APPENDIX 2
Memorandum submitted by Dr Bruce Stafford,
Loughborough University (CP 7)
SUMMARY
This submission highlights some of the issues
related to the contributory principle as it applies to the funding
of social and private insurance.
Definition of the Contributory Principle
The contributory principle requires that entitlement
to benefit is conditional upon the payment of contributions. It
can be contrasted to situations were entitlement is dependent
upon an assessment of need or on the possession of some personal/household
characteristics. Contributions may be monetary or non-monetary,
actual or notional, based on the actuarial risk or be either flat-rate
or earnings related, and compulsory or voluntary.
Current Developments
Social insurance: There is a tension
between minimising public expenditure on contributory benefits
whilst targeting help on those most in need and ensuring contributory
benefits are generous enough to ensure continued public support.
The distinction between social insurance and social assistance
is increasingly being blurred. But this is not a threat to the
contributory principle, nor is the payment of benefits as tax
credits, provided people are aware of the link between contributions
and benefits.
Private insurance: Growth in private
insurance to cover unemployment, sickness and pensions represents
an expansion of the contributory principle.
Public Attitudes Towards the Contributory Principle
Qualitative research undertaken by CRSP shows
public support for the contributory principle. Indeed, respondents
wanted to extend the scope of the National Insurance scheme. Underpinning
their views was an individualistic approach, which depicted their
entitlement to contributory benefits as a right because they had
contributed.
Advantages of the Contributory Principle
The merits of the contributory principle include:
equitable provision; comprehensiveness; simplicity; assurance
of benefits when needed; promotion of self-esteem and benefit
take-up; ease of administration; and reinforcement of the value
of work.
Disadvantages of the Contributory Principle
These include: the exclusion of certain groups
(notably the lowest paid); incompatibility with the flexible labour
market; perceived complexity and a lack of public understanding
of the link between contributions and benefits; and perceived
poor value for money from private insurance for non-pension contingencies.
Reforming the Contributory Principle
Reforms need to address: including those excluded
from contributory benefits who require a replacement income; re-establishing
for the public the link between contributions and benefits; improving
the treatment of the self-employed; and extending the range of
risks covered.
INTRODUCTION
This submission considers some of the issues
related to the contributory principle as it applies to social
and private insurance in the U.K. The contributory principle is
defined (Section 1) and its current development outlined (Section
2). Public perceptions of the contributory principle, as identified
in qualitative research, are described (Section 3). The advantages
and disadvantages of the contributory principle are considered
(Section 4). Finally, ways of enhancing the contributory principle
are considered (Section 5).
1. DEFINITION
OF THE
CONTRIBUTORY PRINCIPLE
2. At its simplest the contributory principle
is a criterion for determining entitlement to benefit, whereby
receipt of benefit is conditional upon the payment of contributions.
Furthermore:
— Although contributions are usually
monetary they can be in kind, for example, recognising the work
done by some people with particular caring responsibilities;
— A related point, is that contributions
can be notional or credited to a person's contributory record;
and
— Other conditions determining entitlement
typically apply in addition to the contributory principle.
3. In social security terms, a form of the
contributory principle operates in the National Insurance scheme
and in private insurance schemes. It is used in insurance schemes
providing a replacement income due to a loss of earnings from
paid work. The main contingencies covered are incapacity, unemployment,
retirement and widowhood.
Moreover:
— The amount paid to the insurance
scheme may or may not be related to the actuarial risk of the
contingency arising—private insurance premiums will be related
to the risk whilst social insurance contributions need not be.
Where contributions are not tied to the level of risk they may
be flat rate or related to the contributor"s level of income;
— Employers can also contribute to
the National Insurance Fund and/or an employee's private insurance
scheme;
— The take up of private sector provision
can be encouraged through rebated contributions and/or tax incentives;
— The payment of a contribution/premium
may or may not be compulsory; and
— The amount of benefit paid to claimants
may or may not reflect the total contributions paid or the (previous)
income of recipients.
4. The contributory principle can be contrasted
with entitlement based on:
— An assessment of an individual's
or their household's needs as with social assistance benefits
like Income Support and Housing Benefit; and
— Selected characteristics of the claimant
or their household as with categorical (or so-called universal)
benefits such as Child Benefit.
