contributions. At the moment, I find it difficult to see why a government would wish to do that. In other words, I would say, at the moment, that governments would want to maintain a separate identity for national insurance contributions, because they have been able to be raise them a lot more easily, it appears, than income tax particularly. I think governments will want to hold on to that. I have not yet answered your question about whether they should be integrated more with income tax or not. They could be. In particular, of course, the one thing which people would tend to suggest immediately would be the upper earnings limit. The Government, of course, has already made quite a lot of changes recently; and there will be forthcoming changes which will bring the national insurance and income tax systems closer together. One of those is to increase the upper earnings limit by more than inflation. I am told that the gap between the upper earnings limit and the higher tax threshold will now be not very great. Therefore, there will not be very many people caught in that band between the upper earnings limit and the higher rate tax threshold. So I would say the immediate and obvious way in which to change national insurance contributions would be to remove the upper earnings limit. However, I do think it is worth thinking about two things in relation to that. One is that, at the moment, it is very much linked with our system of contracting-out and would have to be thought about in that context. The other is that there may be a limit as to how much you can go on increasing national insurance contributions, on the one hand, and decreasing benefits, on the other. We do not appear quite to have reached that yet because the public support seems to be still there, but at some point we probably will. There certainly would be a case for increasing or phasing out the upper earnings limit and using that revenue, which I believe is £4.2 billion, to increase the inclusiveness of the contributory system.

  187. What about the use of working families tax credit? The TUC described it as "an attempt to side-step the means-testing versus national insurance debate". Do you see tax credits as relevant in this debate on the future of the contributory principle?
  (Ms Bennett) In my memorandum I said "not really", because I could not quite see where that was going. The tax credits which have been proposed so far have largely been about people already in employment. I think it is much more difficult to see what you do about tax credits—particularly paid by the employer, which is what the Government seems to think is the distinguishing characteristic between these tax credits and benefits—for people out of the labour market. National insurance benefits are by and large (although not exclusively) for people outside the labour market, with some exceptions (such as pensioners and widows)[1]. Therefore, I do not quite see how you are going to do that. The way in which you could use the tax system, potentially, to replace national insurance benefits, is a negative income tax. A negative income tax, just like a basic income, as I understand it, dispenses with conditionality. In other words, it does not matter whether you are in the labour market or not; the crucial thing is what the level of your income is, for negative income tax, or for basic income the fact that you are resident in this country. So I cannot see how a negative income tax would fit in with the Government's emphasis on being active in the labour market in various ways.[2] I find it quite puzzling to see how tax credits themselves, in any form, can be a part of this debate; but I may not be seeing something which I ought to be seeing.

Mr Pond

  188. May I press you on that a little bit further. If we look at the history of means-tested benefits, obviously national assistance, supplementary benefits, income support, were always there as a safety net. One of the reasons for the increase in means-testing in recent years has been the decline in national insurance benefits. One of the other reasons was, of course, the fact that the original Beveridge social security system was based on an assumption that those in work would have an income sufficient to meet the needs of themselves and a small family. The extension of means-testing was very much for those who were in work but who did not have sufficient to meet those needs. So we had the introduction of family income supplement in the early 1970s, which later became family credit. We had the housing benefit provisions, again mainly to help those who were actually in work. In that context, is it not the case that the tax credits might be seen as a replacement for the means-tested benefits rather than necessarily for the national insurance element?
  (Ms Bennett) A replacement for means-tested benefits out of work?

