Select Committee on Social Security Minutes of Evidence


Examination of witness (Questions 360 - 378)

WEDNESDAY 24 NOVEMBER 1999

MR ALISTAIR DARLING

  360. Not if it is growing at the same time.
  (Mr Darling) You would have to be pretty sure that it is going to carry on growing sustainably. You cannot do that. You really have to decide. If you want to make a policy change, you want to increase the amount of benefit you pay, no matter what sort of benefit it is and it is sustainable, part of the popular welfare state is that it has to be sustainable in financial terms. If you look at what happened in the last 20 years, when the amount of money that the last Government spent on welfare almost doubled, despite the fact that there was failure all around them, then you see that this is when you start to run into problems of sustainability.

  361. You said earlier on that objectives should be to deliver what actually works. You want to eradicate child poverty, for example. You also then said that the minimum income guarantee would help the poorest pensioner but, as my colleague pointed out, this is not true because a lot of those pensioners will not claim what they are entitled to. So by your own definition of measuring success, by what actually delivers, you have not delivered.
  (Mr Darling) No. One and a half million pensioners will benefit from the minimum income guarantee.

  362. But many will not.
  (Mr Darling) It is true there are some who have not claimed what they are entitled to for various reasons. There are some—because as part of our study we went to see them—who flatly refused to claim. Frankly, if someone is in that position, there is a limit to what one can do. You have to ask yourself: what is the alternative? There are two choices. One is that you do absolutely nothing at all. The other is that if you increase the pension for everyone, these poorest pensioners do not see any benefit of that. That seems to be daft.

  363. But they do not, not if they are not claiming the extra they are entitled to.
  (Mr Darling) The answer to that surely must be to try and persuade those people who are not claiming it, to claim it.

  364. That may be so but according to what I am told, in a recent DSS study of 400 pensioners, this identified that 48 per cent had not submitted a claim two years after being identified. That is an awful lot. That is half.
  (Mr Darling) Yes, but if somebody flatly refuses to claim what they are entitled to, I am sure you would agree that there does come a point when there is a limit to what we can do to force them to take the money. I do think what is a greater problem to me is that there are people who are not flatly refusing to claim but are uncertain because they are put off by the process, or some who feel it is really something they should not do, so that we need to get to these people. There are things which I am not in a position to announce today, but we will be saying something about them in the not too distant future, what we can do to make sure that those people who are entitled to support get support. They are entitled to it. It is not something they have to beg for or plead for. They are entitled to it. That money is theirs. It is there for them to take whenever they care to claim it. We need to do more for that. The underpinning philosophy of the minimum income guarantee is to help those pensioners who lost out in the past because they did not accrue enough pension to get them above income support levels. This must be right. I say to you, what has happened in the past is that they were paid benefits, at a very low level of benefits, and a lot of them, as we well know, had to choose sometimes between heating their house or buying extra food. Now we have got the minimum income guarantee. We have the winter fuel payment up fivefold this year, which disproportionately benefits those pensioners on lower incomes. We have the free television licences which again will disproportionately benefit the poorer pensioners because many of the over 75s are living in households which have very low incomes. This is as well as the minimum income guarantee and the cut in VAT in fuel and the removal of the gas levy. They all mean that put together some of Britain's oldest and poorest pensioners will find themselves some £500 a year better off. You are right. We need to make sure that everyone gets everything they are entitled to. Clearly that is something which is very, very important but I do think, and I am willing to defend to the last, that it is the right thing to do.

Mr Leigh

  365. I am sure you have read this article by Nicholas Timmins in the Financial Times, November 22, where he says, I will quote: " National insurance is dead." "... during the past 20 years the value of benefits paid out in return for a given contribution history has been progressively cut." ".... this trend is being heavily reinforced by the Labour Government." "... the National Insurance element—which now accounts for less than half of all social security spending against about two-thirds in the early 1970s ..." It goes on: "Many of those are now getting less and less for their money." And he ends: "But the rationale behind the system is eroding, and if the penny drops with the electorate that they are progressively paying more for less, a political rather than merely a structural crisis over National Insurance may yet arise." Do you agree with him?
  (Mr Darling) Mr Timmins is a very excellent but provocative journalist. I would commend to you the collected work of Mr Timmins. I have taken a particular interest in these things since I have become Social Security Minister, a number of articles have been extremely complimentary about what the Government is doing. He raises here the future of National Insurance. I am not sure. I think the word "crisis" in journalistic terms, even in the FT, can be over-used somewhat. As I said to you, my starting point is different from many people who comment or who write on these matters. My starting point: what are the outcomes the Government wants to achieve? The second point is: what is the best way of dealing with it? I said in reply to earlier answers that if you take the National Insurance system now, which accounts for about 46 per cent of the entire benefit system, 80 per cent of it goes into pensions. We have actually developed and strengthened the National Insurance system. We have made it better in terms of the benefits that people get. That is a very good thing, but I see limited mileage in sitting down and saying— As I said to you, suppose we decided, for some reason, to restore the Natural Insurance system back to what it was when your party came to power in 1979, I think there is a limited value in doing that. I would rather build the system from where we are, keeping in the front of my mind all the time what it is I want to achieve. For pensions, for example, I want to achieve a situation where if people work for a lifetime they can retire on a decent income. By strengthening and reforming the National Insurance system through the state second pension, that is something which is wholly laudable.

