Select Committee on Social Security Fifth Report


The National Insurance approach versus means-testing

71. In evidence to the Committee, it often appeared that one of the greatest advantages of the contributory system was that the system was not based on means-testing. Most experts see contributory benefits as being fundamentally distinct from means-tested benefits, in their purpose. The former are earned by contributors and are designed to anticipate the risk of poverty arising from certain identified contingencies, when income is reduced. The latter are paid out to groups who, by definition, have been identified as poor and therefore in need.[134] Some argue that the distinction is a false one. Professor Disney argued, "the usual distinction between "contributory benefits" and "means-tested benefits" is merely a convenient short-hand. There is no logical distinction between the two types of benefit and it is perfectly possible for a benefit to have payment rules which depend on a contribution record and on the level of current income (as in the present reforms planned for Incapacity Benefit)."[135] Indeed, the Secretary of State for Social Security did not accept the distinction. When asked whether he saw a contradiction in means-tested benefits which are contributory benefits at the same time, he replied "No, I do not."[136]

72. We have concluded that there is a fundamental distinction in origin and purpose between benefits which people have earned on the basis of their contributions to cover identified risks, and benefits paid by the state to people on low incomes.

73. Professor Alcock told the Committee "the Conservative government of the 1980s and to some extent perhaps the new Labour government of the late 1990s are attracted to the notion of means testing as a means of redistributing benefits because it looks like it is giving money to people most in need and in one sense, of course, it is."[137]

74. The present Government's attraction to a means-tested approach can be seen in relation to three groups of current contributory benefit recipients: pensioners, widows and incapacity benefit recipients. In relation to pensioners, the Secretary of State has argued against increasing the State Retirement Pension across the board:

    "If there was an across the board increase - for instance, by linking pensions to earnings - you would end up with people at the top end of the scale, with good investment income and good occupational pensions, hardly noticing the extra cash, but those at the bottom end losing any penny we gave them because of the way the benefits system works"[138]

75. In relation to widows, the Secretary of State explained his decision to replace widow's pension with a six month bereavement allowance (brought about partly by a European Court decision requiring equal treatment of men and women) as follows:

    "Clearly what you could do is...give all the money that we presently give to women who lose their husbands to men as well. This would cost about £250 million extra and the question you have to ask yourself is: is it wise to do that when you bear in mind that nearly half the women who were getting this benefit were in the top half of the income bracket. Is that where you would spend £250 million, repeating the same problem with men?"[139]

76. In relation to Incapacity Benefit claimants, the Government has argued, "it is an inefficient use of resources to pay money to those who are already getting help [through occupational or private pension schemes] while there are others in greater need."[140]

77. This is a perspective which sees the function of social security as mainly the transfer of resources from the better-off to the poor, to alleviate the poverty of the latter. It involves a rejection of the wider functions which the contributory system offers, of allowing individuals, whatever their means, to redistribute income over their lifetime; of offering equal protection to all contributors against risks such as falling ill or becoming unemployed; and of encouraging self-provision and the avoidance of poverty by supporting all contributors, even if they have accumulated savings.

78. The Secretary of State's comments come against a background of a considerable increase in poverty and inequality in Britain, something the present Government is committed to tackling.[141] Rather than paying extra benefit to everyone, the Government is clearly attracted to a targeted approach, concentrating resources on assisting people on low incomes through means-tested benefits. Thus a key element in its strategy to assist poor pensioners has been the introduction of the Minimum Income Guarantee, which aims to give extra means-tested help to pensioners through the Income Support system. The Minimum Income Guarantee represents extra public expenditure of £410 million in 1999-00, rising to £1,090 million in 2001-2.[142] The Government has also channelled more resources towards low-income families in work. Working Families Tax Credit, which has replaced Family Credit, offers a means-tested supplement to low wages. It will provide around £5 billion a year of support for working families, which represents almost £1.5 billion in extra resources compared to Family Credit.[143]

79. The problem is, as Professor Alcock went on to tell us, "there are various policy and practical prices to pay for distributing social security support on [a means-tested] basis."[144] We therefore looked in detail at the problems associated with means-testing.

