Select Committee on Social Security Minutes of Evidence

Examination of witness (Questions 260 - 281)



  260. In summary, you think there is obviously a future for the social insurance principle to pool risk.
  (Professor Disney) Yes.

  261. We have to be honest with people and tell them that they should make private provision, inadequate or risky as it may be in some people's minds. You are moving away from the kind of model where we create a wonderful new, funded state pension system. You think that is unrealistic, do you?
  (Professor Disney) We do not have that model.

  262. I am not saying we have at the moment but in an ideal world do you think that that would be something we should try to create or is it just unobtainable?
  (Professor Disney) I would like to see a lot more funding of pensions but then there is a whole new raft of issues arising if I start that hare running. Some of the problems I allude to would not be the case if we had a funded national insurance system because there would be some assets to match the liabilities and the government could not necessarily then come along and say, "I am sorry; we have just decided to cut all the benefits", because in a sense there would be a pot of money there. To my knowledge, nobody is proposing a funded national insurance system and if they are the reason they would be concerned about that is because a lot of people are then not only going to have to pay outgoings to existing pensioners but they are also going to have to accumulate a national insurance contribution for their own future retirement and that will be quite expensive.

  263. You have done your sums on this, have you? You think it is politically possible to deliver, bearing in mind your last answer?
  (Professor Disney) No, I do not think politically it is possible to deliver and that is why the government has done it by stealth, persuading people in effect that the public system is not going to deliver and you have to jolly well go and get some private provision. That is the way that in the future many more people, one hopes, will retire with adequate private provision and the residual role of the government will be less. That is the way we have gone into a funded system, by offering both incentives to people to contract out but on the other hand correctly raising worries that they are ever going to get anything from the state scheme.


  264. Just thinking about the contributory principle, do you think there is any role for a state retirement pension based on contributory principles? Why not just pay that out of general taxation?
  (Professor Disney) Personally, I would do that because we have so loosened the contributory requirements that periods of inactivity, for various reasons, count towards a pension. We need public intervention. I would prefer to separate the insurance aspect of pensions from the redistributive aspects of pensions. We have to have a redistributive pension. Some people are just not going to save enough. We have to provide something for those people. On the margin, that is going to have a disincentive effect. Those people would probably not have saved that much anyway; whereas we want to encourage people who have more saving and have more income to devote much of that to saving for their retirement. Because of the problems of income testing, we might still want to have a residual element where everybody got a flat something out of the system—call it contributory; call it contingency; I do not mind what you call it—and then people who had less money might get a bit more than that and the rest of provision would be privately funded. That seems to be the way we are moving anyway, frankly, even though we have not abandoned the contribution principle. That seems to be the gist of the Pension Green Paper.

Dr Naysmith

  265. I think most of the areas I wanted to explore have been explored already, but is it fair to say that you do not think a contributory system is necessary at all? Would that be pushing it too far?
  (Professor Disney) I think people should be encouraged to save, particularly for retirement. They have to make contributions. I would prefer that to be through a funded system. We could have a more contribution principle orientated scheme but it would not look like some of the suggestions I have seen put to the Committee. It would be something more like the Swedish system where everybody has a notional account, an unfunded scheme. The money that is credited to it is then increased in line with productivity growth and the pension they get at the end is entirely related to their contributions. If they do not make contributions, they do not get any money, other than a sort of floor system. That is a contribution based system. But a system where you say let us widen the contribution net and bring in all sorts of people who are not going to make contributions but they should be entitled to a contributory benefit, to me, is just a form of redistribution. That has nothing to do with the contributory principle at all. We should separate the national insurance system from the contributory principle.

  266. I agree but that is not what we are doing now. Is there any point in maintaining the idea we have that there is a pot? As you said at the beginning, lots of people think they are putting money away and it is being kept in a pot for them. Is there any point in maintaining this rather flimsy idea?
  (Professor Disney) Certainly I would integrate as far as I could the contribution structure with the tax structure, which is what the current government has been doing. I would denounce any illusion there was a pot of money. It is like an earmarked tax argument. Do you actually want to have a tax which is hypothecated towards retirement provision and then say, "Okay, let's call part of those contributions towards retirement and perhaps other contingencies as well", because people are more prepared to pay that kind of tax, even though they now recognise that what they are going to get out of the system depends on the future generosity of future taxpayers. That is fine by me but that is not quite what I would call the contributory principle.

  267. People have suggested to this Committee in the past that people should be given an outline of all they are entitled to from their past contributions every year so that they know what their benefits are likely to be. From what you were saying this morning, that is just nonsense.
  (Professor Disney) It would be an interesting thing to do. It is nonsense in the following sense: do they know whether those pensions at 60 or 65 are going to be indexed to prices or earnings? Do they know whether the lower earnings limit is going to be this value or that value, because that is going to have an immense effect on the calculation. They do not know those things. It is like the suggestion that we should tell people what their occupational pension is going to be worth at 65, assuming they work for the same company for 40 years, which is equally absurd in my view because if they leave that job the next day they are not going to get anything like that. I am not clear quite what contingency related statements of account mean. It would be desirable to show how much they put in. That would be quite interesting and people would like to know. Why not do that for all taxes? Why not say, "Over my lifetime I have paid £500,000 in taxes"?