2. CURRENT DEVELOPMENTS
Social insurance
5. Contributory benefits account for 46
per cent of the social security benefit budget. In 1996-7, expenditure
on National Insurance was £45.5 billion (DSS, 1998), of which
70 per cent (£32.1 billion) was paid in state pensions, 17
per cent (£7.7 billion) in sickness related benefits and
two per cent (£925 million) in unemployment related benefits.
This was financed mainly by the £41.9 billion paid in contributions
by 24.2 million contributors.
6. Most people at some point in their lives
have direct contact with the National Insurance scheme as contributors
and/or as beneficiaries. The latter include 10.6 million pensioners,
1.7 million in receipt of Incapacity Benefit and 181,000 jobseekers
(DSS, 1998).
7. A number of commentators have highlighted
an erosion of the contributory principle as it applies to social
insurance in the U.K. (for example, Erskine, 1997). Since the
mid-1980s the real value of contributory benefits have been cut
and there has been an expansion of means tested social assistance.
This was largely a response to concerns about the level of public
expenditure on social security benefits. The value of the Retirement
Pension and the State Earnings Related Pension (SERPS) has fallen
relative to average earnings. More recently the introduction of
Jobseeker's Allowance in 1996 lead to a reduction in the time
limit for the receipt of contributory benefit for unemployment
from 12 months to six months. The present government also proposes
to means test Incapacity Benefit so that recipients retain the
first £50 per week of any occupational or personal pension
and benefit is reduced by 50p for every additional £1 received
per week. This is to ensure a "fairer balance between
public and private provision" in response to the use,
by some, of Incapacity Benefit to top-up pension provision.
8. As state pensions are the main items
of National Insurance expenditure the impact of both the upper
earnings limit and "pay as you go" funding is increasingly
to make National Insurance a transfer payment from lower and middle
earners to present day pensioners. There is a concern that as
the coverage and value of contributory benefits falls popular
support for continued payment of National Insurance contributions
will decline especially amongst those (middle class contributors)
with their own occupational and private insurance provision.
Central to the future of the contributory principle
is resolving the tension between:
— Ensuring that contributory benefits
are generous enough to maintain public support for them; and
— Minimising public spending on social
security benefits.
9. It is argued that expanding further the
role of means tested benefits, encouraging private provision and
"residualising" contributory benefits by making their
value nugatory will undermine the contributory principle. Whether
current scale rates for contributory benefits are too low and
endanger public support for welfare spending is unknown. Albeit
support can, to some extent, be inferred from the absence of popular
demands for the abolition of National Insurance contributions.
Conceivably public support for social insurance is more robust
than some commentators suggest. Contributors may perceive gains
to paying National Insurance contributions in addition to the
actual monetary value of contributory benefits. However, public
approbation might be because many people tend not to know or understanding
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 (Stafford, 1998; Corden, 1998).
10. The distinction between social insurance
and social assistance is increasingly becoming obscure. Jobseeker's
Allowance blurs this distinction because there is a means tested
as well as a contributory based component to Jobseeker's Allowance.
This blurring is also evident in the proposed Minimum Income Guarantee
for pensioners (Cm., 1998b) and the means testing of Incapacity
Benefit (Cm., 1998a). The MIG comprises the basic state pension
and means-tested Income Support for the poorest pensioners. However,
this closer integration of National Insurance and social assistance
benefits need not be seen as undermining the contributory principle,
provided the link between National Insurance contributions and
the contributory element of these benefits is understood by contributors
and beneficiaries. The co-payment of social insurance and social
assistance benefits could be seen as a positive way of modernising
the funding and delivery of social security benefits. Recipients
could have a single payment covering all their benefits alongside
a clear statement that, amongst other things, detailed the benefit
amount attributable to contributions. Continuation of contributory
benefits does not require the existence of benefits administered
and delivered separately from other benefits, indeed they could
be paid as tax credits—it does, however, require that contributors
and recipients are aware of that element of a benefit that can
be ascribed to contributions.