  366. We always hear that it is impossible ever to be able to afford to return to the link between pensions and earnings. But the Government, your own Actuary's quinquennial review, Command Paper 4406, shows that if pensions continue to be upgraded by price inflation, the proportion of GDP received per pensioner would be halved by 2060. In contrast, if pensions were in future uprated in line with earnings, pensioners would receive an increasing share of GDP. He goes on to say: "Real earnings growth will result in working people being relatively better off in future, even if National Insurance contribution rates were to be increased to meet the cost of increasing flat rate benefits in line with earnings ... Allowing for higher National Insurance contribution rates and earning limits, someone on average male earnings would still have real net earnings, after National Insurance contributions, of approximately 2.4 times current levels." If I understand all that, what he is saying is because of real earnings growth, people in work could afford to pay for pensions to rise in line with earnings and still be better off in future.
  (Mr Darling) What the Government Actuary was doing there, because it is his job, he was looking at pension provision from the point of view of the National Insurance fund, from the point of view of state funding. Let me take you back to the Pensions Green Paper which we published about 12 months ago. Our view is that the best way to ensure that people have decent pensions to retire on is to ensure there is a combination of state and personal private provision. At the moment, something like 60 per cent of that provision is state, 40 per cent private. Our objective over the next fifty years is to reverse that because we believe that most people on moderate and higher earnings will be better off if they have funded pension provision. What we are doing—and we are actually increasing the amount of money that we spend on state support—is that firstly for those people on lower incomes, being in a funded pension has a limited value because if you do not put in much, you do not get very much out. That is why the state second pension is quite heavily redistributive as far as these people are concerned. The moderate and higher earnings who go into funded pensions, we have so structured the rebate that they can take that rebate with them, to contribute on top of their own contribution and their employer's contributions into a funded pension. You can argue here till the cows come home as to what the proportions ought to be between state and private, and whether people should pay through National Insurance or whether they should pay through their own personal provision, through an occupational pension or whatever. But it is our belief that people in this country on the full pension system will be more sustainable if we can get those people who ought to be in funded schemes to be in funded schemes. Bear in mind, as I said earlier, that pensioner income in this country has grown more than practically any other single group. Many pensioners have done very well, others have not, and the reason for that is because of occupational pensions. That is where I think most people ought to be. The Government Actuary is the Government Actuary. He is not the Government policy maker. He is entitled to make whatever observations he wants. However, I think the way in which we are proposing to proceed is slightly better than the way he is proposing to proceed—not that he is making proposals, he is making observations, if I remember rightly.

  367. I am with you on trying to encourage more people into a personally funded pension system, but I just wonder whether we are being honest with people. What you are really creating is two nations. One nation will have these personally funded schemes of various sorts and another will be reliant on a kind of poor law, will it not?
  (Mr Darling) That is not the case. You have to accept that there are some people in any country who will never be able to earn enough to make contributions to get a decent pension retirement. We are dealing with that problem now. The reason we have so many pensioners who are on income support is because these people did not earn enough in their lifetime. Often they were older women who did not have the opportunity to contribute. Any system has to deal with that. My approach is quite straightforward. If you have people who are earning so little throughout their life—and, remember, a lot of people will earn at some point and then their incomes will increase—if you have some people who are earning so little, what you should do is to have a state system that redistributes the contributions, which is what the state second pension does, which means that when they retire they have a basic state pension, they have a state second pension which is enhanced, and many of them will have stakeholder or some occupational pension on top of that, underpinned by the minimum income guarantee if they fall through that threshold. Most people will have a bit of money from the state, probably taken in the form of contracted-out rebates, plus what they have put in themselves, plus, if they are in an occupational scheme, what their employers put in. But that mix has been an essential part of the pension system for years. There is nothing new in that. What I have done, we have done, is to make the thing better and we are giving far more help than was available in the past to those at the lower end of the income spectrum. They are the ones who lost out. We are having to pick up the consequences of that now which is why we have introduced the minimum income guarantee for the majority of those people. But the best possible thing is to have a funded pension and we are extending people's choices there.

