House of Commons - Social Security - Appendices to the Minutes of Evidence

Select Committee on Social Security Appendices to the Minutes of Evidence

APPENDIX 28

Work commissioned by the Committee from Deputy Government Actuary (CP 37)

NEW STAKEHOLDER PENSIONS AND CONTRIBUTION CONDITIONS

SECTION 1

1. This note has been prepared by the Government Actuary's Department at the request of the Social Security Committee of the House of Commons.

2. It provides comments and financial estimates on certain proposals for a New Stakeholder Pension Scheme (section 2) as well as financial estimates for the impact on the National Insurance Fund of certain suggested changes to the current benefit system (section 3).

SECTION 2

The New Stakeholder Pension Scheme (NSP)

3. The papers given to us on the proposals outline the principles of a New Pension Scheme (NPS) which has the objective of lifting people with full contribution records off means-tested benefits. For this purpose we have assumed this to be the Minimum Income Guarantee (MIG) as it was stated that Housing Benefit should be omitted.

4. The papers included several specific questions which are answered below. In addition, we have commented on those other aspects of the proposal which appear to us to be important both from a financial point of view and in terms of the structure of the proposed NSP.

5. This paper recognises that the fundamental principle and the main characteristics of the proposals are of greatest interest. Although the main principles are clear, most of the details are not yet defined. In general these are matters of political choice. Working assumptions have been made where necessary, especially where they are needed to produce financial estimates where more details are often needed. In view of the uncertainties over the details, some of the estimates have been made by approximate methods at this stage. The details of course could be amended. We would be happy to consider other variants once the Committee has had a chance to digest the comments and figures.

6. Any changes to the current State pension system are likely to involve complex transitional arrangements. At this stage we have not attempted to investigate this aspect, as it is important first to decide on about the fundamentals of any new system, before trying to design the transition phase. However it would be important to investigate at a later stage how the transition to any new system could best be made and this might affect some of the details. At this stage we have aimed for simplicity in order that the issues should be clear. However it must be emphasised that pensions have a way of becoming complicated.

7. The NSP is aimed at replacing the current structure of second tier State benefits for retirement pensioners. It would however also have an impact on occupational provision, including stakeholder pensions. These impacts could range from the purely technical, for example, the provisions for contracting out assuming it continued to exist, to wider issues such as whether NSP would introduce a disincentive for employers to sponsor occupational pensions. These technical factors and behavioural risks would need detailed evaluation once the principles had been fully established.

Summary of the main proposals and main additional assumptions made

8. The new pension system would be made up of two parts:

(a) The current PAYG basic pension (BP), which would remain unfunded and has been assumed to continue to be uprated in line with price increases in future.

(b) The New Stakeholder Pension (NSP). Unlike the current State basic pension, this would be funded.

9. We have assumed that in the very long term only the funded NSP would remain. We have assumed that in the long term SERPS and S2P can be ignored, as they would be replaced by the NSP. As is well known, the current Basic Pension (BP) is falling relative to average earnings, as it is uprated annually in line with prices rather than earnings. There is therefore an increasing gap each year between the Minimum Income Guarantee (MIG) and the BP, assuming the MIG is uprated in line with earnings and, on average over the years, earnings increase faster than prices.

10. This feature of the BP is vitally important for the nature of any pension system designed to be on top of the BP with the objective of ensuring that the total pension income exceeds the specified means-tested level. The target level of any second pension must therefore increase in future to fill the increasing gap. It is a matter of political judgement whether there should be any initial margin in the implicit or explicit target NSP in order to give some headroom to absorb this increasing gap. One extreme position would be to ignore any BP and aim for the NSP to provide the whole pension at a level at least equal to the MIG. Figures on this extreme basis are included below. As an indication of the ultimate position As BP falls relative to earnings in future, in practice the system as a whole would steady move to that position. To the extent that any BP might be included within the total pension payable to those retiring with NSP in future before the ultimate position is reached, the costs would effectively be a transfer between the NSP and the BP.

11. It must also be emphasised that the precise gap between the MIG and the BP in future will depend upon the future changes to the levels of each benefit. This will depend not only on future policy but also on the actual difference between earnings and price increases if the current policy intentions for upratings continue. That difference must be uncertain, especially perhaps at this point in time when commentators are suggesting that we are entering a new economic age. Even small differences in any one year between the rates of increase of average earnings and the RPI can be significant when they are compounded over the 40 years or so which would be relevant for the first cohort retiring under the NPS.