Private insurance
11. Commentators have also highlighted the
growth of private insurance for incapacity, pensions and unemployment.
For some this development is thought to undermine public support
for contributory benefits. However, it also represents an expansion
of the contributory principle. The payment of policy premiums
is akin to making National Insurance contributions. In qualitative
research (Stafford, 1998) some respondents saw a parallel between
paying premiums and making contributions. The issue therefore,
may be less about the role of contributory principle than about
whether provision of insurance for replacement of earnings is
better provided publicly, privately or jointly. Although for technical
and other reasons there are limits to private insurance for unemployment
and pensions and a degree of state intervention is necessary (Barr,
1998; Burchardt and Hills, 1997).
3. PUBLIC ATTITUDES
TOWARDS THE
CONTRIBUTORY PRINCIPLE
12. Qualitative research undertaken by the
Centre for Research in Social Policy for the Department of Social
Security suggests that there is public support for the contributory
principle for National Insurance benefits (see box insert A and
Stafford, 1998).
Most of the respondents favoured:
— The pooling of risks across as wide
a range of groups as is possible—indeed that carers of sick
and disabled people should be included within the National Insurance
scheme as beneficiaries and those who had made a contribution
but did not meet a benefit's contributory conditions should receive
at least a partial benefit;
— Flat rate benefits and earnings relate
contributions;
— The non means testing of contributory
benefits (see Box B);
— That in addition to making contributions,
entitlement to benefits requires claims not to be due to the claimant's
fault (e.g. illness must be due to an accident or chance) and
they must be genuine (e.g. the claimant must be willing to work);
and
— For those outside of the National
Insurance scheme there should be a tax-funded, social assistance
"safety-net" to protect the most vulnerable members
of society.
13. Underpinning these views was an individualistic
approach to the contributory principle. Generally, the respondents
believed that through their contributions they had secured a contract
with the state that gave them a "right" to contributory
benefits. In some instances, respondents thought, incorrectly,
that their contributions were paid into a "personal kitty",
which was available when needed, and this was linked to the notion
that contributory benefits "top-up" other state benefits
and/or private insurance.
14. The respondents found the payment of
National Insurance contributions more acceptable than paying taxes,
because they saw the former as conferring a right to a benefit.
CRSP QUALITATIVE
RESEARCH
The research involved eight discussion groups comprising
people of working age. The respondents were stratified by age
and socio-economic status to give two of each of the following
groups: young middle class; older middle class; young working
class; and older working class.
The discussion covered their opinions on the National
Insurance scheme in general and on a series of possible policy
developments. It focused on three contingencies: incapacity, unemployment
and retirement.
At the beginning of each discussion group the respondents
knew relatively little about the National Insurance scheme. The
researchers "seeded" the discussion with information
so that the views reported here are of informed respondents.
MAIN REASONS
RESPONDENTS GAVE
FOR OPPOSING
THE MEANS
TESTING OF
CONTRIBUTORY BENEFITS
Various reasons were given, of which the principal
ones were:
— it would undermine the claimants'
right to benefit;
— be contrary to the independent
taxation of couples and contributory benefits ought to be treated
in the same way;
— it should not be assumed that
intra-household transfers would be made by partners to compensate
for means testing;
— full benefit was required to maintain
a household's standard of living;
— it would be a disincentive to
working and the reporting of earnings; and
— it would unfairly penalise savers.
4. ADVANTAGES
AND DISADVANTAGES
OF THE
CONTRIBUTORY PRINCIPLE
Advantages of the contributory principle
15. The advantages of the contributory principle
include (not in any order of priority):
— Equitable provision—arguably
only those at risk of needing a replacement income should fund
a social/private insurance scheme from which they might benefit.
