APPENDIX 13
Memorandum submitted by Church Action
on Poverty (CP 11)
EXECUTIVE SUMMARY
1. What is meant by the contributory principle?
- The "contributory principle" denotes
a funding system for certain sorts of benefits.
- The "contributory principle" is of
less importance and should take second place to the "insurance
principle".
2. The advantages and weaknesses of the contributory
principle
- Those claiming contributory benefits tend to
feel that they are "entitled" to them rather than seeing
them as a form of "charity". This is both an advantage
(people feel better about claiming benefits) and a weakness (it
undermines the sense of entitlement felt by those claiming means-tested
benefits).
- Eligibility based on contribution records causes
anomalies within the system, can act as a disincentive to work
and exclude the low-paid and long-term unemployed.
- NICs can act as a "tax on jobs."
3. Public awareness and attitudes towards
national insurance and the contributory principle.
- Young people especially have little understanding
of the difference between means-tested and contributory benefits.
Long-term unemployment has meant that many have never had the
chance to claim contributory benefits.
- Whilst there is still a strong attachment to
the state pension, there is much lower public awareness of other
contributory benefits.
4. Are there other models of welfare delivery
which better reflect today's social realities?
- The current system of tax and benefits is complex
and insufficiently flexible to cope with the flexible labour market.
- An integrated system of tax and benefits is required
if all the anomalies and difficulties inherent in the current
system are to be ironed out.
- A Unified Allowance System is proposed, based
in the dual notions of social solidarity and social insurance,
that would provide a minimum income guarantee for all with a smooth
transfer from receiving benefit to paying tax.
INTRODUCTION
1. This submission to the Social Security
Select Committee's inquiry into the future of the contributory
principle has been developed by the Church Action on Poverty (CAP)
welfare reform group.
2. This group of people, many of whom have
direct experience of poverty, unemployment and living on benefits,
has been meeting regularly since February 1998 to assess the Government's
proposals for welfare reform and to develop CAP's response to
them.
3. The welfare reform group has also had
the benefit of discussions with and advice from colleagues in
the voluntary sector, businesspeople in the private sector, policy
analysts from the statutory sector, politicians and many others.
There has not always been agreement at these meetings but there
has always been a willingness to listen, to hear and to learn.
4. CAP and the welfare reform group wishes
to thank all those who have contributed so far to the ongoing
process of participatory policy development in which CAP is engaged.
We sincerely hope that this submission is part of an ongoing process
which gives people with direct experience of poverty the opportunity
to be part of the process of reform which will change the welfare
state over the coming years.
5. What is meant by the contributory principle
5.1 There was widespread agreement that
the notion of the "contributory principle" needed rethinking.
It was taken to denote a funding system for certain sorts of benefits
in which contributions were made according to income, and benefits
paid out according to contributions.
5.2 For many in the group, the contributory
principle was of less importance than the "insurance principle".
However, they felt that the insurance principle goes beyond the
contributory principle and include all types of benefits. When
people are doing well they give to public funds in the form of
taxation. When they are doing less well, they receive from public
funds in the form of benefits. Giving to public funds in the form
of taxation, and receiving from them in the form of benefits,
are two sides of the same coin and should be recognised as such.
Under the present system, however, tax and benefits are not only
administered separately; they are perceived by Government, politicians
and the public very differently as well.
5.3 Those paying tax and those receiving
benefit are treated in entirely different ways by the system.
Tax-payers are praised for their contribution to the common good
and have their wishes pandered to by Government.
5.4 Those in receipt of benefit, by contrast,
are widely presented as scroungers and regularly vilified by politicians.
5.5 In the current climate, the group felt
that the contributory principle was little more than a way for
governments to "sell" a rather inefficient form of taxation
to the public.
6. The advantages and weaknesses of the contributory
principle and the benefits to which it gives rise
6.1 The principal advantage of the contributory
principle, so far as the members of the welfare reform group were
concerned, is the fact that it allows people to feel that they
are "entitled to their benefits". As one member of the
group said: "people see means-tested benefits as beneath
their dignity . . . people think that they `earn' some benefits
and others are `charity'"
6.2 Another member commented that: "because
contributions have been made people feel that they are entitled
to the benefits—the experience of claiming benefits is different."
6.3 However, many members felt that this
was in fact a dubious advantage. The distinction between benefits
that are notionally paid for out of NICs and those which are paid
out of general taxation was seen by many as arbitrary. Indeed,
the very existence of benefits based on contributions helps to
set up the unhelpful distinction between those benefits to which
people are "entitled" and those which are "charity".