Work disincentives

  80. One of the key indicators of poverty and social exclusion about which the Government has expressed concern is the growth in the number of workless households. In "Opportunity for All - tackling poverty and social exclusion,"[145] the Government drew attention to the rise in the proportion of working-age households where no one is working, which has doubled since the end of the 1970s: "The growth in workless households has been driven both by a decline in male unemployment rates and also by an increase in the number of single adult, including lone parent, households. In addition, employed people have become concentrated in fewer households; the rise in women's employment has occurred largely in households where their partner is already in work."[146] The growth in workless households coincides with the growth in means-tested benefits as the main means of support for people out of work. It was the TUC which drew attention to the role of means-tested benefits in exacerbating the "work rich, work poor" divide. Under the rules for Income Support and Job-seeker's Allowance, the partner of a claimant is only allowed to earn £10, before benefit is reduced pound for pound. If the partner works over 24 hours a week, the claimant becomes completely ineligible for benefit. The TUC commented that the extension of means-testing (due partly to the reduction of contributory unemployment benefits from twelve months to six months) and the declining value of earnings disregarded had created "an especially perverse work disincentive for female partners of unemployed claimants:"

    "First, they are actively deterred from participating in part-time employment and are therefore effectively barred from accessing the major female employment growth area in the past two decades. Secondly, women who are already in part-time work or relatively low-paid full-time work when their partner becomes unemployed are often encouraged to abandon such employment when the claimant's entitlement to contributory benefit ends... very often the woman's take-home pay from full-time work is not adequate to support the household. The logical outcome in these circumstances is for the woman to abandon her job and for the whole household to claim means-tested benefits."

81. The effect of means-testing on women in workless households was also drawn attention to by Ms Bennett, who told us, "When...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."[147]

82. The Government has tried to tackle the work disincentive problem created by out-of-work means-tested benefits by boosting the earnings of families in work through Working Families Tax Credit. The Secretary of State told us, "By making sure that work pays we are trying the ensure that the answer to someone's question, 'Does it pay to work?' should always be yes."[148] Working Families Tax Credit is itself a form of means-tested assistance. Whether or not tax credits escapes some of the problems associated with means-testing, notably the creation of poverty traps for people in work, is discussed further below.

83. Another work disincentive arises from the treatment of housing costs within the means-tested benefit system. In the case of home-owners, people who have received Income Support or income-based Jobseeker's Allowance are entitled to benefit towards their mortgage interest after nine months on benefit. However, home-owners in work cannot get any help with their

housing costs, no matter how low their earnings. For people worried about how they will pay their mortgage, this can create a disincentive to take a job.[149] In the case of tenants, Housing Benefit is available for people in work, as well as those out of work. But because Housing Benefit is means-tested, the amount of benefit paid falls away sharply on even modest earnings. Anxiety about how to pay the rent once in work has been identified as one of the reasons why people may be reluctant to try a job.[150]

84. Tackling the work incentive problems arising from means-tested assistance with housing costs has proved difficult. The Government has outlined a number of options for change in its recent Green Paper on housing.[151] We are studying those options as part of a separate inquiry undertaken by the Committee into Housing Benefit and its future. Nevertheless, we are well aware that Beveridge himself found it difficult to find an answer within his flat rate contributory model to what he termed "the problem of rent."[152]

Savings disincentives

  85. A considerable number of contributors to the inquiry drew attention to the disincentive to save caused by means-tested benefits, where capital over certain limits reduces and eventually removes entitlement to benefit and where money saved in the form of occupational or personal pensions is also taken into account.[153] The problem has been highlighted in relation to pensioners by the introduction of the Minimum Income Guarantee, providing an income of at least £78.45 for a single pensioner[154] - an amount which the Government has guaranteed will rise in line with earnings during the lifetime of the present parliament. Yet, in order to qualify in full, a pensioner must have savings below £3000. Savings above £8000 disqualify the pensioner altogether. These capital limits remain the same for couples. Age Concern told us, "[We hear] from many older people with modest levels of savings or private pension who feel angry and let down that they are little better off after struggling to save during their working life. We note that by the year 2050 the Government estimates that the basic pension will be worth just £32 in relation to today's earnings while the basic income support level will be £75. We fear that those who know they will never be able to build up substantial private retirement income will have little incentive to save or contribute to private pensions."

86. The Government has announced that capital limits for the Minimum Income Guarantee will rise from April 2001 to £6000 (lower limit) and £12,000 (upper limit ). It has also announced an intention to use the Minimum Income Guarantee "to reward pensioners who have made some pension provision for themselves and those who are currently just above MIG levels." Age Concern commented, "We welcome the intention to review current income support capital rules and consider income disregards for pensioners. However such measures, while lessening the problems, will never remove them."

87. The Government's plans to lessen the savings disincentives arising from means-testing are confined to pensioners, but the problem extends to other groups. The Director of Disability Alliance voiced strong criticism of the Government's decision to reduce Incapacity Benefit, where an individual was also in receipt of an occupational pension, arguing that it penalised self-provision:

    "People were encouraged both by this Government and previous governments to make provision through occupational pensions and private pensions for their retirement and that continues, we are all being urged to do that. Here you have people who are not able to reach 65 or whatever their retirement age is because of ill health or disability... why is it somehow wrong for them to have their Incapacity Benefit and their occupational pension? They have paid in twice, they have paid in through the National Insurance system and they have topped up by paying into a second tier provision. Why should they be penalised for that?"[155]

