Examination of witness (Questions 178
- 200)
WEDNESDAY 14 JULY 1999
MS FRAN
BENNETT was examined.
Chairman
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.
Chairman
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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