One member of the group made this point explicitly when she said:
"this false distinction needs to be broken down as society
has an obligation to those who can't earn. Solidarity is important."
Another member pointed to the absurd and cruel rules which mean
that "unemployed people are made `scroungers' after six months."
6.4 Moreover, the group felt that NICs are
an outdated way of paying for benefits and eligibility criteria
cause unnecessary anomalies. As one member of the group put it:
"we don't say `you haven't contributed to the NHS—you
can't use it.' But we do say this about a range of benefits and
pensions for those on low pay or no pay."
6.5 Rule changes over the years have also
created barriers to work. One member of the group is in receipt
of earnings-related Invalidity Benefit which she found met her
need reasonably well. Her disability means that were she to return
to work she would be on a lower level of earnings than she was
when she left work originally. As a result, if she found that
was unable to continue working, the level of Incapacity Benefit
to which she returned would be based on a lower level of earnings
and would therefore be lower itself. Clearly this acts as a disincentive
to return to work.
6.6 Members of the group also felt that
given the persistence of long-term unemployment in many parts
of the country it is inappropriate to place a "tax on jobs"
in the form of NICs. They agreed with the authors of Unemployment
and the Future of Work, when they said:
"Reducing the burden of taxation and insurance
contributions that fall on employment would either increase jobs
or pay, or both. We believe that there is a strong case for reducing
the costs of employing labour and also the taxes and insurance
contributions paid by workers themselves. But the case is most
compelling in relations to relatively low skilled jobs."[69]
7. Public awareness and attitudes towards
national insurance and the contributory principle
7.1 There was widespread agreement that
an understanding of the distinction between contributory benefits
and means-tested benefits was particularly poor amongst younger
people. As one member of the group said: "unemployment has
meant that a whole generation has had little contact with the
system of contributory benefits."
7.2 Whilst there is still a strong attachment
to the basic state pension as an entitlement that has been paid
for, the group felt that other benefits reliant on contributions—Statutory
Sick Pay for example - was little understood by the majority of
claimants. Indeed, members of the group gave examples of friends
who had failed to claim contributory benefits because they did
not know that they were entitled to them.
8. Does the contributory principle have a
future? Are there other models of welfare delivery, for example
better integration of tax and benefits, which better reflect today's
social realities?
8.1 What follows is an outline of an alternative
system of tax and benefits developed by the CAP welfare reform
group, with the participation of people with direct experience
of poverty. The group drew on their own experience of the ways
in which the existing benefits system does not work, the ways
in which it traps people in poverty and unemployment and the complexity
which seems designed to prevent people from helping themselves
and accessing what is due to them. What follows is not a fully
worked-out technical solution. Rather it is an honest attempt
to generate possible ways forward from the perspective of those
for whom the benefits system exists. It is hoped that this proposal
will be carefully studied for what it offers, not dismissed for
whatever weaknesses it may contain.
Background
8.2 As it stands the current system of benefits
is very complex. It gives every appearance of being designed by
and for experts and it is certainly impossible for the majority
of its users to understand. Moreover, it is not sufficiently flexible
to create a secure platform for enabling people to enter the flexible
labour market. Claimants are often unclear of the effect that
taking work will have on their benefits —any assume that
this will result in the loss of all benefits entitlements. Certainly
many have no means of knowing how much benefits they would be
entitled to before accepting the offer of a job. Under the current
system benefits stop when unemployed people sign-off, but wages
may not be paid for at least a week—often a month—leaving
people in severe hardship and unable to meet the extra costs associated
with employment (travel, appropriate clothes etc.). This fear
of the unknown provides a substantial barrier to work.
8.3 So too does the amount of time taken
to process new claims and to calculate benefit entitlements after
a change of circumstance. One member of the welfare reform group
spoke of his experience:
While he was unemployed his wife managed to find
a job for five hours work per week. Her total earnings from the
job were £12. In order to calculate the level of benefits
to which this man was now entitled the Benefits Agency averaged
his wife earnings over the year. Whilst they were making this
calculation, benefits were paid to the man weekly. Once the Benefits
Agency had calculated the change in entitlement, payments were
once again made fortnightly. This left the man and his family
without any income for one week. It felt as if they were being
punished for trying to work.
