APPENDIX 14
Memorandum submitted by Lancashire County
Council Welfare Rights and Social Inclusion Services (CP 12)
The National Insurance Scheme, based on the
contributory principle, should, relative to the private insurance
sector, be promoted as a cost-effective source of protection against
incapacity, unemployment, and retirement. This would be in concert
with wider Government policy, as the benefits are socially inclusive
and help prevent poverty by strengthening the commitment to work.
Recent trends to means test contributory benefits alongside the
withering away of their value, and restricting eligibility, attack
the social contract between the individual and the State that
is implied in the Scheme.
INTRODUCTION
Lancashire County Council Welfare Rights Service
was established in 1987 and exists to serve the 1.1 million residents
of Lancashire. Our purpose is to ensure that all those who need
advice and help to obtain Social Security and local authority
benefits to which they are entitled are able to get it. We have
a centralised benefit take-up team as well as six local offices,
and 24 satellite outposts, distributed around the County to achieve
this aim. We have extensive benefit casework experience, with
annually approximately 60,000 advice transactions and we provide
help with over 2000 Social Security appeals. It is with this background
that we welcome the opportunity to contribute to the inquiry into
the future of the contributory principle.
The Government's new contract for welfare is
based on the principle of "work for those who can; security
for those who cannot". The contributory principle, of establishing
entitlement to some financial security in times of need by paying-in
to State funds when able to, is consistent with this approach.
We see no reason to doubt that its place as the backbone of a
successful Social Security system can continue.
Our casework and benefit take-up experience
has shown us that the National Insurance Scheme has many advantages,
but that it is being undermined by current trends. We are, therefore,
pleased to note that the inquiry will be looking into how the
contributory principle can be modernised.
ADVANTAGES OF
THE CONTRIBUTORY
PRINCIPLE
1. The National Insurance Scheme, in our
experience, is a scheme that carries considerable legitimacy and
clarity of purpose. This is not surprising as it is based upon
an insurance principle that is common to many different situations,
indeed is surely more common today than it has ever been, and
as such has become an accepted part of personal financial arrangements.
2. The National Insurance Scheme contributes
towards social cohesion. Conceptually, those in work pay into
a common fund and get the same benefits. People pay largely according
to their means, and those on high incomes do not gain an advantage.
The taxation of key benefits takes this further. People see this
as fair.
3. The legitimacy of the contributory principle
can facilitate the take-up of benefits. For example, pensioners
do not consider the State Retirement Pension as a benefit but
as a right gained because of what they and/or their spouse has
contributed during their working life. With many years experience
of benefit take-up campaigns focused on pensioners, we know that
successive generations are very resistant to claiming non-contributory
and/or means-tested benefits—and can suffer unnecessary
hardship as a result.
4. When compared to contributory benefits,
other benefits, especially means-tested benefits, are hugely expensive
to administer. They have also been shown to be complex and confusing
to understand for both Benefits Agency staff and claimants. The
evidence shows that underpayments, as well as overpayments, are
common. Contributory benefits, on the other hand, are more straightforward
and simpler to understand and administer. There is also less stigma
to claiming.
5. As was originally intended, contributory
benefits help safeguard household income during adversity, and
can prevent families falling into poverty and reward a commitment
to work. For example, in families where one partner is in low
paid employment and the other is unemployed or sick an award of
a contributory benefit supports the family income, and encourages
the working partner to remain in employment. This is in contrast
to the means-tested benefit structure that can sometimes encourage
the working partner to give up work and then leads to the whole
family falling into benefit dependency.
6. Contributory benefits can serve to keep
people off means-tested benefits by helping to preserve "nest
egg" savings. Without them families and individuals of modest
means are forced to consume hard-won savings and can plummet into
penury very quickly, with little prospect of re-building their
savings for years, even if they return to work relatively soon.
This outcome is obviously exacerbated by the low capital thresholds
for means-tested benefits. The DSS research report "Attitudes
to the Welfare State and the Response to Reform" confirms
our experience that apart from pensions, private insurance to
cover periods of ill-health and unemployment are not commonplace.