  368. One or two questions about making the national insurance system more inclusive just following on from your last answer. We have had representations from the TUC and the Low Pay unit and they want to make the system more inclusive. Do you see any scope for re-basing the National Insurance to extend protection to people currently below the lower earnings limit?
  (Mr Darling) We have, as you know, brought women who were not entitled to the Maternity Allowance into the system. I have said on previous occasions that you do have to look at these things from time to time to see who else might be brought into the system always keeping in mind what it is that you are trying to achieve. In that particular case it was women working on low incomes or for short periods who were being left out. Of those people earning below the lower earnings limit a good proportion of them are living at home with their parents or doing part-time jobs or Saturday morning jobs, and all the rest of it. There does come a point when there is a limited value to extending benefits to absolutely everyone but, as I said to you, we have extended the pensions and national insurance system as well as for men with the Bereavement Allowance. I am certainly not against it philosophically but let's ask ourselves each and every time what is our policy objective and what is the best means of delivering it?

  369. What is your policy objective? I think the problem that people find is that there does not seem to be any theme in the Government's pudding. There does not seem to be any clear and decisive trend either towards means-testing or towards the contributory principle. I know you constantly come back with the argument, "We are creating a second pension and doing all this", but that is the criticism that people make of you.
  (Mr Darling) There are academics, there are others who write about the contributory principle. They talk of this thing as somehow saintly and wonderful in itself and means-testing as something grubby and something which you would want nothing to do with. That is all very interesting. I think the majority of the public do understand where the Government is going. Eradicating child poverty in 20 years. The public understand that because they know poverty when they see it and they know disadvantage when they see it. The question they ask is, "Okay, that is a good thing, but how are you going to deliver it?" What they do not do—and maybe you I and associate with different kinds of people—is assail you in a party and say, "Where do you stand on the contributory principle?"

Chairman

  370. That could be arranged!
  (Mr Darling) I am getting worried about this Committee. One cannot sleep and another one goes to parties and meets some very odd people indeed! But I think that the key thing here is to ask ourselves about what the outcome is. I am not philosophically ill-disposed towards the contributory principle—far from it. Looking at where we arrived two years ago—I know you personally say, "It was nothing to do with me, guv"—but we are, it so happens, in the position where 80 per cent of what is now raised through contributory payments goes to pensions. I have developed that. I do not think we should say, "Let's march back to 1979." I do not think even some of your colleagues would take that view. Let's concentrate as far as the public is concerned on what the outcomes are.

Mr Leigh

  371. The constant repetition that outcomes are important—
  (Mr Darling) But they are!

  372. Alright, but eradicating poverty is what is important but it can be just a cover for saying, frankly, therefore we means-test everything.
  (Mr Darling) We do not.

  373. Of course you are not going to admit it now but that is what you are heading towards.
  (Mr Darling) As a matter of fact we do not means-test everything. We have a combination of benefits, some are contributory based and there are others like the DLA which is a universally non-means tested benefit because it is meant to cover the extra costs of people with disability. We have this mix. I know you do not like it so I will say it again: you really have to ask yourself at every turn what do I want to achieve? I want to achieve the eradication of child poverty. I want to get people into work and to make sure that people who are disabled have a far, far better income than they had in the past. It is appalling how little successive governments have paid severely disabled people. We want to have decent pensions. The underlying theology is important but what prompted me to make my opening remarks is I have read a lot of the evidence you have had and I have met many of the people who contributed to that evidence and there just were times when one felt that some of them felt that the actual means of delivery became an end in itself and I cannot agree with that proposition.

  374. Because we want to create a society where people know that at the end of the day it is worth working and worth saving for their old age because they will get a fair deal from the Government. You are creating a society where it makes no difference. All you want to do is eradicate poverty and we know that will not be done because no government has ever done it but we will leave that on one side. You are continuously eroding the principles that people believe in. Every study shows it.
  (Mr Darling) Let's go back to pensions for example. In pensions what we are doing there is giving increased state help which will encourage individuals to add their own money to that. As I said in reply to an earlier question, people will be able to see that through their annual statement. Most people when they start saving seriously are doing it for their older age, not always but most people. We also want people to save for other contingencies throughout their life. There are two observations on that. One is we are encouraging people to do that through individual savings accounts and through other means. A lot of people that the benefit system has to help are, by definition, people who do not have much disposable income even when they are in work and the idea that they would otherwise be amassing huge savings but for the alleged disincentive of means-testing is rather fanciful. A lot of these people, when they are in work all the money is going to help themselves and their families. I do not accept that the system we have now has got disincentives to save. I agree with one proposition that until people are broadly happy with what they are paying for, either through national insurance or tax, then they will kick up a fuss about it. That unhappiness can be exploited by people from time to time. What we are trying to do is have a social security system the finances of which are sustainable, which we are doing. The growth of social security spending at the moment is very manageable. We are also trying to build a welfare state that meets the needs of people and society today for the next 50 years. It did need to be changed, but we are making changes on a pragmatic basis. The ones that work will be popular and unless the welfare state is popular in that broadest sense, you are right, people start to ask questions about it. That is our objective and I think we will do it.