This does not preclude notional contributions, but does mean that
non-beneficiaries should not pay for benefits which they are not
potentially entitled;
— Comprehensive coverage—it can
encompass employees, employers and the self-employed;
— Simplicity—it is an easy to
understand principle;
— Assurance of security—contributors
know that if the appropriate contingency arises they have some
entitlement to financial assistance;
— Promotion of self-esteem—it
avoids the stigma associated with social assistance as people
believe they have taken steps to protect themselves and consequently
take-up of contributory benefits is better;
— Ease of administration—unlike
means-tested benefits the income of the claimant and any other
members of a household does not have to be established;
— Reinforcement of the value of paid
work through contributors gaining entitlement to a "social
right"—it maintains a link between the labour market
and the contingency when a replacement income is required;
— Use of notional contributions allows
society to acknowledge the non-monetary contribution of carers
and others;
— Flexibility in policy—the principle
is compatible with various other possible policy objectives, such
as redistribution of income over the life course, poverty alleviation,
protection of living standards, etc.; and
— Avoidance of the need to means test
benefits.
Disadvantages of the contributory principle
16. The main disadvantages are (not in any
order of priority):
— Exclusion of certain groups—non-contributors
who might need a replacement income can be excluded from benefit
receipt. A distinction can be made between those who might require
a replacement income for lost earnings and those who do not. The
latter, arguably, should not be contributors/policy holders and
consequently should not be covered by social/private insurance.
Ultimately, it is a matter of political judgement as to whether
certain groups who could require a replacement income should be
excluded from an insurance scheme. Nevertheless, women because
they are disproportionately represented in lower paid jobs are
more likely than men to be excluded from social insurance by the
lower earnings limit. In the mid-1990s approximately two million
female employees and 0.6 million male employees had earnings below
the lower earnings limit and were outside of the contributory
system (unless they made voluntary contributions) (McKnight et
al, 1998). Their low pay further precludes voluntary/private sector
provision. Moreover, the self-employed paying Class 2 contributions
are not entitled to the full range of contributory benefits, notably
contributory Jobseeker's Allowance;
— Incompatibility with the demands
of a flexible labour market—the payment of contributions/premiums
assumes full-time continuous participation in paid employment.
The increase in temporary, part-time and self employment limits
people"s entitlement to social and private insurance;
— National Insurance contributions
are effectively a hypothecated tax on labour;
— Perceived complexity—the complexity
of the National Insurance scheme can make it difficult to understand
(Stafford, 1998) especially for the self-employed (Corden, 1998).
And better information is required on private schemes and the
amount people need to save (for a pension) (Cm, 1998b);
— Lack of transparency—there
is a lack of public awareness of what people receive in return
for the payment of National Insurance contributions (Corden, 1998;
and Stafford, 1998);
— Distrust of private sector provision—whilst
people may be content with their existing occupational and private
pension provision, there is concern that private insurance for
incapacity and unemployment can offer poor value for money (Stafford,
1998). In particular, insurance policies are seen as too expensive,
and administrative charges and commission fees as too high.
5. REFORMING
THE CONTRIBUTORY
PRINCIPLE
17. There is a consensus amongst many commentators
that the contributory principle is in need of reform. Changes
to the contributory principle as it operates in both social and
private insurance schemes are considered below.
Possible reforms to the contributory principle
in social insurance
18. Whether the contributory principle has
a future in the social security system has been questioned. The
crucial issue is whether benefits designed to provide replacement
incomes should continue to be funded by those in paid work, that
is, the potential beneficiaries. This is a political judgement.
The principle of equity, however, provides a strong argument for
continuation of the contributory principle.
19. Any reforms must be set in the context
of welfare reform policy objectives. There is a strong case for
government to clarify the objectives of the National Insurance
scheme. Ostensibly the contributory principle is a means of securing
entitlement to a replacement income in the event of specified
risks occurring. It involves transfers of income from those in
paid work to those retired for pensions and to those of working
age who are incapacitated or unemployed. There are no simple policy
choices for reforming the contributory principle in the National
Insurance scheme. However, reforms need to address:
— Including those excluded from contributory
benefits who require a replacement income;
— Re-establishing for the public the
link between contributions and benefits;
— Improved treatment of the self-employed;
and
— Extending the range of risks covered.
INCLUDING ALL
THOSE WHO
REQUIRE A
REPLACEMENT INCOME
20. The main challenges to the contributory
principle are changes in the labour market and the need to maintain
the political support of net contributors. A central issue is
the treatment of people who might require a replacement income,
but who, for whatever reason, do not pay National Insurance contributions.
