Select Committee on Social Security Minutes of Evidence


BenefitConditions Weekly Amount
Basic Retirement Pension1) one qualifying year1 since 6 April 1975 which is derived from the actual payment of Class 1, 2 or 3 contributions; or 50 flat-rate contributions paid at any time before 6 April 1975; and
2) Full-rate (100 per cent) Basic Pension: about 90 per cent of the years in an individual's working life2 must be qualifying years. For the minimum Basic Pension payable (25 per cent), 9 or 10 of the years in an individual's working life must be qualifying years.
Full pension:
Own contributions or late spouse's contributions:
Spouse's contributions:
Minimum pension: 25 per cent full pension
Additional Pension (also known as the State Earnings Related Pension—SERPS) Accrue SERPS in any year where an employee pays Class 1 NICs on earnings between the Lower Earnings Level and Upper Earnings Level. Aim is to have a pension of 20 per cent of average earnings over full working life. Earnings related : maximum weekly ratearound £120
Widow's Benefit (includes Widow's Pension andWidowed Mother's Allowance) The principle is the same as for basic Retirement Pension, but must be satisfied by late husband's National Insurance contribution record. 1) he must either: have paid 50 flat-rate contributions at any time before 6/4/75; OR have had one qualifying year since 6/4/75 which is derived from the actual payment of Class 1, 2 or 3 contributions.
2) to receive 100 per cent basic rate Widowed Mother's Allowance or Widows Pension, he must have had qualifying years for about 90 per cent of the years of his working life. If the number of qualifying years is less than the number needed for a 100 per cent basic rate, the allowance or pension is reduced accordingly.
Widows Payment may be payable where the late husband paid 25 x LEL in any one tax year.
Full pension: £66.75An age-related pension is paid if the woman was widowed between age 45—55.
Minimum pension: 25 per cent full pension
Lump sum payment: £1000
Incapacity Benefit1) Class 1 contributions paid on earnings and/or Class 2 contributions paid equal to at least 25 x Lower Earnings Limit (LEL) in any one tax year; and 2) Class 1 contributions paid on earnings and/or Class 2 contributions paid and/or Class 1 credits equal to at least 50 x LEL in both of last two tax years before claim starts. 1st 28 weeks: £50.35 Weeks 29-52: £59.55
Long-term rate: £66.75
Age additions (with long-term rate only):
incapacity started before age 35: £14.05
incapacity started age 35-44: £7.05
Jobseeker's Allowance (contribution-based) 1) Class 1 contributions paid on earnings equal to at least 25 x Lower Earnings Limit (LEL) in respect of one of the last two complete tax years before the beginning of the relevant benefit year; and 2) Class 1 contributions paid on earnings and/or Class 1 credits equal to at least 50 x LEL in both of last two tax years before the beginning of the relevant benefit year. Age under 18: £30.95 Age 18-24: £40.70
Age 25 +: £51.40
Statutory Sick Pay (paid by employer)Average earnings in 8 weeks before sickness must be at least Lower Earnings Level. Standard rate: £59.55
Statutory Maternity Pay (paid by employer and largely reimbursed by DSS) Employee continuously employed by employer for at least 26 weeks ending 15th week before expected week of confinement; and had average weekly earnings of at least the Lower Earnings Level. Higher rate: 90 per cent of average earnings
Lower rate: £59.55
Maternity AllowanceClaimants must have worked and paid standard rate Class 1 or Class 2 National Insurance Contributions in at least 26 weeks of the 66 weeks before the expected week of confinement. Higher rate: £59.55 for employees
Lower rate: £51.70 for others (self employed, unemployed and non-employed).


  56.  There have clearly been major changes in the labour market since 1948, affecting those who pay for and receive contributory benefits. Generally speaking the national insurance system was geared to a world in which men had full-time regular working patterns, with only brief spells out of work, and the overwhelming majority of women did not take paid employment, but were expected to rely on pensions built up on their husbands' contributions.

