APPENDIX 1
Memorandum submitted by Ruth Lister, Professor
of Social Policy, Department of Social Sciences, Loughborough
University (CP 4)
SUMMARY
(i) The contributory principle stood at
the heart of the post-war social security system. Contributory
benefits have, however, become increasingly marginalised as a
result of policy decisions over the past two decades. This process
of marginalisation looks set to continue.
(ii) There remains a case for the contributory
principle which is consistent with the present Government's notion
of a "contract for welfare".
(iii) The contributory principle needs to
be modernised in the face of contemporary employment and social
patterns. In particular, it needs better to reflect women's employment
patterns. A number of reforms, which would make the system less
exclusive, have been recommended to this end.
(iv) Tax-benefit integration does not offer
a better alternative to the contributory principle.
INTRODUCTION
1. The contributory principle was central
to the post-war social security system established following the
Beveridge Report. Today, though, a big question mark hangs over
its future as a result of a process of attrition over the past
two decades, which looks set to continue without any proper public
debate. The Committee's decision to undertake an inquiry into
the future of the contributory principle is therefore both welcome
and well timed. This brief memorandum does not attempt a comprehensive
discussion of the contributory principle, but simply focuses on
the state of the contributory benefit system today and the options
for the future.
THE GRADUAL
MARGINALISATION OF
CONTRIBUTORY BENEFITS
2. Beveridge's vision of a social security
system, in which the great majority of the population was covered
either directly or indirectly (through a husband) through contributory
benefits, was never realised. This was, in part, because of the
increasingly dominant role played by means-tested benefits. The
role of means-testing was entrenched in the 1980s when it was
a central tenet of Conservative social security policy to "target
help on those in greatest need" through means-tested benefits.
Thus between 1979-80 and 1997-98, the proportion of total benefit
expenditure devoted to contributory benefits fell from 65 per
cent to 46 per cent.[1]
3. In addition to contributory and means-tested
benefits, there has always been a third arm to the post-war social
security system: contingency benefits which are subject to neither
contribution nor means test. These include benefits, initially
introduced in the 1970s, which fulfil the same earnings-replacement
function as contributory benefits, but for groups who are excluded
from the latter because they have been unable to build up the
appropriate contributions record. These benefits have traditionally
been paid at a lower rate (for adults) than the contributory benefits
so as to preserve the contributory principle.[2]
However, it could be argued that these benefits underpin rather
than threaten the contributory principle by addressing some of
its exclusionary effects (see below).
4. The Conservative Governments of 1979
to 1997 made a number of cuts in contributory benefits, including
the ending of the uprating link with earnings for long-term benefits
and pensions; the abolition of the earnings-related supplement;
a gradual reduction in the additions for children, leading to
their abolition in some cases; and the replacement of unemployment
benefit by job-seeker's allowance (JSA). This last change could
be seen as particularly damaging to the contributory principle
in that it reduced entitlement to contributory benefit from twelve
to six months.
5. Although the Labour Party originally
opposed the replacement of unemployment benefit by JSA, by the
time of the General Election it had abandoned any intention to
restore unemployment benefit. Since then, the Government's policy
towards the contributory principle has been opaque to say the
least. The future of the national insurance scheme took up just
three paragraphs of the Green Paper, New Ambitions for our
Country: A New Contract for Welfare. The main focus of these
paragraphs was the proposed reforms in the contributions system
announced in the 1998 Budget and confirmed in the 1999 Budget.
In relation to the benefits side, the Green Paper merely stated
that these reforms "provide an opportunity to update the
contributory principle" and that the intention was to review
the relationship between contributions and benefits, with a view
to "emphasising the link between work and earning benefit
entitlement" (p30).