12. As suggested by Mr Field, we have made two alternative assumptions, for the factors affecting the gap between the MIG and the BP which the NSP aims to fill:

(a) That the MIG continues to be uprated annually in line with earnings increases;

(b) That the MIG is increased in line with earnings for a further five years and with price increases thereafter.

13. For both (a) and (b) it has been assumed that BP is uprated in line with price increases and that the average difference between earnings and price increases is 1.5 per cent as in the latest QR long-term estimates produced by the Government Actuary.

14. It is important to understand the effect of these assumptions in order to get a clear idea of the changes over time to the required level of the NSP.

15. From April 2000, the full-rate BP will be £67.50 a week for a single pensioner. The MIG for a single pensioner aged 60-74 will be £78.45 and £86.05 for those aged 80 and over. Thus the gap is £10.95 for younger pensioners and £18.55 for those over 80. (This is a simplified outline as it ignores couples and the impact on people with less than the full rate of BP.)

16. In current price terms, BP will remain constant in future. Under the assumption at (a), the two MIG rates quoted would rise to £142.30 and £156.10 after 40 years (when someone aged 25 now will reach State retirement age) and £191.70 and £210.20 after 60 years. For younger pensioners, the "gaps" between the MIG and BP would therefore be £74.80 after 40 years and £124.20 after 60 years. For older pensioners the corresponding "gaps" are £88.60 and £142.70 after 40 and 60 years respectively. It must be remembered (paragraph 14) that the corresponding "gaps" in 2000-01 are £10.95 for younger pensioners and £18.55 for older pensioners.

17. Using the assumptions at (b), the gaps would widen from the present £10.95 and £18.55 for younger and older pensioners over the next 5 years to some £17 for younger pensioners and £25.20 for older ones and then remain constant in current price terms. The difference between these figures and those in the previous paragraph illustrates the vital importance of the policy assumption for future upratings of the MIG in determining the level of the NSP needed to achieve the objective of lifting people with full contribution records off the MIG. In practice the two assumptions lead to such different objectives in future that they are effectively different proposals.

18. To illustrate the potential importance of the difference between the assumed increase in earnings and prices, if the gap were 2 per cent a year (instead of 1.5 per cent assumed for the above figures) and the MIG were uprated in line with earnings, the MIG for older pensioners would be £190 a week instead of £156.10 (paragraph 15) after 40 years. This leads to a substantial increase in the "gap" and illustrates the uncertainty in setting any particular target for the required level of the NSP.

19. In terms of the overall issues to be addressed in considering NPS, this uncertainty affecting the target is compounded by the inevitable uncertainty over the rates of investment return earned on the investments both before and after retirement. The investment policy would of course aim to maximise the rate of investment return within the constraints of the risks which were deemed acceptable. However the actual future return must involve some uncertainty, and, as with the future level of the real earnings growth, the compounding of even small differences can be financially very significant. This must be remembered when reading the figures in the following paragraphs. Any apparent precision is simply arithmetic and never implies that the "correct" numbers can be forecast so precisely.

Assumptions used for the target for NSP

Assuming MIG earnings uprated (assumption (a) in paragraph 12)

20. In the light of the above comments on the changing level of the "gap" in future, for this paper it has been assumed that the target guarantee level for NSP for someone with a full contribution record would be based on the assumed level of the MIG for pensioners aged 80 and over in 60 years' time. That would provide a margin over the MIG for younger pensioners, and would therefore enable those entitled to slightly less than the full rate of total State pension to be still above the means-tested level until they reached age 80. It would also provide a small margin for the first few years of retirements for people with contribution years fully under the new NSP era (assuming that it starts with people around 20-25 as discussed more fully in paragraph 25). For the variant with an earnings uprated MIG throughout, the assumed target NSP is therefore £142.70 a week in current price terms (see paragraph 16). It would be possible to set a higher or lower target, although the implications from departing from the rationale used above would have to be accepted.

21. It must however again be emphasised that, as the BP falls relative to the MIG, this target would slowly become insufficient in the very long-term future. In the estimates below, the impact of assuming a target of the full earnings uprated MIG, ie ignoring any BP, is also shown.