  57.  The labour market has changed substantially over the past 50 years, becoming increasingly flexible with more people in self-employment or working part-time, and a growing proportion of women in the labour market. Some of the main trends have been:

    —  a shift from manufacturing to the services sector. In 1950, just half of all jobs were in manufacturing, compared with around one in five currently;

    —  the expansion of the services sector has shifted demand from manual to non-manual labour, which require different skills and are more accessible to women;

    —  in the 1950s the majority of people in the workforce were male, full-time employees. The current workforce is more diverse. Less than 5 per cent of those in employment worked part-time, currently around 25 per cent do. This reflects the increased proportion of women in employment;

    —  self-employment, which accounted for a relatively constant proportion of the workforce up to the early 1980s, has increased substantially since then—from 8 per cent in 1978 to 12 per cent recently;

    —  since the 1970s the level of unemployment has been consistently higher than during the 1950s and 1960s. This has put more pressure on the contributory benefits system and increased the importance of credits; and

    —  although the number of people with temporary contracts has increased they still accounted for just 6 per cent of all jobs in 1997[10].

  58.  In response, the National Insurance system has developed some flexibility to cater for non-traditional working patterns:

    —  employees (unlike the self-employed) no longer have to pay a contribution or have a credit in every week in order to meet the state pension entitlement test—someone on average earnings can achieve a qualifying year for pension purposes by working about nine weeks[11];

    —  credits and Home Responsibilities Protection arrangements (see above) help protect against gaps in employment. Over the years these arrangements have been extended and become increasingly important for people on low or intermittent earnings, or who take breaks to care for children or sick and disabled relatives;

    —  the fact that the Lower Earnings Limit has risen in line with prices rather than earnings in recent years also tends to keep or bring lower paid workers into National Insurance cover, including many who have relatively low part-time earnings (see also Annex D); and

    —  the introduction of the National Minimum Wage from April 1999 is estimated to bring around 400,000 people into National Insurance contributions in 1999-2000.


  59.  Detailed analysis before about 1980 of the reasons for changes in the share of spending on various benefit types is difficult because data are unreliable, less detailed and may not be consistent with more recent data. There were also many changes in benefit structure (for instance the introduction of new benefits in the 1970s, especially Family Income Supplement, Attendance Allowance and Mobility Allowance).

  60.  At the start of the post-war welfare state just over 60 per cent of social security expenditure was spent on contributory benefits (mainly pensions, and sickness and unemployment benefits), 13 per cent was on income-related benefits (National Assistance) and slightly over a quarter of the budget was spent on other non-contributory benefits (mainly War Pensions and Family Allowances). These proportions changed relatively little over the next thirty years and throughout the period contributory benefits made up around 60 to 70 per cent of the total. There were fluctuations from year to year but no continuous trends. In 1980-81 contributory benefits made up 64 per cent of the total and income-related benefits accounted for 17 per cent.

  61.  The main reasons for this fairly stable picture are:

    —  The basic framework of the social security system remained relatively unchanged until the early 1960s, with the introduction of graduated contributions and benefits. Thereafter the introduction of rate rebates (1967), Family Income Supplement (1971), rent rebates (1972), Invalidity Benefit (1971) and other non-contributory disability benefits (mid-1970s) all led to major extensions in the system although initially they had relatively little impact on expenditure.

    —  Up to the end of the 1970s spending on all categories of benefits grew at similar rates, in spite of the rather different factors affecting individual benefits and client groups. This largely reflects the maturing of the original benefit system, with more people becoming eligible for benefits, especially those requiring a contribution record, and policy decisions to increase the generosity of payments. Total benefit expenditure grew on average by just under 5 per cent per year in real terms between 1949-50 and 1980-81. Expenditure on contributory benefits grew at almost exactly the average rate, income-related benefits grew slightly faster at just under 6 per cent and other non-contributory benefits grew more slowly, at slightly under 4 per cent per year.

  62.  In 1998-99 prices, benefit spending grew from £52.5 billion in 1980-81 to £95.8 billion in 1998-99, an increase of over £43 billion and an annual average real growth rate of 3.4 per cent. During this period spending on contributory benefits rose more slowly than in the previous 30 years, and at the same time expenditure on other types of benefit rose very rapidly. As a result the share of the total taken by contributory benefits fell consistently. By 1998-99, contributory benefits made up less than half of all benefit expenditure, with income-related benefits accounting for around a third.

