Select Committee on Social Security Fifth Report


The values of National Insurance

Collective provision and solidarity

  39. One of the key values emphasised by supporters of the contributory principle is, in the words of Mr Field, "its role in forging social solidarity in an increasingly polarised society. National Insurance supports social solidarity by pooling risk across the population so that higher earners and those with good life chances contribute more than those whose prospects are less fortunate."[73] This view was echoed by the TUC:

    "[It is] a system that chimes with basic assumptions about what is fair. People can make sense of a system which "I pay in, so I have a right to claim, but it is helping those who are weaker than me a bit more than it helps me". Most people want to see a bit of redistribution but they want to see themselves having some rights as well and in a rough and ready way National Insurance is, I think, appealing to basic beliefs about social justice."[74]

40. Unlike private insurance, where those with higher risk are likely to have to pay more or can even be excluded from cover, the compulsory nature of the contributory system means that "every worker who meets the contribution conditions is covered, and none have to pay higher premiums."[75] As Ms Bennett commented. "it...brings together self-interest and pooling of risks, rather than separating them (unlike individual private insurance arrangements); this contributes to the goal of increasing social cohesion"[76]

A contract between the State and the individual

  41. The Social Justice Commission argued that "social insurance is a contract between individuals and society. When we are earning, we accept the responsibility of paying in; when we are not, we have the right to draw out."[77] The idea that payment of contributions constitutes a form of contract is one which appears to be widely shared. Dr Bruce Stafford, author of a DSS study on the public's perceptions of National Insurance and of the contributory principle,[78] commented "generally, the respondents believed that through their contributions they had secured a contract with the state that gave them a 'right' to contributory benefits."[79] Mr Field argued that this sense of a contract, with a balance between responsibilities and rights, fitted well with the present Government's welfare agenda:

    "The contributory principle also fits in with the Government's desire for a transparent and easily understood welfare contract between the state and the individual - as was set out in the Green Paper A New Contract for Welfare: New Ambitions for Our Country.[80] For this to work, contributions have to be hypothecated, and benefits clearly defined."[81]

42. The nature of the contributory system means that the contributor's money is paid into a separate, designated Fund, from which all benefits are then paid. There is a relationship between contributions made into the National Insurance Fund and the benefits which can then be paid out of the Fund. The costs are clear and are more able to be scrutinised. As is discussed above, it is argued that this leads to greater accountability to contributors than would be the case with money raised through general taxation.

43. Some commentators argue that the contract implicit in the contributory principle alters the

relationship between citizen and the State; contributors are owed their benefits on the basis that they have paid for them; not on the grace and favour of the Government of the time. Dr Sheila Lawlor, in reviewing the history of the contributory principle, suggested that "contribution by the individual ... meant that in such things the relationship between citizen and the state was not one of dependency or supplicancy, but of self-reliance."[82] CPAG observed that the public sense that such a contract exists may have acted as a buttress, protecting National Insurance benefits from cuts:

    "the strength of the contributory principle which is why those benefits are still there and what has protected, I think, further cuts is because of this idea that you pay in and you take out and the principle itself, I would suggest, has made it more difficult for governments to make cuts in the social security system which is why we say that we defend it"[83]


  44. Supporters of the contributory principle argue that it encourages self-reliance in two ways. Firstly, by enabling people to pay in to the scheme when they are working and relatively prosperous, it allows them to re-distribute their income to times when income is low - such as illness, maternity, and unemployment.[84] Secondly, a key element of Beveridge's vision was that contributory benefits encouraged people to make further financial self-provision because, unlike means-tested benefits, they reaped the full value of any additional income or savings.[85] As Mr Field put it, "the [pro-] insurance side ... sees welfare as an important agent in building floors under people on which they can build by their own efforts and that if they work harder and if they save and tell the truth they are not going to be penalised."[86] Ms Bennett linked this aspect of the contributory principle to the aims of the present Government:

    ""in principle, contributory benefits do not penalise those with savings or private insurance arrangements; they thereby embody the 'partnership' between public and private provision envisaged in the welfare reform Green Paper...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."[87]

45. Because contributory benefits are earned as individual benefit, they have a particular role in assisting women's financial independence. The Low Pay Unit contrasted this with means-tested benefits:

