APPENDIX 11
Memorandum submitted by the GMB trade
union (CP 9)
1. INTRODUCTION
The GMB trade union has some 700,000 members
working in private industry, and the public services. Most are
relatively low paid. Job security is one of their major concerns.
They share a vital interest in Britain's Welfare State. This paper
sets out the GMB's case for maintaining, improving and re-establishing
the contributory principle as the keystone of a modern, flexible
and responsive Welfare State, suitable for the 21st century.
2. SUMMARY
- The contributory principle is the keystone of
a modern, flexible and responsive Welfare State;
- however, the present system needs to be radically
updated to reflect labour market and employment trends;
- social cohesion depends on the contributory principle
developing high quality and well designed products;
- the contributory principle allows working people
to insure themselves against the hazards of life and it is superior
to means testing and to private sector provision;
- national insurance benefits should be extended
to all workers earning below the Lower Earnings Limit as well
as to all carers;
- the contributory principle has been underminded
by the declining value of national insurance benefits and by gradual
erosion of entitlements;
- national insurance benefits should be indexed
to average earnings;
- to be effective as earnings replacement benefits
an earning related component should be restored;
- the GMB is opposed to the means testing of incapacity
benefit for people with private pensions;
- the GMB is opposed to national insurance contribution
changes which are estimated to exclude 170,000 who would qualify
under the present rules;
- the GMB is opposed to SERPS changes, effective
from April 2000, which will restrict the amount that a spouse
can inherit; and
- the GMB is not convinced that it is possible
to fully integrate the tax and benefits systems.
3. WHAT IS
MEANT BY
THE CONTRIBUTORY
PRINCIPLE?
3.1 The contributory principle, as a phrase,
is less well known to the lay person than either social insurance
or national insurance. However, when Beveridge's social security
system was introduced it was based on the contributory principle.
As a concept the contributory principle was relatively straightforward.
Working people could insure themselves against the hazards of
life, such as unemployment or sickness, by making contributions
from earnings into the National Insurance Fund. In return, subject
to meeting conditions, contributors to the fund became eligible
for a range of earnings replacement benefits.
3.2 In this paper, the terms, contributory
principle, social insurance and national insurance have the same
underlying meaning.
4. THE ROLE
OF CONTRIBUTORY
BENEFITS IN
THE SOCIAL
SECURITY SYSTEM:
ORIGINS AND
DEVELOPMENTS SINCE
BEVERIDGE
4.1 Origins:
"The plan is not one for giving something
for nothing and without trouble, or something that will free the
recipients forever thereafter from personal responsibilities.
The plan is one to secure income for subsistence on condition
of service and contribution and in order to make and keep men
fit for Service."[41]
4.1.1 However, Beveridge's use of the term
"subsistence" was qualified by the report's principal
objective as being "to abolish want by ensuring that every
citizen . . . has at all times an income sufficient to meet his
responsibilities".[42]
Beveridge saw the contributory principle as the best method of
reducing dependency on means-tested benefits. However, contrary
to his original intention, means testing has dramatically increased
over the past two decades.
4.1.2 The GMB is opposed to the policy of
increasing reliance on means-tested benefits, for the reasons
stated below (see 4.2.6). We believe that the policy drift, in
the past 20 years, towards increased means testing is both wrong
in principle and practice. We regard the contributory principle
as the keystone of a modern, flexible, responsive Welfare State.
The GMB believe we now have a major opportunity to re-affirm the
contributory principle and to re-invigorate the links between
the generations.
4.2 Developments since Beveridge:
Decline in the value of national insurance
benefits:
The level of all benefits, including contributory
benefits, has declined in the 1980s and 1990s as a consequence
of the Conservative Government's decision to end the link between
earnings and benefits.[43]
This decision was part of an enduring policy, underlying social
security reform of the 1980s and 1990s, to reset the balance between
means-tested and National Insurance based benefits. As a consequence,
the total number of people in families receiving means-tested
Income Support increased from just over four million in 1979 to
9.5 million in 1997. During this same period, means-tested provision
increased from 16 per cent to 35 per cent of benefit expenditure.[44]
4.2.1 The GMB believe that the decline in
the relative value of national insurance benefits has been a major
factor in the erosion of the contributory principle.