6. Subsequent Green Papers have not dealt
explicitly with the overall role of contributory benefits in relation
to the other elements of the social security system. Although
there is not a completely consistent pattern emerging from the
individual benefit reviews, on balance the net effect is likely
to be a further diminution of the role played by contributory
benefits in the social security system. Thus, for example, the
contribution test for incapacity benefit will be made more restrictive
in order to "strengthen the link between work and benefit"[3];
the contributory principle itself is to be undermined by the introduction
of an element of means-testing into incapacity benefit and fewer
widows will receive contributory benefits (although, in the face
of a European Court of Human Rights case, they will be extended
to widowers on equal terms with widows). The respected social
policy commentator, Nicholas Timmins, has concluded from these
reforms that the combination of the erosion of contributory benefits
and growth in means testing "must call into question the
national insurance system".[4]
7. Increased reliance on means-tested benefits,
at the expense of social insurance benefits, can be understood
as a further shift towards a "liberal" welfare regime,
within which public social security plays a more residual role
and away from more institutional continental European models.
According to a recent study of social insurance in Europe, Britain
is "the European country that has perhaps moved furthest
away from an erstwhile comprehensive social insurance legacy"[5].
The authors conclude that, even though social insurance may also
be under pressure in Continental European countries, it does appear
to be more resilient there than in the UK. Another cross national
research study has suggested that a strong contributory benefit
system is more successful than social assistance in combatting
social exclusion among the long-term unemployed[6].
THE CASE
FOR SOCIAL
INSURANCE
8. The case for collectively financed provision
through social insurance was summarised by the Commission on Social
Justice, on the basis that it:
— protects people more cheaply, efficiently
and fairly than private insurance;
— plays a key role in helping people
to redistribute income over their increasingly varied life-cycle
(though compulsory private insurance could also do this);
— represents an expression of social
citizenship in its balance of rights and responsibilities through
an ethic of mutuality—indeed it reflects the spirit of contract
which inspires the Government's approach to social security reform;
— exemplifies the approach prioritised
by most of our EU partners.
9. According to a Joseph Rowntree Foundation
study, "collectively financed social security may offer a
better deal than is commonly supposed, not just for those with
low incomes and at high risk, but also for those with average
incomes and at more typical risk"[7].
Research also indicates a fair degree of public support for the
pooling of risk involved in contributory benefits, although support
for the contributory benefit system itself is vulnerable to erosion
as a result of diminishing confidence in the benefits it will
pay out in the future[8].
The case was, indeed, made recently by the Chancellor of the Exchequer:
"Of course, the British idea of national insurance has changed
over time. But no one can deny that by sharing risks among 58
million citizens and by the strong helping the weak it makes us
all stronger"[9].
MODERNISING THE
CONTRIBUTORY PRINCIPLE
10. A key weakness of the contributory principle
is that some of "the weak" to whom the Chancellor referred,
are excluded from the social insurance system by its operation.
Around two and half a million employees have weekly earnings below
the national insurance lower earnings limit. According to a recent
study, four-fifths of these are women and this kind of low paid
employment is much more likely to be long term for them than for
men. The authors suggest that while the home responsibilities
protection provision "is certainly reducing the proportion
of women employees whose pension entitlement is affected by their
low earnings, it is not preventing a significant proportion of
low paid women failing to accumulate substantial state pension
entitlement. The NI system therefore needs to be reformed to ensure
that the vast majority of part-time and low paid workers are included"[10].
The point was acknowledged in the Green Paper, A New Contract
for Welfare: Partnership in Pensions, which states that the
Government "will be considering whether more needs to be
done to assist `a group of people, mainly women, who are active
in the labour market but whose access to contributory pensions
is affected by the fact that they work part-time, on low earnings
for long periods'" (p23).
11. As part of its strategy for a modernised,
more inclusive social insurance scheme, better attuned to women's
employment patterns, the Commission on Social Justice proposed
that membership of the national insurance scheme should be extended
to all those employed for an average of at least eight hours a
week—the threshold indicated by the European Commission.
It suggested that since part-time workers earning below the lower
earnings limit would not be able to afford full contributions,
"it might also be possible to follow the example of Ireland,
where social insurance members with very low earnings are exempt
from payment"[11].
