Annex
Memorandum submitted to the Pensions Review
by the National Pensioners Convention on 10 November 1997
THE FINANCING OF NATIONAL INSURANCE
A note attached to Phillip Morgan's[70]
letter of 16 October to Tony Lynes explains why expenditure from
the National Insurance Fund is treated as public expenditure and
included in the Control Total—ie thelimit set on Government
expenditure for the financial year. The note says: "It is
no different fromexpenditure financed by tax receipts, only the
method of finance is different. Where National InsuranceContributions
differ from general taxation is that the money raised can only
be spent on contributory benefitsand the NHS."
We accept that this is the conventional view
held within government but we consider it in some respects misguided
and dangerous. This note puts forward an alternative view for
consideration in the context of the Pensions Review.
It is not true that contributions differ from
taxation only in being earmarked for the payment of benefits,
although this is a vital difference which clearly distinguishes
them from income tax and other taxes which provide a single pool
of money for all forms of government spending. An equally fundamental
difference is that NI contributions establish the contributor's
future entitlement to NI benefits.
This is both a moral and a legal entitlement.
The legal entitlement is enshrined in social security legislation
and can be removed or diminished only by an Act of Parliament.
It is true that in some respects the legislation is less specific
than one would expect in an insurance scheme where rights are
related to contributions. In particular, the discretionary uprating
provisions, leaving the Secretary of State to decide to what extent
pensioners and others should share in rising prosperity, are anomalous
and should be replaced by a clearrule linking pensions and other
long-term benefits to average earnings. Despite this defect in
thelegislation, however, it remains true that NI contributions
confer in a unique way a legal entitlement tofuture benefits.
The moral entitlement is equally strong and
particularly important in a pay-as-you-go scheme. Pensioners frequently
argue that, having paid their contributions throughout their working
lives, they are entitled to the pensions they were promised, regardless
of whether the contributions they paid were invested or used for
current expenditure. It is highly significant that the last Government,
with its passion for benefit-cutting, nevertheless felt obliged
to respect this principle, or at least to give the appearance
of doing so. The cuts made in SERPS pensions were almost wholly
limited to the pension rights resulting from future contributions,
the rights already acquired being protected. Again, this moral
imperative to maintain the rights earned by past contributions
is unique in the field of public finance.
The rights conferred by contributions paid are
matched by the obligation which everyone accepts to pay contributions
in order to acquire those rights. Thus, if the Government were
to decide that pensions and other benefits should in future be
paid at a substantially higher level, it would be considered right
and proper that contribution rates should be increased. No-one
complained when the combined contribution rate was raised by 2
per cent of earnings in 1978, on the introduction of SERPS. On
the contrary, the Government would have been criticised for promising
generous pensions in the future without requiring existing contributors
to pay more. A comparable increase in taxation would have been
seen in an entirely different light.
In terms of the impact on Government finances,
this is crucial. A decision to spend more in almost any other
area of Government activity has adverse implications for the Public
Sector Borrowing Requirement. But a decision to spend more on
national insurance pensions can be neutral or even favourable
for the PSBR, depending on whether, in a particular year, the
increase in contributions exceeds the increase in expenditure.
In considering the financial and economic consequences
of any proposed improvement in state pensions, therefore, it is
essential that the combined effects of higher pensions and higher
contributions should be taken into account. To look at only one
side of the equation must inevitably lead to misleading conclusions
as to what can be afforded.
70 Phillip Morgan is a DSS official and a member of
the pensions review team. Back
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