Examination of witness (Questions 260
- 281)
WEDNESDAY 10 NOVEMBER 1999
PROFESSOR RICHARD
DISNEY
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.
Chairman
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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