  189. No, for those elements of means-tested benefits such as—We know family credit is going to be replaced by working families tax credit. There is an issue about how we deal with housing costs. Hopefully, we will hear something about that in the not too distant future from the Government. Certainly, when the TUC were talking about tax credits as a genuine third way, they were thinking of it as a replacement for the means-tested element and not for the national insurance element. Are you telling the Committee that you are fearful that, in fact, tax credits may be replaced with a national insurance element?
  (Ms Bennett) They certainly do appear to be a replacement for means-tested benefits in work. My worry about that is that they are actually confirming a distinction between people in work and people out of work, and people not on benefits and people on benefits, which I think is not a particularly helpful or constructive distinction. That is one of my major worries about tax credits for people in work. I agree with you that they do seem to be replacing means-tested benefit in work. Also, of course, part of that is not just the attraction of trying to say that people in work do not have to be on benefit like those out of work, but also the public expenditure attractions (because the working families tax credit is apparently not counting at all). So I can see why the Government is doing that. I can see some attractions, from their point of view, of dealing with housing costs in that way, although I think there are going to be a lot of problems if you try to have a rough and ready justice in the housing costs area, which is possible through the tax credit route. I still do not quite see—I am sorry, Chris, I may not be understanding your question—how tax credits paid from employers can replace benefits out of work. It is just possible that you could do that for pensioners perhaps, but I think it is difficult to see employer involvement in terms of paying tax credits for people who are out of work, certainly for a long time. As I say, if it is a replacement for national insurance benefits, then we are perhaps talking about a negative income tax rather than tax credits. I also think that the phrase "tax credits" is being used in a very confused way, because we have several different kinds of tax credits being introduced. Some of them are like working families tax credit—as I would see it, just a revamped means-tested benefit, with problems about the unit of delivery. Some of them are tax credits which are much broader in scope and would be a replacement for tax allowances, but not giving disproportionate benefit to people at their highest marginal tax rate. Yet others would be tax credits which are restricted towards the top of the income range, such as the child tax credit which is being proposed and which would be withdrawn from higher rate taxpayers at a tapered rate. It seems to me that we should start talking about something like: restricted tax credits; tax credits; and a third kind of tax credit. Otherwise, I think we get a bit confused about what we are talking about.

Ms Buck

  190. You touched on earlier the question of public support. You argued the case that if the Government is pretty confused about which direction it wants to go in, then clearly there is public confusion as well. You reflected on this. The two clusters of research that have been done by the DSS and Fabian Society both underpin, in a sense, what you are saying, which is a strong residual public support for the idea of getting something back in return for the contributions you make mostly when you are in work. The DSS Focus Group research also implies that there is very little distinction made between general taxation and national insurance. So what do we make of these fairly conflicting and confused public attitudes in terms of being able to choose a direction to take, given that the direction we take will have very fundamental implications? If we go further down the road of building on the contributory principle, then almost certainly it will mean contributions having to rise fairly significantly. Is there the robust public support for that? That is one question. Then I have a second related question to that. You mentioned earlier in your submission about the need to become more inclusive as part of the direction that national insurance could take. But does not becoming more inclusive into groups who have not necessarily had the connection with the workplace, does that not dilute the one very positive aspect of national insurance for the public? This is the personal pot idea, albeit one which is not real, but which is very much part of people's perception.
  (Ms Bennett) I actually found the public opinion research very reassuring. That was because I felt that, although the public seemed to value a connection between people's labour market status and their social security status, they were prepared to dilute that to a considerable extent by recognising other forms of contribution to society. So the sense of contributing was not, I did not think, interpreted as only contributing via paid employment, but in other ways as well—in particular via caring, of course. I found that quite reassuring. I found it reassuring that people did not want to see national insurance benefits means-tested—that they were not in favour of that. That despite everything which has happened to national insurance benefits, they appeared to trust the Government slightly more than private providers—and so on and so on. I thought there were lots of reassuring elements in the public's views. One of the things which I picked out in my memorandum was that people are very confused. They do not have much information, they do not have much knowledge or experience of the benefits system, by and large. They often think that national insurance contributions fund the NHS, which they do to a very small extent, but hardly at all; people think they do much more than they do. But it appeared, certainly from the focus group research, that the more they were told about the national insurance principle, the more they decided that it was basically a good idea and they would like to see it rather broader, thank you. There is a clear message in there which says: you need to be more upfront about this, Government; you need to be selling this scheme to the people. You need actually to sell social cohesion; you need to talk about it. Not necessarily explain every detail. You can send an end-of-year summary to people of what they are entitled to—that is a good idea. But it is more than that. It is about the language which is used about benefits. It is about the language which is used about beneficiaries. It is about the way in which a scheme is actually sold to the public. That is crucial because of the effect of the media on people's perceptions of benefits and beneficiaries. I thought there was a clear message in there: that this scheme needs to be sold. That there is something there to build on—which is amazing after everything which has happened to the national insurance system—but there is still something there to build on, but which would need to be exploited by Government in order to make that a more vibrant public sentiment. I do not see making the system more inclusive as diluting one of the very positive aspects of national insurance, which is the personal pot idea. This is because I think one of the tricks of Beveridge was to combine individual interest with the collective contract, with collective interest. That kind of mutuality, if you like—where you get something out but everyone else does as well, and you are pooling risks—is one of the major advantages of this kind of system. There are some people who would argue that you do need to loosen and dilute the contributory principle in order to rejuvenate it. That is the opposite—or you could argue it is the opposite—from what you said in your question. I certainly do not see it as contradictory as might be thought.