There are three main options. First, to maintain the status quo,
however, the unfairness of the existing scheme, especially for
women, means that some form of reform is necessary. Secondly,
certain groups, for instance, those earning below the lower earnings
limit could pay a reduced contribution. The difficulty with this
is that people on low incomes may find the payment of even a reduced
National Insurance contribution an unacceptable burden. It would
undermine the government's policy of aligning National Insurance
and income tax. The cost of collecting these contributions could
also be too high relative to the revenue raised. The (flexible)
labour market could also be distorted. Thirdly, notional contributions
could be made to individuals' National Insurance records. This
has the disadvantages of higher earners and employers having to
pay additional contributions and this may diminish their support
for the scheme. Employers would also have an incentive to manipulate
terms and conditions of employment to avoid paying higher contributions.
21. Furthermore, aligning the National Insurance
scheme to the income tax system is not unproblematic. It could
increase the number in paid employment not entitled to contributory
benefits. The contributory principle needs to address this disfranchisement
of social rights. Again, credits for those on low incomes may
be appropriate (but see above).
RE-ESTABLISHING
THE LINK
BETWEEN CONTRIBUTIONS
AND BENEFITS
22. There is a strong case for reinforcing
the link between National Insurance contributions, whether "real"
or notional, and contributory benefits. The contributory principle
is not sustainable unless the public become more aware of the
risks covered and the benefits derived from National Insurance
contributions. This may mean separating the NHS element of National
Insurance contributions from that of contributory benefits. Contributions
need to be matched to a defined set of benefits. One possibility
is revitalising National Insurance, with a new name and restated
purpose, as part of the Government's new contract for welfare.
THE SELF-EMPLOYED
23. The present National Insurance scheme
treats the self-employed differently from employees. There is
little justification for this situation. The government is following
the recommendations of the Taylor report (Taylor, 1998) and bringing
contributions of the self-employed more in line with those of
employees. The amount contributed and the benefits received should
be the same for the self-employed and employees.
EXTENDING THE
RISKS COVERED
24. Extending the range of risks covered
to include long-term care and parental/family responsibilities
could also engender support for both the contributory principle
and the National Insurance scheme.
25. There is a case for recognising more
fully the non-monetary and social contributions made by some people.
Some protection, for instance Home Responsibility Protection,
is available, but the groups covered could be widened to cover
others with caring/family responsibilities, notably to those caring
for disabled people and the long-term ill (Stafford, 1998).
REFORMING THE
CONTRIBUTORY PRINCIPLE
AND PRIVATE
INSURANCE
26. The private sector has to convince the
public that they provide good value for money. There are, as outlined
in the pensions review (Cm, 1998b), arguments for improved regulation
and minimum standards for charges and fees; and for better information
on insurance products and their costs. Contributors need an annual
statement which clearly states what coverage their premiums will
provide in the event of the insured contingency occurring.
REFERENCES
Barr, N (1998) The Economics of the Welfare
State, Oxford: Oxford University Press.
Burchardt, T and Hills, J (1997) Private
Welfare Insurance and Social Security: Pushing the boundaries,
York: York Publishing Services.
Cm (1998a) A new contract for welfare: Support
for Disabled People, London: The Stationery Office, Cm 4103.
Cm (1998b) A new contract for welfare: Partnership
in Pensions, London: The Stationery Office, Cm 4179.
Corden, A (1998) Self-employed People and
National Insurance Contributions, DSS Research Report No.
84, Leeds: Corporate Document Services.
DSS (1998) Social Security Statistics 1998,
Leeds: Corporate Document Services.
Erskine, A (1997) "The withering of social
insurance in Britain", Social Insurance in Europe,
Bristol: The Policy Press, pp 130-150.
McKnight, A, Elias, P and Wilson, R (1998) Low
Pay and the National Insurance System: A Statistical Picture,
Manchester: Equal Opportunities Commission.
Stafford, B (1998) National Insurance and
the Contributory Principle, DSS In-house Report No. 39, London:
DSS.
Taylor, M (1998) The Modernisation of Britain's
Tax and Benefit System Number Two Work Incentives, Budget
98 Report, London: Treasury.
May 1999
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