Contributory benefits

  63.  Expenditure on contributory benefits increased by £11.4 billion (1998-99 prices) between 1980-81 and the present. However this represents an average real growth rate of only 1.6 per cent, well below the overall average. Contributory benefits accounted for 64 per cent of total spending in 1980-81, 47 per cent in 1998-99.

  64.  Within the contributory total there have been both increases and decreases over the period. The most important changes are:

    —  Increased expenditure on pensions Since 1980-81 expenditure on the basic Retirement Pension and the State Earnings Related Pension (SERPS) has increased by over £11 billion in today's prices, an annual average growth rate of 2.1 per cent. This is largely accounted for by an increased caseload: the number of people receiving the basic pension rose from 8.9 million in 1980-81 to 10.7 million in 1998-99. This mainly reflects the rising number of elderly people in the population, and to a lesser extent an increasing proportion of women with the required contribution record to receive pensions in their own right. Expenditure on SERPS increased rapidly towards the end of the period as increasing numbers of people became eligible.

    —  Increased spending on Invalidity-Incapacity Benefits. In real terms, spending on Invalidity Benefit and its recent equivalent grew by 5.5 per cent a year on average between 1980-81 and 1998-99, adding over £4 billion to expenditure, although expenditure has fallen since the introduction of Incapacity Benefit in 1995. Caseloads grew steadily until 1995 reaching 1.8 million, mainly because of a tendency for people to remain on Invalidity Benefit for longer periods, rather than higher numbers of new claims. Average amounts paid also increased because of the earnings related component of Invalidity Benefit. Because these benefits form a relatively small proportion (less than 20 per cent) of the contributory total, their rapid growth had relatively little effect on the total.

    —  Reduced spending on unemployed people, (although this has obviously varied with the economic cycle), and at the end of the period the curtailment of contributory benefits for the unemployed through the introduction of Jobseeker's Allowance.

    —  Transfer of some risks to employers, especially payments for short term sickness. In 1980-81 Sickness Benefit cost £1.5 billion in today's prices.

Income-related benefits

  65.  Expenditure on income-related benefits grew by £22.6 billion from £8.9 billion in 1980-81 to £31.5 billion in 1998-99. This is an annual average growth rate of 7.3 per cent. The share of total expenditure grew from 17 per cent to 33 per cent.

  66.  The growth both in absolute terms and in the proportion of the total can be accounted for by two main factors:

    —  Increased Supplementary Benefit-Income Support caseloads. Total Income Support expenditure in 1998-99 was £11.9 billion, £8.7 billion higher than the equivalent 1980-81 Supplementary Benefit figure (ie excluding payments to unemployed people). Expenditure on all client groups has risen. In particular the numbers of lone parents claiming Supplementary Benefit and Income Support grew steadily throughout the 1980s and early 1990s, although the caseload has now begun to fall. Expenditure on lone parents increased from £1.0 billion in 1980-81 to £4.0 billion in 1998-99, a growth rate of nearly 8 per cent per year on average. The number of sick and disabled claimants also increased significantly, especially after the introduction of Disability Living Allowance in 1992 which entitles claimants to additional Income Support premiums. This increase in caseloads added nearly £3.5 billion to Income Support expenditure.

    —  Higher average amounts of Housing and Council Tax Benefit. From the end of the 1980s rent deregulation and higher Council Tax levels caused rapid increases in spending on Housing and Council Tax Benefits. This added £10 billion to expenditure between 1980-81 and 1998-99, with most of the increase being in the last part of the period.

Other non-contributory benefits

  67.  Other non-contributory benefits made up around a fifth of all benefit expenditure in both 1980-81 and 1998-99, although their share decreased slightly in the intervening years and then rose again. Over this period expenditure grew by £9.4 billion from nearly £10 billion to £19.3 billion in 1998-99 prices, an average annual real growth rate of 3.7 per cent. This growth is almost entirely accounted for by increases in the numbers of people claiming disability benefits—principally Attendance Allowance and Mobility Allowance and, since 1992, Disability Living Allowance. Combined caseloads for these benefits grew from 500,000 in 1980-81 to 3.3 million in 1998-99 (figures for 1980-81 may include people who are in receipt of both Attendance Allowance and Mobility Allowance). The high growth is due to increased take-up by eligible people, rather than increases in the number of disabled people in the population.