8.4 The existence of so many different benefits,
each with a separate regulatory regime, may make bureaucratic
sense, but it makes absolutely no sense to claimants.
8.5 Setting people against each other
Under the current arrangements, taxpayers and
benefits recipients are set against one another. The systems are
split apart and do not treat people equally.
8.6 We are all taxpayers and benefit recipients
Yet, if the system works as it should, those
in receipt of benefit now will pay tax in the future (in fact
anyone who buys anything is already a VAT taxpayer). Moreover,
with the rise of in-work benefits (and the existence of universal
benefits and tax reliefs such as Mortgage Interest Tax Relief)
the majority of tax-payers are also benefit recipients. We all
receive "benefits" from universal services such as health
and education.
8.7 A proposal for an integrated tax and benefits
system
What is given below is not a system worked out
in every detail. It does, however, demonstrate that with a sufficiently
open mind a system of tax and benefits, which is both fair and
which avoids creating personal and financial hardship through
unemployment and poverty traps, can be developed.
9. A Unified Allowance System
9.1 This integrated system would be based
on a single assessment of household need that would replace the
current range of different benefits, regulations and assessments.
This assessment would identify a minimum household income which
would be met by paying a unified allowance (UA) to all claimants
(unemployed, sick, disabled, lone-parents etc.). In effect the
UA would combine all current benefits into one payment. A detailed
initial assessment would be supplemented by a system of regular
self-reporting of changes in circumstances as well as regular
formal assessments.
9.2 Standard national rates and/or locally
set rates?
Some elements within the UA would be paid across
the country at standard rates. Others (e.g. the element covering
housing costs) would be based on actual cost or a "local
reference cost" basis—i.e. there would be scope to
vary certain elements according to the different costs in different
parts of the country.
9.3 Personal Income Allowances (or Earnings
Disregards)
In the same way that all benefits are amalgamated
in this system so too are all benefit disregards and tax allowances.
Thus each individual would be given a fixed (annual) Personal
Income Allowance (PIA) instead. Earnings up to this level within
a given period (month, six month, quarter or year) would have
no impact in the UAS.
9.4 A single and unified taper rate
All earnings above the PIA would lead to benefits
being withdrawn or, eventually, tax paid. A single taper rate
would replace the seemingly arbitrary, confusing and illogical
mix of rates within the current system.
9.5 Initial earnings above the PIA level
would result in a reduction of the UAS payment with effect from
the following payment period (e.g. month). This would provide
a "buffer" as people move into work, allowing them the
chance to meet extra costs and tiding them over until their first
pay cheque.
9.6 A smooth transfer from receiving benefit
to paying tax
At a certain earnings level, the UA would be
reduced to nil and individuals within the household would become
net taxpayers via the PAYE system. The transition from "welfare
to work" or between out-of-work and in-work benefits would
therefore be smooth and many of the barriers to work would have
been broken down.
9.7 A development of the Working Families
Tax Credit?
For people in work, this system could be delivered
through the pay packet as is proposed for the WFTC. For those
not currently working, it may be possible to use an expanded Income
Support, which takes into itself all other benefits, in conjunction
with more generous personal allowances, as a transitional structure.
9.8 A fully integrated tax and benefits system
This scheme would allow for the full integration
of the tax and benefits systems. It would also allow for variations
in earned income in a way that the current system does not. As
things currently stand, people who are offered casual or short-term
work may be unwilling to declare it to the Benefits Agency for
fear of losing their benefits immediately. Similarly, people may
be forced to refuse offers of work. This will be the case if the
additional costs associated with working (e.g. travel) added to
the amount of benefit lost is greater than their take-home pay.
9.9 Overcoming the barriers to taking work
Under the proposed system, however, any income
earned in any given period (week, month or quarter) can be set
against the PIA. Thus, individuals would be able to take up casual
work when it was on offer and to see the immediate benefit of
their labour. It would also allow people who cannot guarantee
their hours of work every week (those with caring responsibilities
or some disabled people for example) to do as much as they can
and still benefit. This system has an in-built incentive to work
(it avoids the unemployment trap) and does not penalise people
for being honest. This system would eliminate the situation in
which one member of the welfare reform group found herself.
She has been seriously ill in the past and still
suffers the effects of her blood disorder and the brain haemorrhage
caused by this. She could now do some limited paid work. Her doctor
advises her to do 10 or 12 hours a week on a therapeutic basis
to improve her condition and make her more likely to reach a condition
where she could work longer hours in future. She will not be likely
to be able to work full time. Her illness has left her forgetful
and the amount of time for which she can concentrate varies from
day to day and week to week. She is now doing voluntary work and
the organisation is in a position to pay her a small stipend.
