ENTITLEMENT TESTS AND MAIN CHARACTERISTICS
OF CONTRIBUTORY BENEFITS
|Basic Retirement Pension||1) 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.
Own contributions or late spouse's contributions:
Minimum pension: 25 per cent full pension
|Additional Pension (also known as the State Earnings Related PensionSERPS)
||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 4555.|
Minimum pension: 25 per cent full pension
Lump sum payment: £1000
|Incapacity Benefit||1) 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 Allowance||Claimants 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 thenfrom 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.
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 testsomeone on average
earnings can achieve a qualifying year for pension purposes by
working about nine weeks;
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.
1949-50 TO THE
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.
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
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.
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
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 benefitsprincipally
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
4. INTERNATIONAL COMPARISONS
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.
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 aretypicallybasing
their new "westernised" social security systems on contributory
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.
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
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.
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
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
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.
5. REFORM OF
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
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.
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);
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.
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.
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.
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.
Sources for data in this paragraph: General Household Survey,
Labour Force Survey. Back
On the basis of average earnings of £377.58 a week (New Earnings
Survey 1997, see table at Annex D). Back
Unlike in the UK, where the NHS is administered and largely funded
separately from cash benefits. Back
Austria, Belgium, France, Germany, Luxembourg and the Netherlands.
Only the Netherlands has deviated from this tradition by establishing
some universal schemes. Back
Greece, Italy, Portugal and Spain. Back