  191. You covered a couple of the other questions I was going to ask, which is great. Thank you very much for doing that. If I may follow a particular point, which again you have answered. If we were to build on the insurance-based benefit to float a reasonable number of people off means-testing and to rejuvenate that directly, as well as to widen the base, are the conditions in place now? What is necessary to build the public support for the additional investment, which would have to come from them to make it possible?
  (Ms Bennett) I do not know exactly. I think there is some support there. I think it is what I said before. You would need to build a base of popular support for this, and you do not do that by the kind of ambivalent attitudes and the kind of policy actions which we have sometimes seen by governments of both political persuasions in recent years. As I say, it is remarkable that the public support is there to the extent that it still is, but in order to build that the two go along together. You would have to have a reversal of the policy to start creating the virtuous circle which has now gone into a vicious circle. I do not disagree that national insurance is now in a critical state. There is a real crisis in its legitimacy, at the moment, but that does not seem to stem from public lack of support so much as government lack of commitment.

Ms Shipley

  192. Looking at the widening of the scope of the contributory principle, what contingencies do you think should be covered in a modernised contributory scheme?
  (Ms Bennett) The ones which have been proposed by others, these are not original thoughts at all—

  193. What do you think? We have had a lot of other submissions. What do you think should be covered?
  (Ms Bennett) There are two issues. One is the groups you cover and the other is contingencies. You are asking about contingencies. One would be about parental leave, for example. The problem, at the moment, is that parental leave is not going to be paid. That means that only certain people will take parental leave and that is those who can afford it. The parental leave policy has been universally welcomed; but this undermines its value. So parental leave ought to be paid. I think a better route, in terms of paying for parental leave, would be via the social insurance route in an inclusive way rather than, as has been proposed by some people, by working families tax credit or other forms of means-tested support. So that would be one suggestion. Another suggestion would be long-term care. As you know, I am sure, Germany has added a 1 per cent contribution to its social insurance in order to pay for long-term care. The Joseph Rowntree Foundation's inquiry into long-term care, although it suggested private management of the funds, was actually suggesting a form of extra social insurance payment for covering long-term care. So those are two possibilities. The public opinion surveys suggested carers. Now that is slightly different because, of course, carers do have credits at the moment, particularly home responsibilities protection; and there is a benefit for carers—invalid care allowance—which is non-contributory but is specifically for carers. Or rather, some carers, as it is very restrictive, both in its amount and in the entitlement conditions. A better benefit for carers would be another possibility.[3] So those are some of the suggestions I would support. May I just go back to the invalid care allowance point. It seems to me that one thing which people have not talked about, so far as I have seen during this inquiry in terms of written or oral evidence, is those "categorical" benefits, which are non-contributory but which are also non-means-tested. The DSS has sometimes tended to lump them in with means-tested benefits and call them all non-contributory. I would certainly distinguish them. If you want to have a benefits system which is not contributory—not even based on a contributory framework—but which is not means-tested, that is the obvious other route to go. So it seems to me that this needs to be part of your considerations—whether this is a possible route to go down. The problem is that we will have only one non-contributory income replacement benefit left, which is invalid care allowance. The other one is due to be abolished, the severe disablement allowance. There are huge attractions in that model of provision, but it does not seem to me that it has proved itself sufficiently robust yet to be the main framework of provision for non-means-tested benefit.