  68.  The only other large benefit in this category is Child Benefit, which has remained fairly stable over the last 20 years.



  69.  The UK is unique amongst comparable countries in having a single comprehensive social security scheme for the entire population. Many European countries have a mosaic of separate schemes for different occupations and different contingencies. Furthermore, health care is typically included within social insurance along with cash benefits[12]. Regard must also be had to each country's unique historical development as well as different social, economic, labour market and institutional characteristics. On account of these differences, meaningful comparisons between countries can be difficult.

  70.  Recently Germany has introduced new contributory benefits (most notably a system of long-term care insurance), Sweden's new second-tier pension scheme will be recognisably "contributory", and the Central and Eastern European states are—typically—basing their new "westernised" social security systems on contributory models.

  71.  The 15 EU Member states tend to cluster into four distinct "geo-social" groups, sharing similar traditions and institutional characteristics. These can be grouped as:—

Northern EU states

  72.  Schemes based on the "Bismarckian" tradition of coverage through employment or family status is still evident in both income maintenance and health care systems[13]. The insurance principle still underlies the determination of benefits (mostly earnings-related) and the method of financing (mostly through contributions)—with different regulations often applying to different occupational groups. Though the social insurance (contributory) schemes are extensive, they still leave some gaps in protection which are filled by highly developed social assistance (welfare) schemes. The system of administration of the social protection systems in each of these countries is fragmented into a number of semi-autonomous schemes for different occupational groups and which are relatively tightly controlled by the Government. The administrative structure is extremely varied and to a large extent each country has a unique configuration, reflecting its historical development as well as social, economic and institutional characteristics.

Scandinavian countries

  73.  Here, typically social protection is a citizen's right, with universal coverage so that everybody is entitled to the same "basic amount" when a "risk" arises, though the gainfully employed receive additional benefits through mandatory occupational schemes. General taxation plays a predominant (though not exclusive) role in financing. The only aspect which remains somewhat separate from the public core of social protection is unemployment insurance, which is voluntary and managed by trade unions (though it is heavily subsidised by the state).

The UK and Ireland

  74.  In both countries, as in Scandinavia, social protection coverage is universal though there is wider use of means-testing.

Southern states[14]

  75.  In these countries, the institutional design of social protection systems is a mixture of the continental Bismarckian model and the (UK and Ireland) Beveridge tradition. On the one hand, there are highly fragmented income maintenance systems with generous pension formulas, but (with the exception of Portugal) no national minimum income scheme, so that gaps in coverage are greater than elsewhere in the EU. On the other hand, these countries have established national health services with universal and standardised coverage as in the UK. Occupational funds and the social partners (i.e. employers and trade unions) play a prominent part in income maintenance.

Outside the EU

  76.  Here the picture becomes even more diverse. The social security schemes in Australia and New Zealand, for example, differ from those found in most developed countries in that there are virtually no social insurance (contributions) features (except for work injury schemes). The social security systems here provide flat-rate benefits paid out of general taxation and which are graduated according to incomes and assets. In 1992, in response to demographic trends, Australia introduced a mandatory contributory superannuation scheme for employees funded initially by employers, but later extended to employees. The new scheme can be viewed in part as a move from an unfunded state pension to a partly Government, partly private, funded retirement income scheme. In 1997, the New Zealand Government unveiled plans for a compulsory retirement savings scheme covering the entire population, but was overwhelmingly rejected in a referendum.

  77.  In the USA and Canada, the Federal and State (Provincial in Canada) governments share responsibility for social security. The Federal Governments in both countries administer the main social security system, providing contributory benefits for old age, disability and widowhood, which are financed equally through employer and employee contributions. The State or Provincial Governments administer unemployment and work injury benefits as well as health care and localised social assistance.