22. It has been assumed that once the NSP comes into payment it would be uprated in line with earnings. If this were not the case, the NSP would fall after retirement relative to the MIG for the variant where the MIG is assumed to be earnings uprated. In order to meet the primary objection of keeping people off the MIG, it would then be necessary to target a higher NSP at retirement to provide a margin over the MIG to allow for the subsequent erosion of the gap during retirement. Although that is perfectly possible, it is more efficient to design the uprating of the NSP as being the same as the MIG and to have a lower target at retirement age. Members of the Committee will be aware that this issue has been raised in the discussions of the interaction between the State Second Pension (S2P) and the MIG.

Assuming MIG price uprated after five years (assumption (b) in paragraph 12)

23. For the assumption that the MIG is earnings uprated for only the next five years, the target is constant in current price terms. Again basing it on the position for older pensioners, it would be £25.20 a week, clearly very much lower than with the alternative assumption (a) for the MIG. In terms of considering a new pension arrangement which aims to provide adequate pensions, it must be questioned whether having a long-term target which is based on price upratings is tenable or desirable.

24. The assumed target guarantee has been set in relation to a single person. Changes in the level of women's economic participation as well as social changes make this more appropriate in looking to the long-term future. In addition, it provides a cushion for couples between the assumed target level of the NSP and the MIG, as two single persons' full rate NSPs would exceed the couple's MIG. This will enable people to have some period of missing contributions but still have total entitlement above the MIG.

What ages should be brought into the NSP on day one?

25. The proposal asks for the best age groups (up to an age between 20 and 25) to bring into the scheme at the start date. This is essentially a matter of political judgment. It will depend upon several factors:

The politically desired speed of phasing in the NSP to improve the future pension levels

The financial effects

Practical considerations

At what age should the pension first come into payment paid?

26. This issue is discussed whenever radical pension reform is being considered or there are concerns over future pension costs. As with many of the other issues, it is a matter of political judgment, in practice in relation to two fundamental questions, one financial and one social:

The financial issue.

The social issue.

We all need pensions—the prospects for pension provision

27. Given the known demographic shifts together with the uncertainties over the improvements in the mortality of the elderly which might take place in future, there are good arguments for favouring increasing the minimum pension age. It could then be left for future policy makers to decide whether there should be rules permitting "early flexible retirement", depending upon the conditions at the time.

Financial Estimates

Assumptions

28. The contribution rate needed to finance the assumed level of target pension will depend critically on the assumed rate of return achieved on the investments and the average number of years of payment after retirement in future. Both of these are uncertain. As requested, the following Table 1 illustrates the contribution rate needed on a number of different assumptions.

29. In order to illustrate the effect of raising the minimum pension age to counter the demographic change, figures are included with a retirement age of 70 as well as 65. This is perhaps most useful when considering whether the suggested level of contribution based on the current State pension age of 65 (from 2020) is acceptable, and to indicate the change needed to the minimum pension age to produce an acceptable level of the NSP contribution rate.

30. For Table 1, it has been assumed that people will earn entitlement to a year's worth of the NSP for a year of actual contributions. This can also be interpreted as implying that people who are credited with entitlement, for example if they caring for children under five, will have appropriate contributions paid for them through some external mechanism, ie the suggested contribution rates in Table 1 make no allowance for having to finance "credits". The issue of "credits" is considered later.

31. Table 1 shows estimates for the contribution rate applied to the same earnings band as currently for employees, which would be needed to finance the assumed level of pension as set out in paragraph 20, ie £142.70 a week in 2000-01 price terms. It shows contribution rates based on assuming that investment returns would be 3 per cent in excess of earnings increases. As this assumption is critical, Table 1 also shows the contribution rates assuming a 2 per cent rate of return.

Table 1


Estimated Contribution Rate (per cent) for NSP for the suggested initial target assumption (a)

Assumed rate of investment return in excess of average earnings	Retirement Age = 65	Retirement Age = 70
3 per cent	9	6
2 per cent	12	8

32. The contribution rates in Table 1 are in addition to the NIC rates which have to continue to be paid in respect of the members of NSP. It would be logical for the members of NSP to pay a form of contracted out NIC rate, as they would not be entitled to State Second Pension. The total target pension assumed for the NSP system is a combination of BP and NSP which taken together are aimed at being sufficient to lift people off means tested benefits, implying that the members of NSP would still be part of the current system.