    "means testing is based on household income and therefore [women] may well not under that system...have their income from work replaced, depending on their spouse's income and the income of others in the household. The National Insurance benefit is their individual income replacement. It does not depend on household income. I think that is a very important principle to maintain."[88]

The focus on work

  46. The contributory system is centred around paid employment, with employers and employees paying towards the protection of those who have been in the labour market. Professor Alcock drew attention to the indirect support the contributory system gives to the labour market. People in work receive wages, and those absent from work receive benefits. Since benefit levels are set below wage levels, they act as an incentive to find work. He commented, "this is logical and popular; and it provides a natural support for labour discipline".[89] The strong link with working is one aspect of the contributory principle particularly welcomed by the TUC, which said:

    "this system foregrounds work. Unions are opposed to grand schemes of benefit reform predicated on the assumption that we now live in a 'post-employment society' or that 'full employment is dead.' Work isn't only a source of income, it provides individuals with a role in society - many studies have shown the importance of work for psychological well being. A benefit system which does not assume that work is the norm for most people would take social and labour market policy in the wrong direction. Instead, benefits should encourage people of working age to enter and remain in employment. This can be achieved by a system of contributory benefits, which are designed to provide for contingencies when workers' earnings are interrupted, and which are funded from the world of work."[90]

47. Ms Bennett pointed out that the assumption of the primacy of paid employment which underpins the contributory principle mirrored the Government's goals for welfare reform; both have at their centre paid work, whilst giving regard to other groups such as carers.

Administratively simple and inexpensive

  48. Professor Alcock argued that a contribution based system carried with it an "administrative gain" which was quite significant, compared to means-tested benefits. Not only was it simpler to process applications, and monitor receipt of benefits, but there was also the avoidance of "the emotional and practical and political consequences" of an administration which, he said, in a means-tested system, tends to lead to intrusion, detailed questioning, suspicion and stigma.[91]

49. CPAG pointed out that benefits based on contributions are less expensive to administer than means-tested benefits. They put this down to less need for fact finding; fewer (if any) reviews following changes in income, and less scope for error in payment.[92] Contribution-based Jobseeker's Allowance, for example, costs an average of £5.15 per week to administer for each beneficiary, whereas income-based Jobseeker's Allowance (which has the same rules of entitlement, but is means-tested) costs £6.11 per week per beneficiary.[93]

Public support

  50. A key feature of the contributory principle for its proponents is its popular appeal. Research carried out on behalf of the Department of Social Security found that there was public support for the contributory principle for National Insurance benefits.[94] Most of the respondents involved in the study favoured a benefit system which involved a pooling of risk across as wide a range of groups as possible, and flat rate benefits but earnings-related contributions, suggesting support for redistribution. Most were not in favour of means-testing contributory benefits.[95] Research by the Fabian Society similarly found widespread support for the principle of social insurance, involving both pooled risk across the population and an element of redistribution.[96] Age Concern noted that its extensive contact with older people indicates that most are very supportive of the principle of contributory pensions and benefits.[97]

51. The TUC told the Committee that its own campaigning experiences suggested that "when they understand the issues at stake, most workers strongly support National Insurance. In our campaign against the introduction of Jobseeker's Allowance, we found that the proposal to halve the duration of contributory benefit for unemployed people without any compensating reduction in contributions was the issue most likely to make people support the campaign. People were angry that something they had paid for was being taken away from them."[98]

52. This sense of ownership of contributory benefits by the public was echoed by the Government Actuary, who felt that people regarded it as "something that they have made a contribution towards even if there is no direct link between their contribution and what benefit they get. There is still a linkage there which helps people to feel that they can take the benefits with honour, which I think is quite different from the situation where you have benefits which are provided out of the state budget"[99] The DSS study above confirmed that people found the payment of National Insurance contributions more acceptable than paying taxes, because they say the former as conferring a right to a benefit.[100] Indeed, the difference in public attitudes to paying taxes compared to National Insurance contributions was referred to by Mr Field in criticising the present Government's tendency to treat contributions simply as a form of tax. He asked, "how politically astute it is for the present Government to continue integrating National Insurance - a scheme which commands strong public support, with direct taxation - a source of revenue famed for its unpopularity with the electorate?"[101]

Do the values attached to National Insurance stand up?