She is in the ironic position that if she were able in time to
do more than 15 hours work, she would receive less under the Disability
Working Allowance rules than she would on therapeutic earnings.
When she applied to work under the therapeutic
earnings rule, she was turned down because her doctor had written
that it would be "good for her morale" rather than "improve
her condition" which, in fact, is his opinion. In her case,
therefore, this should be overturned when she make an appeal.
However, it raises the question: why should it be illegal for
a long-term sick or disabled person to work for under 15 hours
if they cannot prove that it would improve their condition - so
that they could eventually work full time?
She would like to be earning a higher proportion
of her income without the fear that doing so in the short-term
would penalise her in the long term. She says that she would like
a lifetime guarantee that if she finds work too demanding she
can go back on benefits without being worse off. Any time limit
for such a guarantee would be entirely arbitrary for many disabled
people and certainly for her. She could have a relapse at any
time, or not for years, or never. She wants the chance to work
part-time with flexible hours and with no distinction between
her earned income and the income she receives from benefits. She
wants to wake up one day and realise that she is not on benefits
anymore. She wants to be able to work as much as she is able to
on a flexible basis. Ideally she would like to start with 10 hours
work a week building up if she is able to, but with the possibility
of doing less when necessary. She does not feel that this is possible
with the current arbitrary change of status between working 15
hours or over 16 hours a week or doing nothing at all. The UA
system would allow her to do this.
9.10 Overpayments and Underpayment
A number of times per year (perhaps quarterly)
each individual would have their total earned income assessed
against their PIA. Any discrepancies could then be rectified as
they currently are with tax rebates and claims for unpaid back-taxes.
9.11 Retaining personal taxation
One of the key advantages of this system is
that it preserves individual taxation and, since tax allowances
are personal and not dependent on the income of a partner, would
not lead to a situation in which the income of a household would
be greater if one partner remained unemployed.
9.12 A simple and transparent system
This system is also clear and simple. It allows
people to plan their own work patterns with certainty as the current
Byzantine system of interrelated benefits and taxation is eliminated.
It also allows for a transition period as people move into work,
during which they would see no loss in benefits and would receive
the full value of their earned income.
9.13 Equality of treatment for taxpayers and
benefit claimants
Above all, this system treats benefits recipients
and tax-payers in the same way. Neither group is assumed to have
a monopoly of honesty and the sharp division between those who
always receive, and those who always give, is eroded.
9.14 A Basic Income?
Although this system bears some resemblance
to schemes for a Basic Income, it is better seen as a combination
of a universal and a contributory benefits system.
9.15 Basic principles
More fundamentally, however, the scheme is based
on one premise and one assumption. The premise is that each individual
has a right to have their basic needs met. The assumption that
underpins the scheme is that most people will move from being
net beneficiaries to net contributors to the system. Thus, when
times are good people will pay into the system, and when times
are bad, people will receive benefits from it. In this way the
system supports the principle of universal benefits provided through
a form of social insurance. This system allows for an easy transition
between receiving benefits and paying tax and assumes that many
people will move between the two states at different times in
their lives.
9.16 Further work
The UA system has not been worked out in every
detail. More work will be needed in a number of areas including:
— definitions of what constitutes a
"household";
— whether 16-18 year olds are included
in a household assessment;
— to whom payments are made (in order
to avoid redistribution from wallet to purse);
— the means by which unearned income
is taken into account;
— how maintenance payments and second
families would be taken into consideration.
The need for further detail, however, should
not preclude careful consideration of the principles which underpin
the system.
10. CONCLUSION
The tax and benefits system is unfair and traps
people in poverty and unemployment. It is not possible to reform
the system as it currently stands. It may be possible to reduce
some of its worst aspects by tinkering with starting rates of
tax and benefit tapers, but the inherent inequality in the way
that tax-payers and benefits recipients are treated will remain.
Policy-makers and politicians must take this opportunity to consider
a total reconfiguring of the tax and benefits system—building
on the start made with the Working Families Tax Credit. Without
this, it is impossible to imagine that any changes will do more
than transform an awful system into a bad one.
May 1999
69 Unemployment and the Future of Work. An Enquiry
for the Churches, CCBI, 1997, p 92 Back
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