Funding
142. In discussing strategies for reform, the question
of further funding is key. Some attention was given during the
course of our inquiry to the growing surplus in the National Insurance
Fund. There were differing views on its significance. The Secretary
of State was dismissive. He said, "there is a surplus of
about £5.9 billion at the moment, but you have to be careful
about that...To give you an example, some people have said that
if you increase the state pension by a little more this year,
you will use that surplus and that is fine. However, that would
take the surplus away in two years and you would then be left
with a National Insurance Fund deficit. You cannot make long-term
decisions on benefits based on what could be a temporary surplus."[233]
In contrast, Mr Field told us that "there is going to be
a very, very substantial surplus without cutting contributions,"
which he thought represented an important means of funding change.[234]
When asked whether the surplus represented a "crock of gold,"
the Government Actuary and his staff were cautious but did not
totally reject the idea: "there is some sensitivity analysis
which gives an indication, but I like to think of the contribution
rate being broadly stable in future rather than thinking that
there is emerging here a certainty of a pot of gold. Maybe our
best estimate is that there would be, but we have got to be careful
not to assume that that will definitely happen."[235]
We have concluded that, unless there is a significant
change of policy, there is likely to be a growing surplus in the
National Insurance Fund as a result of benefits being linked to
prices, and contribution income, based on earnings, rising at
a faster rate. However, we agree with
the Secretary of State that any use of the surplus must be sustainable
in the long term.
143. We have also considered the question of whether
National Insurance contributions should be raised to pay for improvements
to benefits, to diminish reliance on means-tested benefits. The
question arose, in particular, in connection with our views on
the basic state pension. The Government Actuary's figures show
that, in order to pay for earnings uprated benefits, the combined
contribution rate for employers and employees would have to rise
by 3.2 percentage points by 2020-21 and by 7.6 percentage points
by 2060. In the context of real earnings growth, we recommend
that the Government should consider this as one option for funding
improvements to benefits.
144. The research we commissioned from Mr Young prompted
consideration of much higher rises in contribution rates to pay
for more radical reform. We have concluded that, before rises
of the scale envisaged could be contemplated, considerably more
work needs to be done to promote the National Insurance scheme
and its advantages, and to give the public at large a greater
sense of ownership of the National Insurance Fund and the benefits
to which it gives rise. We recommend that the Department of
Social Security should work with the Department for Education
and Employment and the Qualifications and Curriculum Authority
to develop appropriate guidance for schools to include an understanding
of National Insurance in the citizenship curriculum.
Making National Insurance more
inclusive
145. An urgent priority is to better adapt the National
Insurance scheme to modern labour markets. We consider that more
can be done, at relatively little expense, to bring low paid workers
currently below the Lower Earnings Limit, the majority of them
women, into the National Insurance system. Mr Young of the Government
Actuary's Department estimated the extra annual cost to Jobseeker's
Allowance and Incapacity Benefit, if the lower earnings limit
were reduced to £30 a week, would be £150 million and
£600 million. This compares with annual overall expenditure
on these benefits of £525 million and £6,770 million
respectively.[236]
In the case of Retirement Pension, Mr Young was able to give only
a rough figure for the extra cost of giving low earners earning
at least £30 per week access to the basic pension. He estimated
it would cost an additional £0.4 billion. Again, it seemed
relatively low in relation to the annual expenditure on basic
Retirement Pension of £33.8 billion. We recommend that
eligibility for Incapacity Benefit, Jobseeker's Allowance and
the basic state pension should be extended to people earning £30
or more a week.
146. The combined effect of the National Minimum
Wage and the uprating of the Lower Earnings Limit in line with
prices is already having the effect of bringing more workers into
National Insurance. We support the Chancellor's creation of a
'zero rate band' for National Insurance contributions where low
paid workers eligible for National Insurance are exempt from contributions.
In order to assist low paid workers to enter the 'zero rate
band' for National Insurance contributions, we recommend that
the lower edge of the zero rate band be frozen in cash terms,
thus allowing inflation gradually to raise the number and proportion
of workers entitled to National Insurance Benefits.
147. One group currently outside the National Insurance
system for whom there is considerable public sympathy are carers
of sick and disabled people. Dr Stafford's research on public
attitudes to the contributory principle found there was public
support for including such carers within the scheme. Mr Young
of the Government Actuary's Department was asked to estimate the
cost of paying carers of disabled people (currently eligible for
Invalid Care Allowance) a benefit from the National Insurance
Fund at either the rate of Jobseeker's Allowance or Incapacity
Benefit. The cost was estimated at £1,090 million (JSA rates)
or £1,400 million (IB rates). The cost could be financed
by an extra contribution rate of about 0.5 per cent. This does
not take account of a concomitant saving to the Treasury of £850
million in the cost of Invalid Care Allowance. We recommend
that the Government give serious consideration to using the surplus
in the National Insurance Fund to pay for a non means-tested benefit
for carers of disabled people paid at the rate of Incapacity Benefit.
218 Appendix 26 para 1.3, quoting the Performance and
Innovation Unit, Adding It Up: Improving Analysis and Modelling
in Central Government, 2000, TSO. Back
219
Ms Sutherland's report appears as Appendix 26. Back
220
Mr Young's report appears as Appendix 28. Back
221
And earnings-replacement non contributory, non means-tested benefits. Back
222
In this context, 'family' and 'family unit' and ' household unit'
refers to an individual, plus any partner and any dependent children. Back
223
Fran Bennett, Ev p 117 para 7.1. Back
224
Fran Bennett, Ev p 114 para 5.5. See also Joan Brown, Appendix
23 section 2. Back
225
See Appendix 27. Back
226
Frank Field, Q. 225. Back
227
Mr Field did not include Housing Benefit here, on the assumption
that it is abolished. Back
228
Q. 226. Back
229
Q. 237. Back
230
His target level is the 'gap' between basic state pension and
the highest level of Minimum Income Guarantee (for 80 year olds
and above) which would exist in 60 years time, a figure of £142.70
a week. This gives a margin, which would enable those with slightly
incomplete contribution records to still be above the means-tested
level. Back
231
See Q. 5 and Q. 7. Back
232
Appendix 23 para 1. Back
233
Q. 349. Back
234
Q. 211. Back
235
Q. 305. See also further information provided in Appendix 25. Back
236
See Appendix 28 para 82. Back