The Secretary of State rejected the argument that means-testing discouraged savings. He told us, "a lot of people that the benefit system has to help are, by definition, people who do not have much disposable income even when they are in work and the idea that they would otherwise be amassing huge savings but for the alleged disincentive of means­testing is rather fanciful. A lot of these people when they are in work all the money is going to help themselves and their families. I do not accept that the system we have now has got disincentives to save."[156]

The impact of the household means-test on women and disabled people

  88. Means-tested benefits are based on the combined income and savings of couples (the 'household means test'); whereas an individual's own contributory benefit is based on their past contribution record, and is not affected by a partner's income.[157] The effect of the household means-test on work incentives for partners in couples has already been discussed. But it raises wider issues concerning the right to financial independence - of women and of disabled people. The Low Pay Unit argued that the effect of increased means testing was that women were more likely not to have their lost earnings from work replaced, because their right to benefit was conditional on their partner's income: "the National Insurance benefit is [a woman's] individual income replacement. It does not depend on household income...that is a very important principle to maintain."[158] The effect, commented Ms Bennett, was "contrary to women's aspirations for greater financial independence."[159] Together with Professor Ruth Lister, she also pointed out that it went against the individualisation of social security benefits, which has been identified by the European Commission in a list of key issues for the modernisation of social protection systems.[160]

89. Disability Alliance made a similar point in relation to disabled people. The independence of people with disabilities is eroded if benefits to which they are entitled by virtue of being disabled are then reduced because they are living with a partner with income or savings.[161]

90. The Secretary of State did not accept the case for individual benefits: " moving away from household assessment on which the benefit system has always operated...[and] going to an individual assessment is to raise the obvious point of the duke and the duchess. The duchess has no money but the duke has millions. Do you say that you should pay the duchess income support or do you say that the duke has an obligation to his family that the state does not always have to have."[162] He thus explained the household means-test as an intrinsic part of the means-tested system.


  91. A feature to which many people drew attention was the innate complexity of means-tested benefits, which require detailed assessments of need tailored to individual circumstances and close scrutiny of all sources of income and capital. Each time a claimant's circumstances change, their benefits require re-assessment. The result is a system where administrative costs are high and errors are common. Professor Alcock pointed out that the administrative costs of insurance benefits are around three to four per cent of the overall budget, compared to around 11 per cent for Income Support and 15 per cent of Housing Benefit. He commented: "In terms of cost effectiveness within public expenditure this is a significant difference."[163]

92. The error rate as a result of the complexity is considerable. However, as the Public Accounts Committee reported late last year, the Department of Social Security saw little further scope for simplification, given the necessity (within means-tested benefits) of targeting those in need. The Benefits Agency has told the Public Accounts Committee that there would always be a level of error and fraud as a result of the complexity of the system. They estimated that, even with management improvements, ten percent of payments would always be wrong.[164] The DSS estimated that in the year April 1998- 99, customer and official error in Income Support and Jobseeker's Allowance accounted for £532 million.[165]

93. The complexities which cause error can also lead to fraud. Losses due to fraud in Income Support and Income Based Jobseeker's Allowance were estimated at £1.5 billion in 1998-99, dwarfing the £46.9 million attributed to fraud in contribution-based Jobseeker's Allowance and the £184.1 million attributed to Child Benefit fraud.[166]

Problems of take-up

  94. Means-tested benefits have particular problems regarding take-up. For example, up to 700,000 pensioners are entitled to Income Support but are not in receipt of the benefit. The Government has recently launched a £15 million campaign to encourage pensioners to claim Income Support[167] (now paid at a higher level due to the Minimum Income Guarantee), but doubts have been expressed whether the campaign will be successful. Age Concern commented that it had been very supportive of Government initiatives to increase take-up among pensioners, but said, "we do not believe that it will ever be possible to bring take-up levels to anything like that of the state pension due to factors such as the inevitable complexity of the systems and attitudes towards means-testing."[168] The complexity of means-tested benefits can make it difficult for an individual to know whether they will qualify for benefit in advance of making a claim. The claims process itself can seem complicated and intrusive. There is also the question of stigma. Many groups drew attention to the different attitudes people have towards claiming contributory benefits and means-tested benefits. For example, Disability Alliance said, "the media and public opinion draw sharp distinctions between benefits that have been 'earned' in some way or are provided 'by right' - for widows or disabled people - and those where receipt implies being part of the 'dependency culture', or the 'something for nothing society', claimed by scroungers and the feckless and paid for by tax payers."[169]

95. In contrast, Professor Disney suggested that the problem of take-up, particularly among pensioners, might diminish in future due to the greater financial rewards available: "take-up is also partly a question of how much benefit you are entitled to by taking up. One of the reasons that take-up -- I am not saying the only reason -- was low was that for many people, say, the difference between the basic state pension and income support was 50p. As the minimum income guarantee gets indexed to earnings, assuming that will continue, and the basic pension gets indexed to prices, in a sense the incentive to take-up gets that much larger"[170]