  194. The DSS, in its memorandum, points out that credits and home responsibilities protection have been extended in recent years, and is becoming increasingly important for people on low or intermittent earnings, or who take breaks to care for children or sick or disabled relatives. It gives a full list of contingencies for which credits can be awarded. They include: credits for approved training; credits for people starting work after completing training or education; caring when invalid care allowance is in payment; unemployment, if entitled to jobseeker's allowance; incapacity; maternity. People in receipt of family credit get credits for the purposes of retirement pension and widow's benefits. We have actually heard from a lot of witnesses, who have made a case for the contributory system to be more inclusive by crediting in to people. The present system is already doing it, for example, carers, so what is the problem?
  (Ms Bennett) I think there are a lot of people who do not recognise the extent to which the boundaries of the contributory system have expanded in the ways you have quite rightly listed. There are a lot of people who talk about social security reform as though we still have a system which has not changed since Beveridge. You will often see the beginning of people's introductory paragraphs to their memoranda—not to this Committee necessarily—but they say: "The system has remained unchanged since Beveridge but the world has changed. This is the problem with the contributory system." That is not really the case. Precisely all those lists of credits and ways of making the system more inclusive have, quite rightly, been introduced. One particular problem is people below the lower earnings limit who are earning, who are in the labour market, but who may be in a situation in which they are not credited in. What to do about people below the lower earnings limit is a big and complex issue and I know the TUC is particularly exercised about it. Of course, it will be slightly different now because the Government is introducing what the TUC calls a "zero rate band" between a phantom lower earnings limit, (in a sense,) and a new earnings limit which will be the personal tax threshold. So what you will be getting is a band of earnings on which you pay no contributions but you have contributory benefit rights—which is different from being credited in because, as I understand it, credits cannot count by themselves for benefits; they have to be combined with contributions. However, with this new zero rate band, people who are between the phantom lower earnings limit and the personal tax threshold will pay no contributions but will have an entitlement to benefits based on that band of earnings. Now, it is possible to see that being extended below the phantom lower earnings limit to an even lower lower earnings limit. The other option, which the Commission on Social Justice proposed, was that you would include everybody who was working at least eight hours a week. Another possibility is that you include the "maternity allowance group"—those earning £30 a week or over. (I do not know where the £30 a week came from; it may be because it is related to the single person's benefit in some way, I do not know.) That is another option. There are lots of options. The issues have been: one, do you actually ask people for contributions, and that makes them feel more part of the system; or is that unfair to low-paid workers who have already got very stretched incomes, so do you credit them? Two, what do you do about benefit levels for people who do not earn a living income from their earnings anyway and, therefore, if you gave them a full benefit level they would probably have benefit when they were sick or unemployed which was higher than their earnings when they were in work? So there are crucial issues which overlap with the issue which I think is the most difficult in the social security system, which is what do you do about part-time workers on social security benefits and that lower earnings limit issue overlaps with the part-time workers issue. Like other people, I have struggled with this for years and certainly the Commission on Social Justice proposed part-time benefits, particularly a part-time unemployment benefit for people who would say they were available for work for part of the week but were not available for the other part of the week because they were doing something else. The history of the national insurance system recently has been that we are now much more "all or nothing" than we used to be—which I think is a shame if you are looking at a flexible labour market. We used to be able to have a half rate of benefit for a half contribution record. We used to be able to have a three-quarter rate of benefit for a three-quarter contribution record. We used to have a rule by which some people who used to work part-time could get unemployment benefit for the days on which they used to work and were available for work, rather than a full week's benefit. There are all sorts of ways in which you have now got 100 per cent or nothing, whereas what a lot of people are arguing for, quite rightly, is ways in which you might combine presence in the labour market with benefit receipt, or ways in which you might bring people who have only had a partial presence in the labour market into benefit receipt when they do not have that presence any longer. Those are exciting but difficult areas, which it would be worth launching another inquiry on.