This is despite considerable efforts on the part of the previous
Governments. This should not be surprising. For one, families
and individuals with limited means will always be able to find
something more pressing to spend the money on—hence the
importance of compulsion in the National Insurance Scheme. The
point was well made in 1978 when married women were denied the
opt-out, with the reward being full and equal participation in
the National Insurance Scheme. For another, after the pensions
miss-selling scandal (in which, it should not be forgotten, faulty
Government policy was an important factor) levels of confidence
in private-sector schemes are very low. In fact, the conditions
are probably as near as they have ever been to the situation in
the pre-war period when private insurance schemes were so inadequate
and extortionate as to give rise to the Beveridge Commission.
PROBLEMS INHERENT
IN CURRENT
TRENDS
7. More and more people continue to fall
out of the contributory scheme, and are forced to claim means-tested
benefits, with all the downside effects. There is no reason why
this trend cannot be reversed, but modernisation will be required.
8. People perceive the current system as
unjust in situations where they have paid into the National Insurance
Fund for a substantial period and then miss out on only a few
contributions, because the qualifying period has changed, thus
denying them entitlement to benefit particularly during periods
of ill-health and unemployment. However, for many years trends
have continued this policy of reducing access; for example, the
proposals in the Welfare Reform and Pensions Bill to restrict
entitlement to Incapacity Benefit to people with a more immediate
contribution record. This will exclude the long-term unemployed,
forcing a greater reliance on means-tested benefits. It will serve
to reduce the value of contributions paid during good times when
in work and will be arbitrary in its impact. A recently unemployed
person who has a stroke will be able to claim Incapacity Benefit,
whereas someone who has, through no fault of their own, been unemployed
long-term will not (in the same circumstances) be able to use
the contributions they have paid. Actions of this kind rightly
give rise to accusations that the Government is unilaterally varying
a contract. It is noteworthy that transitional protection rarely,
if ever, applies in these situations.
9. The raising of the National Insurance
lower earnings threshold is a matter of importance. There is concern
that this will simply encourage more employers, even allowing
for the minimum wage, to create low paid part-time jobs, or two
part-time jobs rather than one full-time job, to avoid paying
National Insurance contributions—which will obviously result
in an increase in the working population excluded from contributory
benefits.
An analysis of Jobcentre vacancies in Preston
in October 1998 reported that 36.6 per cent were jobs with a rate
of pay below the lower earnings level (£64 a week)—a
2.4 per cent increase on 1997 figures. Approximately half of the
vacancies paid less than the single person's tax threshold of
£80.70 a week.
(Jobwatch Preston 1998: An analysis of Jobcentre
vacancies in Preston. The fifth in series of research reports
prepared by Greater Manchester Low Pay Unit for Preston Borough
Council.)
10. The question of replacement incomes
is more acute for the low paid than anyone else as in-work incomes
are likely, even with Working Families Tax Credit, to leave little
scope for insurance provision for times of ill-health and unemployment.
Their vulnerability to a rapid deterioration in personal resources
and descent into social exclusion is a real prospect.
11. People who see the contributory principle
as part of a financial transaction with the State, giving them
rights to a range of insurance benefits in return for contributions
paid, also perceive injustice when they have to go through a further
financial test to claim these benefits. This currently applies
to people with occupational/private pensions when they claim Jobseekers
Allowance, but will also apply to Incapacity Benefit if the proposals
in the Welfare Reform and Pensions Bill are accepted. There is
evidently double-payments here (private provision and National
Insurance contributions). If the discouragement of early retirement
on benefits is the intention couldn't a more just way be found
to achieve this?
12. There is the appearance of a lack of
a systematic approach towards future plans for contributory benefits.
Mixed messages are given as to the Government's policy on contributory
benefits. On the one hand, the Government is extending the scope
of bereavement benefits, and proposing that under 25 year olds
with a disability/long-term incapacity be passported to Incapacity
Benefit (a contributory benefit) rather than maintaining the non-contributory
benefit Severe Disablement Allowance. On the other, it is proposing
the introduction of the measures detailed above as part of their
Welfare Reform programme. Again, the Minimum Income Guarantee
for pensioners refers to means-tested benefits only, and has caused
much confusion.
13. The DSS Research Report "Attitudes
to the Welfare State and the Response to Reform' noted that people
had little understanding of how the National Insurance system
worked and what people could expect from it. This should not be
seen as a lack of support for the system, but more a response
to the lack of information available. We would, therefore, endorse
the Report's findings that the Government needs to provide people
with clearer explanations about how National Insurance works and
how their contributions are used. In our experience, when people
have the system, and their rights within it, explained to them
they are fully supportive of it.
13 May 1999
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