33. How would such higher contributions be made in respect of the members of the NSP? If employers had to pay part of the higher contribution, the labour market would be distorted as there would be higher "NSP+ NI" charges in respect of younger workers. It would then be a matter of judgment as to the level of extra contribution which it would be acceptable to ask the members of the NSP to make in return for the promise of the new pension under NSP. If it were decided that the members of the NSP should pay significantly lower contributions to the continuing NI Fund to compensate for the new contributions to the NSP, the lost income to the NI Fund would have to be made good from other sources.

34. This is the "double funding" problem which would emerge within this type of proposal. It would be a matter of judgment as to the level of this financial strain which would be acceptable and how it was to be financed. If this route were followed, the lost income would be lowest, but still substantial, in the early years, as there are relatively few members of the NSP. However the amount would build up steadily. The financial impact would thus depend critically on the way in which the extra contributions to the NSP were spread between the NSP members and the remaining NI fund contributors.

35. The contribution rates in Table 1 are based on assuming that they would apply to the same earnings band as for employees at present. If the contribution rates were levied on all earnings over the threshold rather than only up to the upper earnings limit, they would be about 12 per cent lower. For example, the rate with a retirement age of 65 and assuming a rate of return 3 per cent in excess of earnings would be about 8 per cent instead of 9 per cent.

36. On the assumption being made that the BP continues to fall relative to earnings, the NSP target must increase to fill the increasing gap. Table 2 shows the ultimate rate of contribution needed on the assumption that the BP is nugatory. Although this only applies in the very long term, regular small increases in the contribution rate would be needed towards the ultimate level to offset the falling BP, even if all other factors were to remain constant. This contribution change would be part of the regular review process needed to ensure that the contribution rate remained adequate in the light of the investment performance and economic and demographic changes.

Table 2


Ultimate Contribution Rate (per cent) for NSP Assuming nil BP

Assumed rate of investment return in excess of	Retirement Age = 65	Retirement Age = 70
3 per cent	13	9
2 per cent	17	12

37. The figures in Table 2 are significantly higher than those in Table 1 as, in effect, they include the cost of funding BP as well as NSP. However, unlike the figures in Table 1, no continuing NIC contributions would be needed for BP. As for the figures in Table 1, the rates in Table 2 are based on the current level of the threshold and the upper earnings limit and assume that these would be in creased in line with earnings over the long term.

Uncertainty

38. Tables 1 and 2 show that the required contribution rate is very sensitive to the assumed rate of investment return. It is important to emphasize the implication of this uncertainty. It is not simply a matter of producing alternative suggested contribution figures. They emphasise one of the main risks in operating a pension system with a guaranteed benefit level at retirement (even if it depends on the contribution record) but with the financing of the system dependent on the investment return on the assets.

39. This can be regarded as the counterpart of the uncertainties involved in operating an unfunded scheme, for example the current State pension system, when the uncertainties over the relative numbers of contributors and pensioners and the level of pensions and earnings produces uncertainty in the contribution rate. In that system, it is vital that the contribution rate can be altered, as is the case in the UK system.

40. The counterpart to this in the funded NSP is the risk that the contribution rate proves inadequate in the light of the actual return achieved. The controversy over the supposed poor value people believe they are receiving at present when buying an annuity can be seen as a reflection of this kind of investment risk in a different context. It would be essential for the contribution rate to be monitored at regular intervals in the same way as for other funded pension schemes to ensure that the funding remained on target to provide the promised pensions.

Contribution rate for alternative assumption for the uprating of the MIG (paragraph 17)

41. As explained in paragraphs 23 and 24, the target for the NSP if the MIG were uprated in line with prices after 5 years is much lower than for the above variant. As a result the required contribution is very much lower. On the basis of the target as set out in paragraph 23, the contribution rate needed on the same assumptions as above would be between 1 per cent and 1.5 per cent.

OTHER ISSUES

Older people at the start of the new scheme

42. The papers on the proposal suggested that older workers might join the NSP on a voluntary basis but not receive the guaranteed pension. This raises a difficult fundamental issue of principle.

43. It has been assumed for the estimates in Tables 1 and 2 that the same contribution rate would apply at all ages. The contribution rate would be earnings related whilst the NSP would be essentially flat-rate. This is possible because the NSP is compulsory so the redistributive nature is possible.