  375. Is there a case for the increase in benefits for carers?
  (Mr Darling) We have introduced for carers the state second pension for the first time ever which I think is something that is broadly welcomed.

  376. There are various suggestions that have been made to help carers, to make it easier for them to combine caring with work, the introduction of an individual carer's benefit, benefits for young carers. All these sort of ideas are being put to us. Are you prepared to look at them seriously?
  (Mr Darling) I am citing an example where we have done something for carers. As you know, the Government published a strategy for helping carers earlier this year and there are a number of things we are looking at. I am quite sure that we do need to do more. Many people want to look after relations, for example, who are ill and I am sure the state can do more to help people do that to everybody's advantage. I am clearly not in a position to say what we are going to do in terms specifically today. If your question is, "Are you prepared to look at these things?" the answer is, "Of course", and we have already made a start.

  377. In order to reward people for working, is there not a case for the re-introduction of partial benefits? Part of your whole philosophy is to encourage people who cannot sustain full-time work. Is there any mileage in rewarding people for working? Is there a case for reintroducing partial pensions?
  (Mr Darling) There is a broader philosophical question and that is how do you reward work and if they cannot work what benefits does somebody get? That is something that the Government looks at continually. You are right, we want people to go into work and we want to show this pays in every sense to do that but I suppose if you are looking at the contributory principle in its basically pure form it works on the basis the more you put in the more you get out. But clearly you want to make sure the benefits system looks after people who have not been able to work and we are prepared to look at that. We have looked at that. I mentioned the women who qualify for the Maternity Allowance for the first time and they are those who tend to be working part time on lower wages so, yes, we will look at that.

  Mr Leigh: Thank you.

Chairman

  378. You have been very clear with us this morning, Secretary of State, and I appreciate that, but my enthusiasm for this report is waning! I had hoped that we would be able to put in a shop window a whole range of things. Obviously you have got to be realistic and there are no blank cheques but with a real push and a real champion at the heart of the Government you could really reinvigorate the contributory system. You are coming across to me this morning very clearly, very openly—brutally clearly and openly—that you are going to keep all your options open, take it year by year and get to your target. I do welcome the setting of targets on policy which are commendable and some of them are tough targets and it will be very interesting to see to what extent you succeed in these. But you are doing what most governments have done, every year: short-term decisions, a bit of this and a bit of that, but there is no vision, no long-term goal, no idea of where you are going. Where is the system going to be in 50 years' time? Just give me a guess.
  (Mr Darling) We have a very clear vision of where we want to be. We are the first Government ever to sign up to eradicating child poverty in 20 years. You are right that the Poverty Report is very important and I hope you will return to it. I think it is one of the most important documents that this or any Government has produced in terms of welfare reform. We have clear visions. We want everybody who can be there to be in work. We want more security for those who cannot. We have a clear vision about pension provision in the future. In order to deliver that vision what I say to you is any government needs to look at the means of delivering it and then decide what is appropriate. I think most people that you would meet at these parties we have been talking about or anywhere else would say that that is a sensible approach to as "What is your vision? What is your objective?" and the second question is "How do you actually deliver it?" If you start with the question, "I have got these means of delivery, what can I do with it?" that seems to me to look at things the wrong way round. I am sorry if I have parted company with you and no doubt I will read tomorrow that I have parted company with a number of people who take a different view, but what I say to you is judge me, judge this Government on what we deliver. That is the test. That is what is going to make the welfare state popular or not, whatever the case may be. You have to write your own report but I would say to you keep in front of your mind what we are here for. People vote for governments to make life better for themselves and society generally. That is the long-term vision. The means by which we do it will fluctuate from time to time but that does not matter. But the long-term vision is a welfare state properly supported politically and financially that is sustainable which absolutely does the things it was set up to do which at the end is to provide opportunity for everyone.

  Chairman: Secretary of State, that has been very valuable. Thank you very much. The public session is now closed.


 
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