Mr Leigh

  268. Because there would be a riot.
  (Professor Disney) It was a rhetorical question.

Dr Naysmith

  269. Turning to your specific paper, in paragraph 29, you talk about incapacity benefit. It looks as if what you are proposing is that we abolish incapacity benefit completely, partly because you talk about the changing patterns of work and so on. Would that be your view? Would you want another benefit which is conditional purely on health status instead or is that a misreading of it?
  (Professor Disney) This is not written by me. It is written by my colleagues, but I have read it. That is my interpretation of what they have written. Is incapacity benefit being paid to people because they have higher expenditure or because they are incapacitated, which is a perfectly good reason for giving people money, or is it to compensate them for being inactive? If it is the latter, you want to take it away if they find a job. If it is the former, then you do not want to take it away if they find a job. They should get it anyway. In other words, contingency should be unrelated to your other income.

  270. That is part of the government's argument about what is going on this week. It is related to not being able to work rather than extra needs for incapacity.
  (Professor Disney) That would have to be their justification for doing this, but a counter argument would be to say that, just like we give child benefit or one parent benefit, we give incapacity benefit to people who have medical problems to compensate them for those. Therefore, they should continue to receive it, whether they are in work or not. If you withdraw it, then it does become a disincentive to work, as we know with invalidity benefit, when it was tax free for older workers. They were probably much better off on tax free invalidity benefit than other avenues. It is a question of where there is an enormous disincentive effect, even within a contributory system because it is not the income testing of the benefit that is relevant; it is simply that the whole thing is taken away as soon as you work.

Mr Pond

  271. My apologies for arriving after the beginning of your session. There are two points of clarification. One was the question about the net return on savings, because of the debate about the role of an earnings-related guaranteed minimum income on the pension in reducing people's willingness to make their own provision. If I remember from the dark, distant days of my economics, there are always in these matters two countervailing effects. Is it not possible that one of the effects of that would be that people make greater provision if they know that the net return, over and above what they get on guaranteed minimum income, is going to be reduced, as well as the balancing effect where some may think it is just not worth a candle?
  (Professor Disney) Yes, what you are saying is, if my economics is less dim and distant, if you take money away from people basically they have to save harder to get back to where they were, so the disincentive is on the margin. Clearly, there is something to that in the sense that the continued cutbacks in public provision of pensions have been one reason why people have been more anxious to save in various retirement instruments; whereas the kind of incentive effects operate on the margins. What you are saying is that if we withdraw this benefit in a particular way then that may or may not discourage you from saving. Particularly in the labour market, one is interested in those marginal decisions. With pensions, because it is over your whole lifetime, it is true, but I do not quite see that that is really related to the earnings related versus separate state pension debate. I think the income effect is much more related to how people perceive the overall generosity of the system. If they think overall the system is less generous they will tend to save more but on the margin they are going to look at how particular rules concerning how capital assets or income are tested in affecting your pension. They are going to look at that on the margin as to how much saving they will do.

  272. That was an interesting answer in relation to Doug Naysmith's questioning. Is there a useful distinction here between the contributory principle and the concept of social insurance, perhaps where social or maybe national insurance, if you want to keep the name, is much more I suppose the continental European approach of saying that if we pool our risks and our resources we can provide some sort of safety net for the majority of people; but to accept that the contributory principle itself, in which contributions are directly related to benefits, is probably one that we are moving away from and that may be no bad thing? Would that be your position?
  (Professor Disney) Yes. There must be a limit on how you pool risks in a social insurance system in the sense that it is obvious that some people are going to do rather better than other people, just because they live longer and so on. All insurance pools risks. It is not just social insurance that pools risks. A private insurer pools risks. That is what insurance is. We can have some provisions where, for example, we treat men and women equally even though they may live to different ages, but there comes a point where I guess we have moved so far away from contributions bearing any relation to benefits that it is hard to call that a social insurance system at all. That is why many of our continental analysts regard not the original Beveridge conception—which they do not fully understand but of course was a social insurance with a flat benefit and flat contribution—but what we have as a purely redistributive system in which the amount of money you get out is related to some desire to redistribute and the amount you put in is related to your lifetime income. That cannot be seen to be a kind of contributory principle. It is a grey area of how far you move away from pure actuarially fair insurance before it no longer becomes insurance and just becomes redistribution.

Mr Swayne

  273. You have been fairly positive in the scientific sense in the way that you have answered the questions. Other commentators have had a much more normative attitude to the issues. For example, Frank Field was quite clear that he saw the contributory principle as encouraging what he regarded as desirable social behaviour, contributions, initiative, thrift, prudence, and he also claimed Beveridge's support for his point of view. What do you think of that then?
  (Professor Disney) I have reported on what is my comparative advantage to use technical jargon as an economist, which are things I understand rather than normative principles. In the original Beveridge scheme and indeed in quite a lot of what Frank Field has written, you can see something that is much closer to what I would call a contributory principle based insurance system. I entirely agree with his argument, in a positive sense, that if you want to encourage thrift and so on you should have a system by which if I contribute more I get more benefit. I do not think that is particularly a normative point; I think that is a positive point. If you think normative things flow from that, that is fine by me, although I do not really claim to have any expertise in this.