44. If, as suggested, it were possible for people at older ages to join NPS on a voluntary basis at the outset (or even at any later point in time), then it would be necessary for the contributions they pay to reflect the value of their accruing pensions. Or alternatively the benefits they accrue would have to be related to the value of the contributions paid. Otherwise, the finances of the NPS would be undermined by "selection", ie those people who expected to gain financially would join and those who expected to lose would not. Unless this was deemed desirable on policy grounds and the financial strain met from some external source, it would clearly be unsatisfactory.

45. Introducing such a different system for those who could join on a voluntary basis would add an extremely complex administrative burden to the scheme. Indeed it would have to be a totally different structure and nature. Assuming that contributions remained a percentage of earnings, it would be necessary for the benefits for voluntary members to be earnings related, unlike the NSP. They would also have to be age-related.

46. Given these problems, it must be seriously questioned whether the nature of this voluntary system remains worthwhile, especially in view of the redistributive nature of the NSP scheme itself.

Life Cover

47. It was suggested that life cover should be included within NSP. The above contribution rates make no explicit allowance for life cover. They implicitly assume that a lump sum benefit would be paid on death before retirement roughly equal to a share of the accumulated contributions in respect of those dying in a given year, including the allocated investment return. Given the reduction in the numbers marrying and the continuing changes in households, it might be considered that this is a more appropriate form of "life cover" for NSP.

48. The total sum implicitly available for death benefits could be paid out in whichever way were thought most appropriate. For example, a higher lump sum death benefit could be paid at ages closer to retirement than at younger ages in view of the longer period of contributions. The precise level of death benefit could then depend upon the level of contribution chosen as well as the age and contribution period, as in effect the accumulated "savings" in respect of those people dying would be divided between them.

49. At an alternative extreme, the death benefit could be set at the same level at all ages. The level would again depend upon the chosen contribution rate. However, as a very rough approximation it could eventually be of the order of £10,000 for each 1 per cent contribution rate, once there are contributors to the NSP at all active ages.

Credits

50. The estimated contribution rates in Tables 1 and 2 are based on the assumption that entitlement would be earned only by those people actually paying contributions. The proposal included the suggestion that those people caring for a child under five and those with full-time care responsibilities could have their contributions paid for them.

51. It is estimated that this would add about 10 per cent to the number of people in any one year who were accruing entitlement to NSP. If they were entitled to accrue the same level of pension as those actually contributing and the cost of this were loaded on to actual contributors, it would increase the contribution rates in Tables 1 and 2 by about 10 per cent.

52. If instead, as suggested by the papers provided to us, this extra cost was paid by higher earners, it could be done in an infinite number of ways. However, if all contributors pay contributions on earnings between the employees' threshold and the upper earnings limit, the extra cost of financing these credits would be approximately equal to levying a contribution rate of about one-half of that rate on earnings above the upper earnings limit for those with such higher earnings.

The unemployed

53. We were also asked for the impact of crediting in unemployed people at a later stage. The costs of this would depend critically on the level of unemployment. It would also depend upon the precise rules governing such credits and in particular on whether they would only apply if the individual were unemployed for a full year. In addition, if the unemployed were included, would credits also be given to the long-term (and short-term) sick?

54. Extending credits so widely would be extremely expensive. For example, if such credits were extended to the unemployed and the sick in a way broadly equivalent to that proposed for Second State Pension (noting that the unemployed do not receive credits for Second State pension), the cost of such credits would be about 50 per cent higher than for the credits for the people in paragraph 48-51.

Low earners

55. The contribution rates in Tables 1 and 2 are based on assuming that contributions would only be made by people earning over the employees' threshold. We were asked to comment on the level at which people on low earnings could come into the full pension contribution and entitlement and how this should be done.

56. The lower limit for contribution to the NSP could obviously be set at the desired low level. However, that would involve people with extremely low earnings and, perhaps, their employers, making NSP contributions albeit of very small amounts. This might have an undesired impact on the labour market for such workers. In addition, the administrative complexity for the inevitably small amount of total contribution seems undesirable.

