APPENDIX 8
Memorandum submitted by the Federation
of Small Businesses (FSB) (CP 5)
The Federation of Small Businesses (FSB), formed
in 1974 is a non-party political campaigning group that exists
to promote and protect the interests of all who manage or own
small businesss. The FSB is the UK's largest business organisation
with 135,000 members.
1. The contributory principle simply relates
to the entitlement of certain benefits within the Social Security
Scheme, subject to payment of National Insurance Contributions.
2. The role of contributory benefits
The contributions principle dates back to pre-1939
when approved societies such as the Prudential Assurance company,
provided limited benefits in the form of Unemployment Sickness
and Retirement Pensions, on payment of a "Voluntary Contribution".
Following the Beveridge Report of 1944, and
the introduction of the NHS/National Insurance Act 1946, members
of Approved Societies received refunds of their contributions
and began paying compulsory National Insurance Contributions in
the form of a weekly stamp—at that time 2 shillings, or
10p.
Unlike the impulsive passing of legislation
today with the consequent "U" turns and repealing of
various acts, the 1946 act had been carefully thought through
and was simple and effective, being administered from the present
offices in Newcastle upon Tyne, with over 100 local offices throughout
the country. There were, at that time, only three main benefits.
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.
3. Current developments affecting the future
of the contributory principle
The introduction of stakeholder pension schemes,
which employers may have to adminster. Further benefits to be
paid and administered by employers such as the Working Families
Tax Credit.
4. Public awareness
Generally speaking, the average member of the
public has little or no conception of the contributory principle.
This has come about since the abolition of the "Stamped Insurance
Card", and the introduction of percentage payments, coupled
with payroll schemes.
If there is any awareness at all, it is one
of belonging to the belief that "Contributions" are
just another form of taxation via deductions of 10 per cent of
earnings on behalf of employees, and the imposition of Class 4
contributions which go directly to the Inland Revenue.
5. Advantages and weaknesses of the contributory
principle
(a) The inception of the Social Security
Scheme was to create an ideal system of basic benefits to cover
the eventuality of unemployment, sickness, and retirement and
so it was in 1946. It was based on the old Voluntary Contribution
scheme where contributions enjoyed individual accounts and were
aware of their entitlement.
(b) Over the years successive governments
have introduced more and more benefits until now there are some
60 benefits, all of which have their separate and distinct set
of regulations. It is now impossible to fully train staff; the
system is too complex, and the computerised system in Newcastle
is in danger of collapsing. The public are no longer aware of
their entitlement, hence the amount of unclaimed benefits.
(c) The benefit rates generally are now
so high that there is little or no incentive to return to work.
(d) The imposition of class 4 on the self-employed
is viewed as a direct tax.
(e) The introduction of ERS proved an expensive
failure and had to be abandoned, just in the same way as the Graduated
Pension Scheme.
(f) In short, the whole system is too complex;
too expensive to administer and this, combined with the high increase
in fraud, makes for drastic changes as outlined in (6) below.
6.—7. Does the contributory principle
have a future?
No it does not. It should be scrapped, not modernised,
and now is the ideal time, when the Inland Revenue has been merged
with the Contributions Agency.
It would not be too difficult to simplify the
system of non-Means Tested Benefits, provided it was "Thought
Through", and not enacted by impulsive measures, as we have
witnessed so often in the past. The procedure we have in mind
would be too long to go into here, but suffice it to say that
to replace the contributory scheme by direct taxation would save
millions in Contributions Agency staff time; overloaded computers
and the clumsy, ineffective methods which have evolved over the
past 15 years.
Bill Dickinson
Social Security Spokesman
Employment Affairs Committee
May 1999
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