4.2.2 For example, those who have reached
pensionable age, and have satisfied the contribution conditions,
the Basic State Pension is paid at the flat weekly rate of £66.75
for a single person. In 1948, when it was introduced the State
Pension represented around 15 per cent of average earnings. It
peaked in the early 1980s, at around 20 per cent, but as a result
of indexation with prices it has since fallen back to 15 per cent.
4.2.3 The Basic State Pension is now 12
per cent less than the £75 Minimum Income Guarantee (the
new name for Income Support for pensioners). In practice , pensioners
have not shared in the rising prosperity of the nation.[45]
If the link with earnings had been maintained then the Basic Pension,
in 1998, would have been £84.34 instead of £64.70. However,
Age Concern sponsored research has suggested that an "adequate"
income for a single pensioner would be in the region of £150
per week.[46]
4.2.4 Today, more than one in three pensioners
have to rely on means-tested benefits. Yet, it is estimated that
another one million pensioners fail to claim the Minimum Income
Guarantee. In 1997-98, means-tested benefits to pensioners cost
the Exchequer a further £8.9 billion or 1 per cent of GDP.
4.2.5 Since its introduction, in 1978, the
State Earnings Related Pension Scheme (SERPS), the second tier
in the UK's pension provision, has undergone a number of major
changes which together have further undermined the contributory
principle. These changes include: the indexing to prices instead
of earnings; revising the SERPS formula which will effectively
halve the future value of SERPS pensions by 2040-41 and the reduction
in the amount of SERPS that can be inherited by a widow from April
2000.
4.2.6 The unemployed and the sick have fared
no better. With the introduction of Jobseeker's Allowance (JSA)
and Incapacity Benefit (IB) claimants faced stricter regimes but
received benefit on much less generous terms. For example, JSA,
for a single person aged 25 and over is currently paid at the
weekly rate of £51.40. While the long term rate of IB, payable
after one year of incapacity, is £66.75 (the same rate as
the Basic State Pension). These sums represent around 12 per cent
and 15 per cent of average pay, respectively. At these rates,
neither JSA nor IB can be described as true "earnings replacement"
benefits. Claimants have already to satisfy rigorous tests and
meet stringent labour market conditions in order to receive benefits.
The GMB can see no justification why, having met those conditions,
claimants should not receive an adequate level of benefit. We
therefore call for contributory benefits to be annually indexed
to increases in average earnings. In order to become realistic
earnings replacement benefits an earnings related component should
be restored.
4.2.7 It is against this background that
the use of means testing has dramatically increased over the past
two decades. It is said that means testing allows better targeting
so that those in real need receive it. However, means-tested benefits
have many disadvantages:
— there is a stigma attached to claiming
means-tested benefits;
— the eligibility rules are often complicated,
misunderstood and lead to overpayments;
— take-up rates are poor, eg, in 1996-97
between £2,350 million and £3,500 million went unclaimed;[47]
— in 1996-97, unclaimed Income Support
totalled between £1,240 million and £1,800 million and,
on average up to 1.55 million people did not claim their entitlement;[48]
— the most vulnerable lose out—measured
by caseload pensioner take-up of Income Support is only estimated
to be 61-70 per cent;[49]
— means tested benefits are paid at
inadequate levels. For example, Income Support is paid at £39
below a low cost budget for a family with two children;[50]
— because they are income related,
they create poverty traps which act as employment disincentives;
— means testing penalises those who
have made provision for the future; and
— it is bureaucratic and expensive
to adminster.
For all these reasons, the GMB rejects the continued
use of means testing.
4.3 Breaches of the contributory principle
The introduction of Incapacity Benefit and Jobseeker's
Allowance provide evidence of breaches of the contributory principle
which we contend have lead to further erosion of public support.
Behind both reforms was the intention to reduce costs. In both,
the benefit regime became more coercive.