57. In practice, low earners are in a position similar to those who might be awarded credits as above. Indeed, many of them might be entitled to credits, for example as proposed above, if they are working part-time and are caring for a child under five. The extra costs of crediting in some of those earning below the current threshold would depend upon the level at which a new even lower limit might be set and how the credits were awarded. For example, people earning under the assumed threshold for NSP contributions should all be part-time workers. It might therefore be appropriate for them to be credited with less than a full year's credit, say quarter or half a year, depending upon their annual earnings. The extra costs would depend on exactly how such credits affected entitlement to NSP.

SECTION 3

Changes to National Insurance contribution conditions

58. The Committee also requested estimates of the cost of certain changes to the conditions under which individuals would be entitled to National Insurance (NI) benefits. The general objective underlying these proposals is to increase the number of people who would be entitled to the benefits for the contingencies covered by the NI Fund.

59. The financial estimates relate to Great Britain. The estimates are given in 2000-01 benefit rate terms and relate to the numbers in the population in that year. Inevitably any changes would take place at some time in the future. However in order to be able to compare the extra costs with those at present, it is useful to present them as if the changes had been fully in force in the current (2000-01) year. The estimates are consistent with the latest Government Actuary's estimates underlying the recent Budget. The estimates for the extra costs can therefore be compared with the estimate for National Insurance benefit expenditure of £46.99 billion in the Government Actuary's report on the drafts of the Social Security benefits Up-rating Order 2000 and the Social Security (Contributions)(Re-rating and National Insurance Fund payments) Order 2000 (Cm 4587), presented to parliament in January 2000. Where relevant, the estimates are based on assuming 1.16 million people unemployed.

Proposal 1: Extending NI benefits at current rates to meet the contingencies covered by National Insurance (unemployment; sickness/incapacity; retirement; bereavement; maternity) without contribution conditions.

60. The estimated extra NI expenditure is shown in Table 3. For retirement and Sickness/Incapacity, Table 3 also shows the reduction in other non-means tested benefits paid to those people who would instead become entitled to Retirement Pension or Incapacity benefit.

Table 3


Extra NI costs of removing contribution conditions

	£ billion
Contingency	Extra NI Fund Expenditure	Reduction in other non-means tested benefits	Net cost, excluding means tested benefits effects
Retirement Pension	6.0	0.2	5.8
Sickness/Incapacity	5.0	1.0	4.0
Unemployment	2.5		2.5
Widow(er)s	0.1		0.1
Maternity	0.4		0.4
Total	14.0	1.2	12.8

NOTES TO TABLE 3

61. The estimates in Table 3 show the extra costs and the offsetting savings split between NI Fund and some Vote 1 benefits. The impact on means tested benefits are not included in the above Table but would be significant.

RETIREMENT

62. The estimate assumes that all people would be entitled to the full rate of Basic Pension (BP). The largest part of the cost is due to increasing the rate payable to those people receiving less than the full rate of BP, especially women either not receiving any BP or receiving it at a reduced rate.

63. It has been assumed that pensions would be paid to people overseas on the same basis as at present.

SICKNESS/INCAPACITY

64. The extra cost is based on giving all those people who do not receive incapacity benefit but who are currently eligible for NI credits due to incapacity, including those receiving severe disablement allowance, the same benefits as paid to present incapacity benefit cases. Allowance was also made for some increase in the propensity of women to become entitled, on the assumption that they are less likely to claim credits at present if the household unit would not be eligible to means tested benefits.

UNEMPLOYED

65. The estimates are based on assuming that all current JSA claimants would be entitled to the benefit paid from the NI Fund. This would be substantially offset by a reduction in current non-NI JSA expenditure (although as with the other costs, no allowance is made for reductions in means tested benefit costs).

BEREAVEMENT

66. The cost is mainly due to giving full rate benefit to all those with some.

MATERNITY

67. The estimate is based on the assumption that the higher rate of MA would be payable for 18 weeks in respect of all births.

Financing the extra costs in Proposal 1.

68. NI expenditure is financed by contributions from employees, employers and the self-employed (as well as a trivial amount of voluntary contributions and investment income which is best regarded as maintaining the level of the fund rather than a source of financing expenditure). The extra income needed to meet the extra costs in the above proposals would therefore be met by a combination of increases to the contribution rates of employees, employers or the self-employed.

69. The current employees' contribution rate is 10 per cent (excluding the impact of any contracted out reduction), including the National Health Service allocation of 1.05 per cent. The self-employed contribution rate is 7 per cent. If the whole of the additional NI expenditure of £14 billion were financed by increasing the contribution rates for employees and the self-employed, this would require an extra contribution rate of about 5 per cent.