  195. I think we may just take them one at a time. Can I ask you some brutal questions about money. You were making a very compelling case in your very lucid and eloquent way, but if you are going to broaden some of the categories and the contingencies are recovered is that not going to cost quite a lot of money? Is anybody doing any work that could help us with even very rough estimates about what kind of sums of money we would be involved in and, indeed, how you might think about financing that because there are the three partners, there is the Government, although there is a nil Treasury grant at the moment, there are employer contributions and employee? Is that balance right? If you did decide to lift the upper earnings limit and you were making some interesting suggestions with some qualifications about the difficulties, what would that involve? I was particularly interested in the knock-on effect on contracting out and it would help me—and my colleagues may understand that better than I do—to know if there is anything that we could follow just to pursue that thought because it is an interesting one that we must be careful to take into account. Can you talk to us a wee bit about that, although maybe the answer is that you do not have a calculator that is any better than ours, but if that is the case maybe we should know about it. Could you help us with that?
  (Ms Bennett) I think there may be somebody here who is much more expert on pensions than I am. I would not pretend to have any expertise on pensions or contracting out; so if I could just leave that one aside and suggest you ask somebody who does, that would be great. However, obviously affordability is an issue. I think there have been different projections on whether that is a huge problem or not in terms of the current structure of benefits and that appears to hinge on two things: one is that we have not got a problem compared with other countries because we have already had the ageing bulge; the other is that we have not got a problem compared with other countries because of the decision to price-link the old age pension. Calculations have been done, for example, to show that the current national insurance system is completely affordable and, indeed, I believe, leads to lower contribution rates by 2020 or so than it has got now. So I do not think it is a question of the affordability of the current system; it is, as you put it, a question of the affordability of improvements. There are technical issues about that and there are political issues about that. The technical issues would be how much is it going to cost to extend provision, for example, to people under the lower earnings limit at the moment or how much is it going to cost to credit in a wider group of people or whatever. The work that was done for the TUC by Emma Maclennan actually suggested that bringing in people under the lower earnings limit would cost about £150 million—which does not sound very much, and that is probably because they do not earn very much and so we would not give them very much! But that is not out of this world in terms of making a more inclusive system, for example, and obviously it compares very favourably with £4.2 billion, if you thought you could phase out the upper earnings limit completely. There are ways in which you can approach doing other calculations. But I am not sure how easy it is to do a complete calculation of replacing benefits for those who are currently on means-tested benefits (or not getting anything) by non-means-tested benefits more generally, by relaxing contribution conditions. I did suggest in my memorandum that the three-way financing was something that might be looked at and, in particular, if you look at bringing in people who are currently outside the contributory system and who may not have a very secure or long-term presence in the labour market, you could argue that that is more appropriate to financing via general taxation (or to more of a share of financing via general taxation). Therefore, if you were moving the system in that direction you might increase the share of the Treasury supplement, for example. The other issues which arise are obviously how much more can employees bear, given that the burden of the recent increases in national insurance contributions seems to have been borne by them more than by employers. But the other side of that is how much more can employers bear, given that the European Union employment strategy appears to include being very careful about, if not reducing, costs on labour. I think there are limits.[4] I think the political side is quite interesting because, as I was saying before, if you are going to go for a benefits system which is only for poor people, then you may say that the costs are going to be a lot less; but most people who say they want a benefits system that is not "wasted" on the contributory benefits, but goes to "genuinely poor people" only say they want to do that in order to increase the benefits. However, it seems to me very difficult, if you change the payments side, for it not to change the politics of the financing side. There may well be a change in the willingness to finance benefits if there is a lot of change in the categories who benefit from those payments. So I do not think it is a fixed sum of money. Some of the technocrats who write about social security reform tend to suggest that there is a fixed pot of money and that if you took it from these people and redistributed it to those people, this would be much more rational and redistributive. That may be all very well in theory; but in practice we have to take account of popular opinion and the political views of the situation in which we are. That means that you have to look at quid pro quos on the financing and payments side, including bringing in what would happen on private provision and what would happen in terms of people asking for subsidies for that private provision, if it was an alternative.

  196. You rather dismissed the idea that employees really would be a fair target in terms of altering the balance because you said that they carried more than their fair share of the burden. I would be interested in a sentence or two on that and a bit of background. Surely if the idea is so compelling then if you are going to get better benefits in a contributory system then the contributions should bear the burden of some of the increases in the developments. I am not talking about the affordability of the system, that is absolutely understood and agreed.
  (Ms Bennett) No, sorry, I was not suggesting that you would not be able to increase those; I was just saying there will be limits on various of the elements of the possible payments. It appears that we have a fairly elastic public acceptance of increases in national insurance contributions; that is certainly what governments have found over the last few years. I am merely saying the balance has shifted between the different components of the financing.

Mr Leigh

  197. I apologise for being late, I was at another meeting in the House. In your paper at paragraph 3.4, and if you have dealt with this I apologise, you say: "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." In paragraph 5.8, you say: The conclusion of most informed commentators is that the role of private insurance is inevitably circumscribed—at least in the absence of compulsion, controls...." What I wonder is what would be your view, although it is true that people have this existing attitude that they prefer state provision, if the state said to young people, people coming on the labour market "from now on we will compel you to put your contributions not in a pool which is going to ensure that when you retire you will get some derisory pension that does not keep pace with earnings, but we will compel you to put your pension into a funded system which will be highly regulated but run by a private company and everybody in your age group will have to do this"? Do you not think that there might be interest, indeed public confidence, in that sort of proposal?
  (Ms Bennett) The Government did not appear to think so, because it seems to have considered that in its pension proposals and rejected the compulsion element. I do not know. I think it is very interesting, the insurers' attitudes towards this, because what they tend to say is "we have our role, and the state has its role; and we can do the things that we do very well, and we compete in a market to do that, and the state does what it does and we cannot substitute for the state". In particular, the way in which private providers tend to say that they cannot substitute for the state is in the pooling of a wide variety of different risks. They do pool risks within a fairly narrow, restricted group, but they cannot pool risks within a much wider group. And, of course, they also say "the state can draw on sources of finance which are not available to us". That is not quite the same as pensions which are more about a desirable risk (of growing old); they are about savings rather than risk. I think those have always been treated rather differently within our social security system—not always, but recently—in terms of the partnership between the state and private providers. If you are suggesting, however, that you should privatise the National Insurance system I think it would be very difficult for private providers to do that any more efficiently or effectively than the state without regulation and state subsidies of a kind which would make its private nature slightly artificial. Presumably the other thing you are getting at is funding versus pay as you go provision because of the idea of ownership which a private pot of savings might give to people and because of the advantages which funding is said to give over pay as you go in terms of investment.