53. In examining the views of those who are critical of National Insurance, we encountered views from a variety of perspectives. In some cases the objections are fundamental; in others, they are based on a perception that, however laudable the values, the system has not worked in practice; a further group recognised that there were problems, but argue that the system can be overhauled and improved.

Does National Insurance really aid social solidarity?

54. Perhaps the biggest stumbling block to claims that National Insurance helps to forge social solidarity is the fact that, in practice, most people today seem unaware of the wider ideology attached to National Insurance, or even what their contributions pay for. The DSS research on attitudes towards the contributory principle found that, generally, people saw no real distinction between paying National Insurance and tax. When asked to identify what their contributions paid for, the one item identified by all groups questioned was the health service. The TUC admitted that its attempts to campaign against the introduction of Jobseeker's Allowance (which involved reducing from 12 to 6 months the period for which contributory benefit for unemployed people was paid) were hampered by people's lack of understanding of how the contributory system worked:

55. The DSS research highlighted that many saw their contributions as a form of personal kitty.[103] In Professor Disney's words, "many people do think there is a pot of money somewhere in the system with their name on it."[104] This view does not necessarily accord with the ethic of mutuality implicit in the contributory principle. It was even suggested that greater transparency about the redistributive elements of National Insurance might make people less willing to support it. The Director of CPAG said, "I think there are dangers with a hypothecated tax approach because it can make the principles of redistribution, for example, vulnerable. In terms of identifying where the money is going it becomes politically unpopular to continue to fund that service or that benefit in that way. I think if it is more exposed in terms of the contribution there are risks in that."[105]

How fair is National Insurance?

  56. Although many see the contributory principle as embodying notions of fairness and equity, the DSS pointed out that, in practice, "the system tends to favour higher earners and those with full-time, regular work patterns, while lower earners and part-time workers with less regular work patterns may find it difficult to qualify for equivalent benefits." National Insurance contributions are far more regressive in their effect than income tax. The TUC drew attention to the fact that "not only are NIC [National Insurance contribution] rates not progressively raised as income rises, for workers with earnings above the Upper Earnings Limit the proportion of their income paid as contributions falls if their earnings rise."[106]

57. Furthermore, since 1980, the Upper Earnings Limit has been uprated in line with prices not earnings. Because earnings have consistently risen at a faster rate than prices, higher paid workers are paying National Insurance contributions on an ever diminishing proportion of their wages. In 1982, the Upper Earnings Limit represented 136 per cent of average male earnings. In 1999, it had fallen to approximately 110 per cent of average male earnings.[107] As a result, there was a £800 million reduction in National Insurance Fund contribution income in 1999-00 alone.[108] In April 2000 and April 2001, the Upper Earnings Limit is being raised by more than price inflation. "However," comments the Government Actuary, "as the UEL is expected to be approximately 115 per cent of male full time average earnings in 2001, these increases merely bring the level of the UEL back to equivalent levels in the early 1990s, not the higher levels in the early 1980s."[109] The result is that the cost of National Insurance falls disproportionately on those with modest to middle incomes.

58. The drifting down of the Upper Earning Limit does not affect employers' contributions. The result is that they are gradually coming to bear a proportionately greater share of the cost of National Insurance benefits. In 1999-00, employers contributed approximately 58 per cent of contributions, with employees contributing the balance. The Government Actuary estimated that if earnings limits increase each year with prices, by 2060 employers will be contributing 72 per cent of these contributions.[110]

59. Professor Disney also raised the question of whether earlier generations of contributors and beneficiaries do better than later generations. He suggested that "much of the evidence is that the earlier generations scoop the pot and the later generations do not do so well."[111]

What contract?