70. There would of course be a reduction of £1.2 billion in non-means tested benefits, together with a significant saving on means-tested benefits.

Proposal 2: As for Issue 1 but with the level of benefit payment equal to the corresponding Income Support Rates

71. For this proposal, it was assumed that the income support (IS) rates related to the personal rate as dependency additions now form a relatively small part of NI benefits.

72. The IS rate was taken to be the standard rate for a single person aged over 25 plus any premiums that are clearly appropriate. These premiums are as follows:


Retirement	Pensioner Premium for those pension age-74
	Enhanced PP age 75-70
	Higher PP age >80
Bereavement	Lone parent premium where relevant.
Incapacity	Disability premium for durations over one year
Unemployment	No premium
Maternity	Family premium

73. The estimated extra NI expenditure in addition to the amounts shown in Table 3 is shown in Table 4. The total extra cost of paying these "IS rates" over the current NI rates is around £8.5 billion.

Table 4


Extra NI Fund	Extra NI costs
Expenditure	£ billion

Retirement Pension	7.2
Sickness/Incapacity	0.9
Unemployment	0.2
Widow(er)
Maternity	0.2
Total	8.5

Financing the extra costs in Proposal 2

74. If the whole of the additional NI expenditure of £8.5 billion were financed by increasing the contribution rates for employees and the self-employed, an extra contribution rate of about 3 per cent would be required. It must be remembered that this is in addition to the effect of Proposal 1.

Proposal 3: pay a benefit to carers of disabled people at either the Jobseekers Allowance (JSA) or Incapacity benefit (IB) rate.

75. The following estimates are based on recent Invalid Care Allowance beneficiary data.

76. The benefit rate if paid at the JSA rates has been assumed to be the standard personal rate for people aged over 25. It has been assumed that dependency additions would be paid as appropriate. It is estimated that this would increase the cost of invalid care allowance from about £850 million to £1,090 million.

77. Paying at the IB rates has been interpreted as being the IB Long Term rate, which would also affect adult dependency additions. It is estimated that this would increase the cost of invalid care allowance from about £850 million to £1,400 million.

Financing the extra costs in Proposal 3

78. If the level of benefits proposed were financed by the NI fund, the extra contribution rate would have to provide for the full cost, although there would be a reduction in voted expenditure of the current estimated annual expenditure of £850 million. If the expenditure of £1,090 million (the JSA rate basis) were financed by increasing the contribution rates for employees and the self-employed, an extra contribution rate of about 0.4 per cent would be required. If the expenditure of £1,400 million (the IB rate basis) were financed by increasing the contribution rates for employees and the self-employed, an extra contribution rate of about 0.5 per cent would be required.

Proposal 4: The impact on NI expenditure if the lower earnings limit for establishing entitlement to benefit were reduced to £30 a week.

79. The estimates for this Proposal are based on the current rules for NI benefits, ie not allowing for the Proposals 1 or 2.

Incapacity Benefit (IB) and Job Seekers Allowance (JSA)

80. Data on the extra numbers of contributors who would have a qualifying year for IB or JSA were obtained from DSS.

81. The estimates make allowance for low earners to have a higher propensity to claim benefits than as at present, based on data on current beneficiaries and their past earnings.

82. The extra annual cost of IB and JSA are estimated to be £600 million and £150 million respectively. These costs may be compared with the estimates of £6,779 million and £525 million for IB and JSA in 2000-01 in the GA's Uprating and Re-rating report (Cm 4587).

Retirement pension (RP)

83. The data available are not adequate to provide a reliable basis for making estimates for the impact on expenditure on RP. We have however used the data which are available to try to make some estimate, which must however be regarded as particularly uncertain. For Basic Pension, extra expenditure might be about £0.4 billion (cf estimated RP BP expenditure for 2000-01 estimated at £33.8 billion). This makes no allowance for any change to expenditure on SERPS or State second pension. It would be a matter for policy decision whether such low earners should be credited with entitlement to the second tier pension as well as BP.

Financing the extra costs in Proposal 4

84. If the whole of the additional NI expenditure of £1.15 billion were financed by increasing the contribution rates for employees and the self-employed, an extra contribution rate of about 0.4 per cent would be required.



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