  78.  Elsewhere, developing countries, such as those in the Far East (eg Singapore and Malaysia) and Africa (eg Kenya and Zambia), operate public provident fund schemes. These are essentially savings programmes in which regular contributions withheld from employees' wages are matched by their employers and set aside in a special fund for later repayment to the worker (usually in a single lump sum with accrued interest) when defined contingencies occur.

  79.  In yet another model, Chile initiated a pioneering experiment in 1981 by reforming its state social security system and replacing it with a programme of individual (mandatory) private pension accounts based on defined contributions. These provide old age, survivors' and disability benefits. This privatisation model has been adopted, with varying degrees of modification, by several other countries in Latin America, notably Argentina, Mexico, Peru and Colombia.



  80.  The Pensions Green Paper, A new contract for welfare: Partnership in Pensions, (Cm 4179) sets out the Government's plans for radical reform of the whole pension system, to rebuild trust and ensure that everyone can look forward to a secure retirement.

  81.  The Green Paper includes proposals for a new State Second Pension which will replace the current State Earnings-Related Pension Scheme (SERPS). It will cut the number of pensioners who will need to rely on the Minimum Income Guarantee. In stage 1, the value of the second pension will be doubled for those earning less than £9,000 a year. There will be more help for those earning between £9,000 and £18,500 a year through higher National Insurance rebates. In stage 2, when the new stakeholder pension schemes have established themselves, the State Second Pension will become flat-rate. The aim is for all middle and high earners to have private, funded pensions.

  82.  Carers, some disabled people and mothers with young children will receive flat-rate credits to the new State Second Pension.

Incapacity Benefit

  83.  Measures in the Welfare Reform and Pensions Bill modernise Incapacity Benefit. The Bill:

    —  amends the National Insurance contribution conditions for new claims;

    —  also for new claims, provides for taking some account of income from occupational and personal pensions in assessing the amount of Incapacity Benefit; and

    —  extends entitlement to long-term incapacitated people who claim while aged 16 to 19, who would currently receive Severe Disablement Allowance (SDA).

  The Bill also abolishes SDA for new claimants. No existing claimants will be affected.

Bereavement Benefits

  84.  The Welfare Reform and Pensions Bill sets out a new system of bereavement benefits, consisting of:

    —  a Bereavement Payment of £2,000 paid to both widows and widowers on bereavement;

    —  a Widowed Parent's Allowance for widows and widowers with dependent children (equivalent to the current Widowed Mother's Allowance, and including any State Earnings Related Pension); and

    —  Bereavement Allowance for widows and widowers aged 45 and over with no dependent children. A weekly, age-related benefit (with no SERPS component payable) for six months.

Maternity Allowance

  85.  Measures in the Welfare Reform and Pensions Bill also extend Maternity Allowance to the lower paid. Women earning below £66 a week (lower earnings level) but at least £30 will get Maternity Allowance of 90 per cent of earnings. Women earning at least £66 will get £59.55 (standard rate). Earnings from all sources will count in assessing earnings. Self-employed women with a small earnings exemption will get £27 (90 per cent of £30). Subject to Parliamentary approval, these changes are intended to be effective for women with an expected week of confinement on or after 20 August 2000.

Tax Credits

  86.  The Tax Credits Bill means that from October 1999, Family Credit and Disability Working Allowance will be replaced by the Working Families' Tax Credit and Disabled Person's Tax Credit and administered by the Inland Revenue.

National Insurance

  87.  Further reforms to the structure of National Insurance will mean that from April 2000, a new primary threshold for employees will be introduced. Employees will not pay contributions on earnings below this threshold but if their earnings are between the lower earnings limit and the new threshold, they will have a deemed payment of contributions which will ensure that raising the limit at which contributions are paid does not exclude them from access to contributory benefit.

10   Sources for data in this paragraph: General Household Survey, Labour Force Survey. Back

11   On the basis of average earnings of £377.58 a week (New Earnings Survey 1997, see table at Annex D). Back

12   Unlike in the UK, where the NHS is administered and largely funded separately from cash benefits. Back

13   Austria, Belgium, France, Germany, Luxembourg and the Netherlands. Only the Netherlands has deviated from this tradition by establishing some universal schemes. Back

14   Greece, Italy, Portugal and Spain. Back

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Prepared 13 December 1999