  60. At its simplest, the National Insurance contract embodies the idea that, in return for contributions paid into the Fund when working, people can draw on the Fund when unable to work. Yet, as a number of experts pointed out, contrary to the popular view, there is very little link between contributions and benefits in the system.[112] For example, restrictions on which contributions can be counted and when can mean that a person who has had deductions made from their earnings for National Insurance can still end up not qualifying for benefit. The DSS estimates that in 1995-96, there were about four million people, mainly those with low earnings, who paid standard employee or self-employed contributions or voluntary contributions for short periods during the year, who did not attain a qualifying year for basic retirement pension, even with credits.[113] Professor Alcock told the Committee:

    "there are some structural weaknesses in the scheme itself and that is... the extent to which it does try to make an actuarial link between contribution and benefit means that inevitably it excludes people on what turn out to be often quite arbitrary distinctions between how many benefit contributions you made in particular years at particular times and whether you were in or out of the labour market at particular times in your life."[114]

61. If there was a sense of a contract between individual and State in respect of contributions, some argue that the contract has been torn up. During the 1980s and 1990s, benefits were reduced in value and contribution conditions tightened, at the same time as contribution rates rose. Dr Lawlor argued, "it is wrong to penalise people retrospectively and to take away rights of entitlement which they have been compelled to pay for and been led to expect benefit in respect of."[115] CPAG commented: "confidence in the system has been undermined, because people pay their National Insurance and they have seen that government cuts back the scope for the entitlement to benefits. That is where the crisis is"[116]

62. Others argue that any sense of a contract as a result of National Insurance contributions is misplaced. Professor Disney's view was that National Insurance was simply a device for raising money because people did not like paying taxes. "They think that if they pay contributions somehow they have a greater entitlement than if they paid income tax. ...: You can make the argument, "I have paid contributions all my life. I ought to get more pension." Why not make the same argument: "I have paid income tax all my life. Why do I not get a pension I deserve?" To me, they are almost identical statements."[117] In reality, Governments have always felt free to alter National Insurance contribution rates and benefit conditions, not necessarily on a strictly actuarial basis. The idea of benefits as a right may be popular, but simply does not accord with reality. The notion that payment of designated contributions by individuals somehow protects the resulting benefits from Government interference is misplaced. Moreover, benefits may have gone down in the last two decades, but in previous decades provision was enhanced. Professor Disney told us:

    "Government changes provisions, often retrospectively, and often to increase the marginal returns and contributions. It has not always been one way traffic; it has tended to be in the 1980s and 1990s that benefits have been cut back so that people are saying, "I paid my contribution. How come I do not receive such high benefits now?" In the 1970s particularly, we had the opposite. People put in contributions and were actually getting bigger benefits, in a sense, because of subsequent policy changes -- for example, early retirees getting a much greater than actuarially fair pension, periods of non contribution like home responsibility protection being introduced, and over favourable treatment of labour market entrants. All these things were senses in which we paid more out than the individual put in. The deviations from the contributory principle work both ways."[118]

Do contributory benefits lead to self-reliance?

  63. Here, the critics point to various changes to Beveridge's plan which have undermined his desire to encourage voluntary savings. Dr Lawlor thought that the introduction of earnings-related contributions (later largely scrapped) was partly to blame: "In my view, once governments moved to earnings-related pensions , though that brought some more money into the kitty to pay for pensions, it did mean they were moving away from the flat rate scheme and probably psychologically discouraging people from making additional savings outside."[119] Professor Disney took the view that people had been given a misplaced sense of security that the State Retirement Pension would be sufficient to live on in old age, and therefore voluntary provision was unnecessary. In fact, changes such as the abolition of the link between pensions and earnings, and the destruction of SERPS had changed the position considerably. "All the past 20 years have shown us that nothing is guaranteed in the system at all. It is giving people a security which is quite illusory."[120] Moreover, the introduction of rules to abate benefits to take account of occupational pensions - first in Unemployment Benefit, and more recently, in Incapacity Benefit - do little to encourage private provision. In Ms Bennett's words, "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."[121]

Do the links with the labour market stand up?