Impact on behaviour

  96. The effect of means-testing on work incentives, savings incentives and fraud levels has led some people to criticise the negative effect that means-tested benefits have on behaviour. Mr Field told us: "means testing does actually teach people that if you work you will lose benefit, that if you save you will be disqualified, and woe betide you if you tell the truth because you will lose entitlement."[171] He argued that means-tested benefits reward failure: "They are a reward for not having a higher income. The duty of government is to arrange public policy so that people's basic instincts work to promote the public good. While welfare always should provide a decent safety net, the main emphasis of welfare should be in encouraging people to make a success of their own lives, and not - as at present - to place the greater emphasis on rewarding failure."[172]

The creation of a 'them' and 'us' society

  97. Means-tested benefits, by definition, go to the poor. Yet all taxpayers have to pay for them. Several organisations argued that, going down the means-tested route, would reduce support for the welfare system among those who had to pay for it because, unlike National Insurance benefits, the middle classes got nothing in return. The TUC argued that "A purely means-tested system would create a social division between those who paid for it and those who benefited. It seems unlikely that such a system would be as popular, and the electoral pressures on Governments to hold down benefit levels might be irresistible."[173] CPAG agreed, saying that it was much easier for governments to marginalise, cutback and isolate, benefit recipients concentrated wholly among the poor.[174]

134   See, for example, Dr Lawlor and Professor Alcock, Q.10, and Mr Tony Lynes, Appendix 18 para 4.1. Back

135   Richard Disney, Ev p 149, footnote. Back

136   Q. 343. Back

137   Professor Alcock, Q. 16. Back

138   The Guardian 29 March 2000. Back

139   Q. 357. Back

140   A new contract for welfare: Support for Disabled People, p. 21 para 31, HC, 1998-99, no 4103.  Back

141   See Opportunity for All - Tackling poverty and social exclusion, 1999, Cm 4445. Back

142   DSS Press Release, 11 April 2000. Back

143   New Ambitions for Britain, Financial Statement and Budget Report, HC, 1998-99, no 620.  Back

144   Q. 106. Back

145   Cm 4445. Back

146   Cm 4445, Chapter 2, paragraph 12. Back

147   Q. 183. Back

148   Q. 344. Back

149   Appendix 15. Back

150   Into Work? J. Ford, E. Kempson, and J. England, Rowntree, 1995. Back

151   Quality and Choice: A decent home for all, DETR/DSS, April 2000. Back

152   His conclusions raised wider questions about housing provision which are still relevant today: "The extreme variation of rents, between regions and in the same region, for similar accommodation is evidence of failure to distribute industry and population and of the failure to provide housing according to needs. No scale of social insurance benefits free from objection can be framed while the failure continues." Social Insurance and Allied Services, para 216, Cmd 6404, 1942. Back

153   See, for example, Friendly Societies Parliamentary Committee Appendix 7, Lancashire County Council Appendix 14, Catholic Agency for Social Concern Appendix 17, Ms Joan Brown Appendix 23. Back

154   Rate from April 2000. Back

155   Ms Lorna Reith, Q. 145. Back

156   Secretary of State, Q. 374. Back

157   Although payment of an addition for a spouse or carer of the contributor's children would depend on the level of their earnings or occupational pension. Back

158   Q. 84. Back

159   Ev p 114 para 5.6. Back

160   Fran Bennett, Ev p 114 para 5.6, and Professor Ruth Lister, Appendix 1 para 13, referring to Modernising and Improving Social Protection in the European Union, Com [97]102, European Commission, 1997. Back

161   Disability Alliance, Ev p 90 para 6.5.1. Back

162   Secretary of State, Q. 344. Back

163   Ev p 9-10. Back

164  Paragraphs 11-13, Appropriation Accounts 1997-98 Class XII, Vote 1 (Central Government Administered Social Security Benefits and other payments), Committee of Public Accounts, HC, 1999-2000, no 103. Back

165   The Results of the Area Benefit Review from April 1998 to March 1999 and Measurements for the Public Service Agreement, DSS Analytical Services Division, 2000. Back

166   Figure 1, p. ix, HC, 1999-2000, no 103.  Back

167   DSS Press Release, 29 March 2000. Back

168   Appendix 3 para 6.2. Back

169   Disability Alliance, Ev p 90-1 para 6.5.1. See also, Low Pay Unit, Q. 84, Lancashire County Council, Appendix 14, para 3.  Back

170   Q. 253. Back

171   Frank Field, Q. 209. Back

172   Frank Field, Ev p 129 para 5; see also the Friendly Societies Parliamentary Committee, Appendix 7. Back

173   TUC, Ev p 36, para 27. Back

174   Q. 123. Back

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