4.3.1 When Incapacity Benefit replaced Sickness/Invalidity
Benefit it did so on less generous terms. A new test, the "All
Work Test", was introduced to determine a person's incapacity
for work. This (now discredited) test was essentially a medical
and functional test. It replaced the previous regime which "better
reflected the interaction between medical factors and personal
and environmental factors impeding access to employment of people
with disabilities".[51]
Under the new benefit, claimants were only able to transfer to
the long-term rate of IB after one year's incapacity instead of
28 weeks under the old scheme. There were also restrictions placed
upon claiming age-related and adult dependant's additions.
4.3.2 JSA replaced Unemployment Benefit
and Income Support for people required to maintain a connection
with the labour market. But JSA has been ridiculed. It has been
described as "uneasy hybrid" combining in an apparently
unified benefit a partly means-tested, insurance based contributory
component, payable for a much reduced period and a fully income-related
component which is not very different from Income Support.[52]
With JSA, the UK has the least generous form of unemployment
benefit in the European Union, with an earnings replacement rate
of only 23 per cent. Like Incapacity Benefit, JSA could be
said to have breached the contributory principle. The period of
entitlement, notwithstanding the more rigorous job seeking regime,
was reduced from one year to six months. The adult dependant's
additions were abolished and lower rates of benefit were introduced
for those aged 18-24.
5. CURRENT DEVELOPMENTS
AFFECTING THE
FUTURE OF
THE CONTRIBUTORY
PRINCIPLE
5.1 "If we were starting from scratch—if
there were no incapacity benefit scheme—I do not believe
that we would start up a scheme that ignored the fact that many
people receiving IB have quite substantial incomes from their
pensions."[53]
5.1.1 The Welfare Reform Bill proposes to
effectively means test Incapacity Benefit for those claimants
in receipt of an occupational or private pension, which is over
£50 per week. Incapacity Benefit will be reduced by 50 pence
for each additional pound. It is argued that this change only
brings IB into line with JSA. It is estimated that this will affect
about 40,000 people but that existing claimants will be unaffected.
5.1.2 The GMB opposes this proposal. It
amounts to means testing and it is contrary to the contributory
principle of national insurance. Due to the falling value of contributory
benefits many people were encouraged to take out alternative private
provision. This trend gained further impetus with the introduction
of Incapacity Benefit in 1995, when the earnings-related component,
available under invalidity benefit, were abolished. Such a change
contradicts the Government's policy to "provide work for
those who can and security for those who cannot".[54]
Moreover, the 50 per cent "taper" is greater than the
marginal rate of income tax for highest earners.
5.2 The Welfare Reform Bill also proposes
national insurance contribution (NICs) changes to Incapacity Benefit.
In future, claimants will need to have actually paid national
insurance contributions in one of the two tax years before their
claim. Although these changes bring IB into line with JSA we do
not accept this as a satisfactory justification. The Government
estimates that these changes, if implemented, will exclude up
to 170,000 from receiving Incapacity Benefit. The GMB opposes
such a change. Most of these will be people who would have claimed
IB after a period of unemployment. So, for example, someone who
has paid NICs for many years and became unemployed and developed
a disabling condition at a later stage will no longer be entitled
to claim IB.
5.3 The reduction in the amount of SERPS
that can be inherited by a widow from 6 April 2000.[55]
Once more, this change, if implemented, will further undermine
the contributory principle. The GMB calls for this change to be
repealed.
6. PUBLIC AWARENESS
AND ATTITUDES
TOWARDS NATIONAL
INSURANCE AND
THE CONTRIBUTORY
PRINCIPLE
6.1 The evidence seems to indicate that
the public today has a confused and perhaps cynical view of national
insurance. Following the changes introduced by JSA, a commentator
claimed that National Insurance Contributions are "in reality
just an earmarked tax rather than actually earning entitlement
to benefit".[56]
This theme is reflected in the commonly quoted, but erroneous,
suggestion that employer's NICs are nothing but a tax on labour.