  198. Yes.
  (Ms Bennett) I think the latter argument is contested. I think there are different arguments either way about whether it encourages more investment and savings if you have funded pension provision (of which we already have a lot in the UK). However, the problems which have been identified with changing from pay as you go to funded provision are the problems of the transitional generation who have to pay twice. That will be the case whether you set up a funded state system, or a funded private system as you are suggesting. I do not think it gets you over that problem. The other thing, I think, is that whether you have a funded or a pay as you go system to finance your pension provision, at the end of the day the standard of living of pensioners in the future is actually going to be dependent on the productivity of the workforce and the relationship of other dependants to pensioners in the future, rather than on whether they are depending on annuities or state provision. It is also going to depend on the attitudes of the Government of the day, of course, towards people getting annuities (or dividends, or whatever) and people getting state pensions. There is an illusion of control if you have a private funded pot of money; but I am not sure that it gives as much control as may be supposed.

  199. Still, if you are a young person and you are required now when you enter the labour market to put ten per cent of your income into your own personal funded scheme as opposed to paying ten per cent of your income to National Insurance, as you say you will probably have to pay for the transitional arrangements as well, and I accept all that, you do not deny, do you, that it is still going to give you a much better pension than the existing state pension in 30 or 40 years' time, is it not?
  (Ms Bennett) I am not sure that it is. The work by John Hills and colleagues at LSE recently showed that—not just for people on low incomes and with disadvantages, but also for people on average incomes and with ordinary risks and contingencies of every day life—private provision tended to give a worse deal than state provision.[5]

  200. Even if everybody was prepared to do it in the new system? If everyone was required to do it rather.
  (Ms Bennett) I do not suppose they would have been able to look at that. If everybody is required to do it and you have tight regulation of schemes to prevent the kinds of problems we have had with private provision recently—and you might have state subsidies, in order to ensure that those people who would lose out disproportionately in a private scheme actually get as much as the state wants them to—it does not seem to me that you are that far from state provision anyway; it seems to me that the boundary is rather artificial. The other argument which is always being made, again by that LSE team, is that the state ends up with the bad risks. The only way it can avoid ending up with the bad risks is the kind of compulsion that you are talking about. That is why that kind of compulsory scheme seems to me—and, I think, the current Government—to approach the nature of a state scheme really.

  Chairman: That has been very valuable for us. Your evidence, both written and oral, will reap careful study. We are very grateful to you for your contribution this morning. We are still open for submissions. We hope to be able to bring the inquiry to a conclusion in the not too distant future but if there are any other bits and pieces of information, and that applies to any other experts in the field, we will be very pleased to have them. Thank you very much for your time.

1  Note by Witness: Pensioners and widows do not have an "earnings rule" when receiving national insurance benefits. Back
2  Note by Witness: A negative income tax would also suffer from similar problems which apply to those to means-tested benefits. (See page 114.) Back
3  Note by Witness: The alternative approach would be to improve and amend the current non-contributory benefit. Back
4  Note by Witness: As stated elsewhere this is not intended to suggest that there is no scope for increasing contributions (see above for example on phasing out the upper earning limit)-merely to suggest some of the issues which would be brought into such a debate. The crucial factor would be the commitment from Government to a revitalised social insurance system. Back
5  Note by Witness: See, for example, John Hills with Karen Gardiner on the LSE Welfare State Programme (revised edition), The Future of Welfare: A guide to the Debate, Joseph Rowntree Foundation, 1997 Back

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