  64. Although contributory benefits are only available to people who have earned them through working, it is doubtful that this fact in itself acts as much of a work incentive. Indeed, the TUC noted that, "one of the weaknesses of National Insurance at the moment, especially for a Government that is concerned about promoting transitions from welfare to work and which has adopted the basic principle of work for those who can, security for those who cannot, is that it is not an active system. It is based on a model that saw the welfare state as having largely a reactive role to play, covering people for gaps in their earning power." [122]

65. As was discussed above, there have been dramatic changes in the labour market which the National Insurance system has failed to reflect. There are approximately two and a half million people earning below the Lower Earnings Limit (four-fifths of them women) who therefore have almost no access to contributory benefits. People in intermittent work, or work with fluctuating hours, can pay contributions but get little back. The TUC commented, "the exclusion of large groups of workers - including some who are most likely to need the support of the benefit system - undermines its validity."[123]

66. Until recently, the rules for paying contributions led to a significant 'bunching' of workers with earnings just below the Lower Earnings Limit.[124] This reflected the fact that, not only did employers have to start paying employer contributions from this level, but there was also an 'entry fee'. By raising the employer threshold and abolishing the 'entry fee', the Government has tried to tackle this problem. However, the TUC thought the problem, although reduced, would still exist: "we are aware that it will not abolish the trap: because earnings below the threshold are exempt from NICs, there will continue to be some incentive to hold wages below that level in order to keep workers 'off the books.' Retaining a threshold may continue to encourage employment below the LEL."[125] The present Government's introduction of the National Minimum Wage is also likely to bring more people into National Insurance, but the Low Pay Unit told us, "although the minimum wage has taken a lot of people...above the Lower Earnings Limit and therefore into the contributory system, the evidence that we have from the many, many calls we have had to the Unit is that people are actually having their hours cut, so they are going back under again."

Simple and inexpensive?

  67. The rules governing entitlement to contributory benefits may appear less complex than those for means-tested benefits and hence simpler to administer, but this is to overlook the huge administrative machinery necessary to pay and record contributions made. Contributions are expensive for employers, especially small employers, to collect; a point made by the Federation of Small Businesses which complained: "during recent years there has been a dramatic shift in responsibility in the collecting and payment of benefits from government departments to employers. This considerable burden has been done without consultation or consent and has reached the stage where it is no longer acceptable."[126]

68. Professor Alcock drew attention to the "mammoth exercise of providing records of contributions, benefits and liabilities for virtually the whole of the population over working age."[127] The National Insurance Recording System (NIRS) has to maintain details on over 65 million National Insurance accounts with approximately one million new accounts created each year.[128] It is approximately three times the size of the self- assessment system used by the Inland Revenue. The Professor's view was that computer-based data storage had made the administrative task of recording contributions paid and consequent benefit entitlements easier to manage. In reality, the introduction of a new National Insurance Recording System (NIRS2), originally intended for February 1997, has proved an expensive and time-consuming administrative disaster. There have been delays of over three years in introducing the new system. As a result, thousands of short and long term benefit awards have had to be calculated on an interim or emergency basis, resulting in benefit shortfalls for some and the anxiety of possible overpayments for others. The difficulties have also led to delays on the part of the Contributions Agency in making rebate payments to personal pension providers, leading to a loss of investment income for the individuals involved. An estimated £34.686 million has had to be paid out by the Contributions Agency in compensation for the delays.[129] The Chief Executive of the Contributions Agency, which awarded the contract for the development of NIRS2, admitted to the Committee of Public Accounts in January 1999, "I sometimes wish I had never seen NIRS2....I believe whoever was delivering this system would have had is the size, complexity and the impact of the NIRS2 system which makes it unique."[130]

69. It is also questionable from the claimant's point of view how administratively simple the National Insurance system is. In reality, people are confused by the patchwork of different benefits they end up having to claim - often a mixture of contributory benefits, topped up with means-tested supplements, administered by separate bureaucracies. Professor Alcock concluded, "where claimants are in practice receiving their total benefit income from these two (or more) sources, the administrative distinctions are more likely to be a source of confusion than confirmation of entitlement criteria - where, that is, this distinction is noticed at all. From the claimants' point of view in particular, it is at the least doubtful whether the less than comprehensive benefit coverage now provided by the insurance scheme fully justifies the continued separate existence of the large scale administrative structure which accompanies it."[131]

How robust is public support for National Insurance?