The welcome decisions to create an effective "zero-rated"
band for those earning between the old lower earnings limit and
the new limit, aligned to the tax threshold and to extend maternity
allowance to women earning at least £30 a week could be seen
as precedents for such a policy. Moreover, as the alignment of
the tax and national insurance thresholds moves the contribution
system closer to the tax system, the logical next step would be
to abolish the regressive upper earnings limit on contributions.
This would raise £4.2 billion a year,[12]
which could be used to extend membership of the scheme at the
bottom.
12. The Commission on Social Justice made
a number of further proposals for the modernisation of the social
insurance scheme:
— the extension of full membership
of the scheme to self-employed people;
— part-time unemployment insurance;
— the extension of the scheme to cover
family responsibilities (which overlaps with the Committee's inquiry
into parental leave) and long-term care;
— the incorporation of the non-contributory
contingency income-replacement benefits;
— the possibility of the introduction
of an option to pay higher contributions for higher benefits,
as a means of extending choice and encouraging the support of
better paid workers.
13. There is some evidence from research
that the general public would support a more inclusive social
insurance system which better met the needs of those unable to
pay the contributions entrance fee into the scheme.[13]
Such an approach would also be consistent with 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.[14]
ALTERNATIVE MODELS
OF SOCIAL
SECURITY DELIVERY
14. The Inquiry's terms of reference ask
whether there are "other models of welfare delivery, for
example better integration of tax and benefits, which better reflect
today's social realities" than the contributory principle.
As I argued in an earlier Memorandum to the Committee, tax-benefit
integration is not a "magic wand".[15]
There are considerable problems with negative income tax-type
integration which would entrench the role of means-testing even
further. The alternative model of integration, citizen's income,
has a number of attractions, but also has a number of drawbacks.
These make it unlikely that it could command the necessary broad-based
political support in the foreseeable future. However, depending
on future trends in paid work, it could be better attuned to future
social realities and therefore should not be ruled out as a possible
longer term option.
CONCLUSION
15. The contributory principle does have
a future, provided that it is adapted to take account of contemporary
employment and social trends. Perhaps paradoxically, the principle,
as originally understood, has to be relaxed as a means of strengthening
its role in modern society. On current trends, however, the future
for the contributory principle and for the social insurance scheme
in the UK must look bleak. It is to be hoped that the Committee's
inquiry will help to stimulate a political and public debate before
it is too late.
May 1999
1 Calculated from Social Security Statistics
1994 and 1998, Department of Social Security. Back
2
Under the reform of the severe disablement allowance, which confines
the benefit to those disabled early in life, this differential
will be removed. Back
3
Secretary of State for Social Security, House of Commons Hansard,
28 October 1998, col. 341. Back
4
Financial Times, 19 November 1998. Back
5
Clasen, J. (ed.) (1997) Social Insurance in Europe, Bristol:
Policy Press. Back
6
Clasen, J., Gould, A. and Vincent, J. (1997) Long-term unemployment
and the threat of social exclusion, Bristol: The Policy Press. Back
7
Burchardt, T. and Hills, J. (1997) Private Welfare Insurance
and Social Security: Pushing the Boundaries, York: Joseph
Rowntree Foundation. Back
8
Stafford, B. (1998) National Insurance and the Contributory Principle,
DSS In-House Report 39, London: Department of Social Security;
Fabian Society (1998), Public Attitudes on the Future of Welfare,
Research Findings, London: Fabian Society. Back
9
Brown, G. (1998) `The SNP nightmare', The Guardian, 12
November 1998. Back
10
McKnight, A., Elias, P. and Wilson, R. (1998) Low Pay and
the National Insurance System: A Statistical Picture, Manchester:
Equal Opportunities Commission. Back
11
Commission on Social Justice (1994), Social Justice. Strategies
for National Renewal, London: Vintage Press. Back
12
House of Commons Hansard, written answers, 15 March 1999,
col. 479. Back
13
See footnote No. 2. Back
14
European Commission (1997) Modernising and Improving Social Protection
in the European Union, Com[97]102, Brussels, 1997. Back
15
Social Security Committee (1997) Tax and Benefits: An Interim
Report, Appendix 1. Back
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