Although, with regards to employee contributions, the same sources
are less forthcoming. Yet, another commentator thinks that "when
the contributing public get the worst of both worlds, continuing
to pay for benefits they no longer receive" it is difficult
to argue that NICs are not another tax.[57]
Moreover, a recent study of self-employed people and National
Insurance Contributions by the Social Policy Research Unit (SPRU)[58]
found that there were low levels of understanding of the overall
contributions scheme and that the links people made between contributions
and subsequent entitlement to benefit were often wrong, especially
among the younger people. Finally, anecdotal evidence suggests
that it is common for older people to be surprised and shocked,
that they do not have an automatic entitlement to the full Basic
State Pension which suggests that public awareness is at a level
which is less than desirable.
7.1 Advantages: In the GMB's view
the contributory principle is, from experience, the best model
of social insurance. It is a superior model because as it is a
compulsory scheme it avoids relating contributions to an individual's
risk.
7.1.1 To be efficient, private sector insurance
needs to set the level of premiums in relation to the risk of
the individual. So, for example, coal miners who have higher occupational
risks than office workers would expect to be charged higher premiums.
People with higher risks are the old, disabled and the unskilled.
They are also likely to include women, members of ethnic minorities
as well as those in part-time, temporary or casual employment.
Such people would face unaffordable premiums and therefore be
unable to benefit from private sector provision.
7.1.2 Like the TUC[59],
we agree that the private sector can play a role in providing
income replacement insurance but that this provision should be
seen as complementary to the state scheme, not as an alternative
to public provision. We are vigorously opposed to any proposal
which would envisage State provision retreating further towards
a "safety net" only role.
7.2 Weaknesses: However, the contributory
principle's major weakness is that not all workers are covered
by National Insurance benefits. This exclusion affects low paid
and part-time workers, primarily women, whose earnings fall below
the Lower Earnings Limit but the majority of carers are also affected.
7.2.1 Lower Earnings Limit: In order
to qualify for the range of contributory benefits a worker has
to have earnings above the (LEL) as well as satisfying the qualifying
conditions for the particular benefit. For example, 10.6 million
people received the State Pension; around 96 per cent of men but
only 49 per cent of women receive the full amount of basic pension.
But it is estimated that around 400,000 people over pension age
are not receiving a state Retirement Pension.[60]
This figure would include those who have paid into the National
Insurance Fund but failed to meet the minimum conditions to qualify
for a pension.
7.2.2 The Education and Employment Committee's
Report on Part-time Working[61]
reckoned that, by Winter 1995, 2.5 million people were excluded
from contributory benefits, 95 per cent of whom were women workers.
Evidence demonstrated that women workers, in particular, are most
disadvantaged by the National Insurance system. They make up the
vast majority of part-time workers and work part-time for longer
than men. Research showed that 20 per cent of women who were earning
below the LEL in 1991 were in the same position five years later.
A further 14 per cent of women who were earning below the LEL
were out of the labour market by 1996. For men, only 3 per cent
remained earning less than the LEL.[62]
Whereas two-thirds of men who were excluded by the LEL were either
students or young workers, just a quarter of women were in this
category. Black workers, particularly those at the bottom of the
income scale, have on average lower hourly earnings than their
white counterparts so they were more likely to fall below the
LEL.[63]
7.2.3 However, workers with occasional fluctuating
earnings bringing them above the LEL are in the perverse position
of paying National Insurance Contributions without any prospect
of qualifying for contributory benefits.
7.2.4 Carers: Today, in Britain,
almost seven million people provide care for disabled, frail or
elderly relatives or friends. The vast majority of carers are
unpaid. Only a very small proportion of this number, in 1996 it
was 357,000, qualify for Invalid Carers Allowance (ICA), a weekly
social security benefit. Those who receive ICA also get a weekly
contribution credit. But credits will only help a person to satisfy
the second contribution condition for benefits, such as contribution-based
JSA, which has two contribution conditions. A carer would only
become eligible for contribution-based JSA if they have satisfied
the first contribution condition, which requires them to have
actually paid the appropriate amount of contributions in one of
the last two years prior to their claim for JSA. The majority
of carers not receiving ICA may be eligible for Home Responsibilities
Protection (HRP), introduced in 1978. However, HRP entitlement
only helps to reduce the number of years in which contributions
need to be paid in order to qualify for the State Retirement Pension.
It does not enable a carer to become eligible for short-term benefits
such as Incapacity Benefit or contribution-based JSA.