  70. As discussed above, relatively few people understand the main features of National Insurance benefits or the philosophy behind it. Dr Bruce Stafford, who conducted the DSS funded research on public attitudes to the contributory principle, speculated that "public approbation might be because many people tend not to know or understand the mechanics of social security spending, in particular, what they receive in return for National Insurance contributions and because contributions are believed to have a major role in funding the NHS."[132] He was one of a number of contributors who pointed out that people's greater willingness to contribute to the National Insurance Fund had never been fully tested, due to the fact that contributions are compulsory.[133]

73   Ev p 129, para 5. Back

74   Q. 52. Back

75   TUC, Ev p 40 para 49. Back

76   Fran Bennett, Ev p 113 para 5.2. Back

77   TUC, Ev p 6 para 26 quoting the Commission on Social Justice, Social Justice, 1994Back

78   National Insurance and the Contributory Principle, DSS In-house report 39, 1998. Back

79   Dr Stafford, Appendix 2, para 13. Back

80   Cm 3805. Back

81   Ev p 129 para 5. Back

82   Sheila Lawlor, Ev p 18 para 16. Back

83   Q. 112. See also Tony Lynes, Appendix 18. Back

84   Professor Alcock, Q.1, Frank Field, Ev p 129 para 5, Professor Lister, Appendix 1 para 8. Back

85   See paragraph 23 above. Back

86   Q. 201. Back

87   Ev p 114 para 5.2 and Q. 184. Back

88   Q. 84. See also Catholic Agency for Social Concern, Appendix 17 para 3.1. Back

89   Ev p 8 para 4.3. Back

90   TUC, Ev p 36 paras 23-4. Back

91   Q. 61. Back

92   Ev p 77 para 77. Back

93   The Government's Expenditure Plans 2000/01-2001/02, Figure 42 Estimated administration costs of main benefits 1998-99, Cm 4614. Back

94   National Insurance And The Contributory Principle, DSS In-house report 39, 1998. Back

95   See Dr Bruce Stafford, Appendix 2. Back

96   Public Attitudes on the Future of Welfare, Fabian Society Research Findings, 1998. Back

97   Age Concern, Appendix 3 para 3.1. Back

98   TUC Ev p 34, para 12. Back

99   Government Actuary, Q. 316. Back

100   Dr Bruce Stafford, Appendix 2 para 14. Back

101   Ev p 128 para 4. Back

102   TUC, Ev p 34 para 13. Back

103   DSS In-house report 39, 1998. Back

104   Q. 247. Back

105   Q. 122. Back

106   TUC, Ev p 49 para 113. Back

107   Para 3.11, National Insurance Fund Long Term Financial Estimates, Government Actuary's Department, 1999, Cm 4406. Back

108   See Appendix 25. Back

109   Cm 4406. Back

110   Para 3.14, Cm 4406. Back

111   Q.247. Back

112   Professor Alcock, Ev p 10; Professor Disney, Q. 247. Back

113  DSS, Ev p 170 para 18. Back

114   Pete Alcock, Q. 17. Back

115   Sheila Lawlor, Q. 14. Back

116   Q. 111, see also RNID Appendix 5, Lancashire County Council Welfare Rights Appendix 14, RNIB, Appendix 21. Back

117   Q. 256. Back

118   Q. 247. Back

119   Q.11 & 18. Back

120   Q. 256. Back

121   Q. 184. Back

122   Q. 39. Back

123   TUC, Ev p 50 para 118. Back

124   Low Pay and the National Insurance System: A Statistical Picture, Mcknight, Elias and Wilson, EOC, 1998. Back

125   TUC, Ev p 48 para 103. Back

126   Appendix 8. Back

127   Ev p 12 para 5.18. Back

128   Delays to the New National Insurance Recording System, memorandum by the Comptroller and Auditor General to the Committee of Public Accounts, Ev p 1, HC, 1999-2000, no 182.  Back

129   House of Commons Hansard, 23 July 1999, cols 701-702W. Back

130   Q 110, Delays to the New National Insurance Recording System, HC, 1999-2000, no 182.  Back

131   Ev p 13 para 5.19, see also Church Action on Poverty, Appendix 13 section 8. Back

132   Dr Stafford, Appendix 2 para 9. Back

133   See also Professor Alcock, Ev p 11 para 5.14. Back

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