Mr Leigh

  274. What does "normative" mean?
  (Professor Disney) I do not quite know. I assume it means social values.

Mr Swayne

  275. A value judgment. You accept that the principle that underlies that is that the system that we choose will alter the behaviour of the recipients, the contributors?
  (Professor Disney) I think that must be true, but my disagreement with that perspective is to the extent that it says that what we have now in national insurance constitutes that kind of system.

  276. Yes, but is that not because, as you spent considerable time saying in your opening address, of the confusion that people have as to what the current system actually constitutes? You also made reference to the fact that people do prefer to pay national insurance rather than tax because they have some, perhaps mistaken, concept of what it is actually paying for. Nevertheless, given that these confusions exist, perhaps something could be salvaged from the wreckage of what we have by addressing those confusions.
  (Professor Disney) Suppose everybody understood it and said, "It is clear now that the amount I save in contributions is not necessarily going to guarantee anything when I retire", putting it at its extreme. How does that become a system in which thrift and incentive are encouraged?

  277. I agree entirely with you there but you obviously have to address the other side of the equation, which is what you will get back in return.
  (Professor Disney) If you said should we have a system in which people save and, by saving, can actually accrue rights to pensions and would that be a good thing on balance, I would have to say probably, yes. That is where I agree with Frank Field, but that is not what we have. Therefore, if we cut through the confusion and say that what we actually have is future generations of voters who are going to decide how to treat you, irrespective of how much you put in—it depends on how many future voters there are; if there are a lot of you, because of the baby boom, retiring and not many future workers, they are not so keen on putting in large pots of money—then it is not clear that it has those kinds of incentives in the system any more.

Mrs Humble

  278. One of our difficulties is to look to the future. We have had lots of detailed accounts of the past and some of the deficiencies of the present, but working out where we want to go is altogether more difficult. We have talked about pooled risk. You mentioned earlier that people had a false sense of security with the existing system. Desmond Swayne has just explored all these other issues about whether we want to use our social security system to change society, to bring about more individual responsibility etc. What do you think our welfare state should be for? It is always the rotten question at the end!
  (Professor Disney) You have to ask what you are trying to deliver and not get hung up on past history, except to the extent that it limits what you can do that is feasible, which is I realise a major limitation. To some extent, recent reform has been bound up in overcoming various difficulties and complexities and reconciling different kinds of views rather than actually saying, "What is this all about?", if I understand the question. I think, for example in pensions, the idea of separately thinking about the insurance components and the redistribution component is quite a simple way of thinking about what we want to do. We want to decide what minimum the state provides to everybody and we then want to decide how to have a system that best allows people to save on top of that for their own retirement. Getting that balance right is the key thing. With other contingencies that occur during the working life, the incentive effects are incredibly important. We have to work out that the system should not incur great penalties to people who go into work and go out of, say, disability or unemployment. There are all kinds of traps and disincentives there. We have to decide what contingencies we want to support and then make sure that people in those contingencies do not get discouraged from going back into economic activity. Those are the basic principles. You can see a lot of what is going on is going in that direction. I do not dispute that. Sometimes you get wrapped up in quite complex reforms which are conditioned on past history and people lose track of how the whole puzzle fits together.

  279. One of the issues which we have not explored very much is poverty and to what extent the social security system should address the issue of poverty. I would like you to comment on that within the context of if we are having a social security system that is looking at issues to do with poverty and therefore targeting people in that way, will it undermine the overall impression that people have of a welfare state that is providing that pooled risk, that we are all sharing in some way? It goes back to your earlier comments about people's perceptions and those perceptions are based on the fact that they believe they are paying in now lest they might need to call upon that "fund" in the future.
  (Professor Disney) I think your last sentence is the right way of thinking about it. Even with redistribution people are buying insurance. It is always a tax clearly but the tax system is a form of buying insurance against poverty, against adverse life chances. It seems to me that is an important role for Government and it should be rather explicit about it. What the current system is doing is persuading people that they are buying their own pensions, which they are not really, but what you are actually doing is you are buying redistribution. I do not say that is a bad idea, in fact I think it is rather a good idea.

  280. Finally, to sum up, are we hung up on this terminology of Contributory Principle?
  (Professor Disney) Definitely.

  281. Should we just forget about it and instead of trying to tinker and amend the system should we just scrap it and move on?
  (Professor Disney) There are many countries that take the Contributory Principle seriously, that is what I am saying. Ironically we seem hung up on it and we do not take it seriously in my view.

  Chairman: That has been very valuable, Richard, very thought provoking, and your submission is helpful too. Thank you very much for coming this morning.

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