7.3 The Government has announced plans to
align the starting point at which an employee and the employer
begin to pay national insurance contributions (NICs). These NI
contributions will become payable when the employee earns an amount
equivalent to the personal allowance for income tax. It is understood
that those earning between the existing LEL and the new starting
point for NICs will have their entitlement protected. However,
it seems that those whose earnings fall below the LEL, will continue
to be excluded from contributory benefits no matter how many years
they had worked. With no entitlement to benefits such as contribution
based Jobseeker's Allowance such workers will be forced to claim
Income Support, entitlement to which is based on the household's
income and assets. The GMB finds this position indefensible as
well as unacceptable. We insist that workers earning less than
the LEL and carers should become eligible for national insurance
benefits and call for the examination of the LEL, as announced
by the Chancellor of the Exchequer in his March 1999 Budget, to
address this issue.
8. DOES THE
CONTRIBUTORY PRINCIPLE
HAVE A
FUTURE: ARE
THERE OTHER
MODELS OF
WELFARE DELIVERY,
EG, BETTER
INTEGRATION OF
TAX AND
BENEFITS, WHICH
BETTER REFLECT
TODAY'S
SOCIAL REALITIES?
8.1 The GMB views the contributory principle
as fundamental to the UK's social insurance system. By making
contributions from their earnings into the National Insurance
Fund working people can insure themselves against the hazards
of modern life. The GMB believes that the contributory principle
can be re-established as the fundamental keystone to the welfare
state for the 21st century. We also believe that this is consistent
with the Government's policy of "work for those that can;
security for those who cannot".
8.2 The proposal to integrate the UK's tax
and benefits systems is not a recent one. It is however, a proposal
awaiting a consensus. Andersen Consulting, the management and
technology consultants has, in evidence to the Social Security
Committee, called for the creation of "tax-benefit integration
laboratory", which would allow the Government to explore
ways to integrate taxes and benefits. Andersen are confident that
such a regime can harness the "legacies which result from
the heavy investment Britain has made in amassing accurate tax
and social security data, applying information technology and
developing civil service staff skills".[64]
8.2.1 The Working Families Tax Credit (WFTC)
is one of the main vehicles by which the Government seeks to explore
the potential for integrating the tax and benefit systems. Tax
and benefit integration may have considerable scope to play an
important role in the labour market, ie, "making work pay".
The GMB welcomes the tax credit initiatives but recognises their
limitations: these credits are primarily aimed at those with good
prospects of finding paid work.
8.2.2 However, the GMB remain unconvinced
that tax benefit integration has general application. We concur
with Martin Taylor's conclusion that tax and benefits traditionally
have very different objectives.[65]
The former is aimed at funding government expenditures whereas
the latter is the "relief of need". While recipients
of "in-work" benefits paid tax this was not the case,
generally for benefit recipients. Moreover, individuals pay tax
but benefit is paid to household groups. These differences
reflect their respective objectives.
8.2.3 There are other issues that would
follow on from full integration such as the abolition of National
Insurance contributions for both employees and employers. However,
such radical reform would necessitate significantly higher rates
of income tax. The abolition of employers NICs would create a
£27 billion gap in government revenues equivalent to a rise
in Corporation tax of over 50 per cent.[66]
We are not convinced that full integration is a realistic proposal.
Like Taylor, the GMB believes that the tax and benefit systems
can be directed in their own ways to combat poverty and improve
work incentives.
9. COULD THE
CONTRIBUTORY PRINCIPLE
BE MODERNISED
TO PROVIDE
FOR CHALLENGES
OF THE
NEXT MILLENNIUM?
9.1 There have been many fundamental changes
since Beveridge. Women's labour market participation has increased
dramatically. Moreover, it is no longer acceptable to view married
women as being mere dependants. The old industrial structures
have collapsed and the very nature of work has changed. Yet there
are still unacceptable levels of unemployment. These are all changes
and trends that Beveridge did not foresee.
9.1.1 The contributory principle needs to
be developed to meet the demands of a modern society. The contributory
principle needs to be modernised to generate a more cohesive society.
Public welfare needs to be well-designed and of good quality otherwise
those at the top of income distribution will see no reason in
supporting it. Failure to modernise will only further undermine
the present system. As we have seen swathes of society, but mainly
women, have been excluded from national insurance benefits. So
any modernisation of the present system needs to take this factor
into account. It should be inclusive rather than exclusive.
9.2 The National Insurance Fund is flexible
and modifications can be implemented reasonably quickly to respond
to changing economic conditions. The National Insurance Fund is
a "pay as you go" fund with one year's contributions
used to pay out benefits in the same year. Moreover, its administration
costs are low. It provides a relatively simple way for each working
generation to provide for their fellow citizens who are no longer
able to work. By doing so it is a good example of social solidarity
at a time of increasing individualism.
9.2.1 In the past it has been argued that
"as long as the social insurance fund balanced, there was
no excessive charge to the state" but that "growth of
long term unemployment in a non-contributory environment has undermined
the contractual basis of National Insurance".[67]
But this view has been itself undermined, perhaps from an unexpected
quarter. The fund remains "as attractive a model now as ever.
It has nothing to do with funding".[68]
John Edmonds
General Secretary
May 1999
41 The Beveridge Report on Social Insurance and Allied
Services, para 455 (1942). Back
42
Ibid. Back
43
"Work disincentives and benefit levels", TUC
Briefing (Number 20), October 1998. Back
44
Social Security Overview (number 1), Welfare Reform Focus
File 1998. Back
45
"Partnership in Pensions", Department of Social
Security, 1998a. Back
46
"Raising the wage of retirement" by E Midwinter.
Age Concern England, 1998. Back
47
Income Related Benefits Estimates of Take-up in 1996/97 (DSS/Corporate
Document services, 1998) cited in Benefits A Journal
of Social Security Research, Policy and Practice. Issue 24 January/February
1999, page 38. Back
48
Ibid. Back
49
Mr John Denham, Written Answer, Column 27, 26 October
1998. Back
50
Family Budget Unit, Kings College, London "Low cost but
acceptable-A minimum income standard for the UK: Families with
young children". Back
51
"Incapacity for work: a new benefit and new tests".
D Bonner (1995) 2 JSSL, pp 98-112. Back
52
"Jobseeker's Allowance: an uneasy hybrid", D
Bonner (1996) 3 JSSL, 165-184. Back
53
Alistair Darling, Secretary of State for Social Security (Hansard,
23 February 1999, column 223). Back
54
"New ambitions for our country: a new contract for welfare"
1998. Back
55
Social Security Act 1986. Back
56
Bonner, opus citus, page 184. Back
57
"When is a tax not a tax? When it's called National Insurance"
by Rory O'Kelly, Fabian Review, p 10, Spring 1999. Back
58
"Self-employed people and National Insurance Contributions"
by Anne Corden cited in Benefits, A Journal of Social Security
Research, Policy and Practice, pp 21-22.7. THE ADVANTAGES AND
WEAKNESSES OF THE CONTRIBUTORY PRINCIPLE AND THE BENEFITS TO WHICH
IT GIVES RISE Back
59
"TUC comments on the Green Paper on Welfare Reform",
TUC 1998, p 24. Back
60
Parliamentary Written Answer, column 622, 30 March 1999. Back
61
House of Commons' Education and Employment Committee Second Report:
Part-Time Working, Volume 1, paragraph 103 (Session 1998-99). Back
62
Ibid, paragraph 106-107. Back
63
"Pride not Prejudice: Analysis of Black Workers in Today's
Labour Market", TUC, November 1997, p 10. Back
64
"Think big, implement small, scale fast" by T Gbedemah
and P Cullam, Citizens Income Bulletin. Back
65
"Work incentives: A Report by Martin Taylor",
The Modernisation of Britain's Tax and Benefit System (Number
2). Back
66
Ibid, para 2.13 Back
67
"Beyond Unemployment" by R Skidelsky and L Halligan,
Social Market Foundation (Occasional Paper, Number 5), 1993. Back
68
"The Age of Entitlement", by D Willetts, MP.
Social Market Foundation (Paper, number 14), 1993. Back
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