The future of contributory benefits
Controversy about the Welfare Reform and Pensions Bill has recently focused attention on contributory benefits and the balance between means-tested and non-means-tested benefit provision. The Social Security Select Committee is conducting a timely inquiry into the contributory principle and its future. Martin Barnes examines the options.

The role of social security
Disadvantages of the contributory principle
Strengths of the contributory principle
Can we afford contributory benefits?
'Modernising' contributory benefits
Tax and benefit integration
Financial support for children

A clear statement on the role and future of contributory benefits was omitted from the Welfare Reform Green Paper (published in March 1998). Many questions were left unanswered. A public debate should have been instigated before publication of the Welfare Reform and Pensions Bill - that debate has now become essential.

CPAG would like to see the contribution principle in its current form updated to reflect the concept o an ‘insured person’. Social insurance does not seek the same objectives as private insurance – the former has important social goals.

Private insurance has to be governed by ‘market’ factors (ie, the assessment of risk against financial cost), which is why its scope will always be limited. People should have the option to take out private insurance, but it would be wrong to restrict contributory benefits in the belief (or with the intention) that private insurance will be available – the demand for private insurance may increase, but the supply may not.

The role of social security
A problem with any debate on social security is that it is usually driven by a concern about cost. That social security spending has increased is beyond dispute, but CPAG does not believe that we cannot ‘afford’ a more generous system, let alone the current one. As a percentage of Gross Domestic Product (GDP), social security spending has fallen from nearly 13 per cent in 1993/94 to slightly over 11 per cent in 1998/99.

Social security has been compared to an ambulance ‘picking up casualties of social, economic and ideological change. It would be perverse to blame ambulances for motorway accidents, even though they always appear at them’.

CPAG believes that social security should prevent poverty and not just intervene to alleviate it - the concept of social insurance implies the maintenance of an adequate living standard, not merely support at what many would see as a subsistence or ‘safety net’ level.

The social security system should:

• provide collective security against risks such as unemployment, sickness or disability;
  
• share some of the additional costs that some experience - eg, through caring for children or adults;
  
• redistribute income across a range of groups, including between generations and from the better off to the poor. The contributory principle strengthens this redistribution by enabling the better off to receive benefit.

The contributory principle is consistent with these objectives – we would like to see the contributory system improved.

Contributory benefits should be at a sufficient level to minimise the need for means-testing. One of the advantages of contributory benefits is that because they are not means-tested they provide an incentive to save (means-tested benefits provide a disincentive). Benefits should not be eroded by a failure to index link – there must be a commitment to maintain their value.

Means-tested benefits can be updated and improved, but should not be an alternative to contributory or non-contributory benefits.

Disadvantages of the contributory principle
There are disadvantages to the contributory principle. Beveridge failed to predict the significant changes in the labour market – for example, long-term unemployment, greater part-time and casual employment and the increased participation of women. Income inequalities have increased.

The existence of relatively long periods of unemployment for many, particularly during the 1980s and early 1990s, lead to a need for vertical redistribution from people with relatively secure and better paid employment as well as the horizontal redistribution originally envisaged.

Male workers were assumed to be the heads of stable, nuclear families. Since the 1940s this has increasingly not been the case. Beveridge failed to predict the growth of the female workforce (now almost 50 per cent of the workforce).

The levels of contributions cause problems. Those who have not paid are not entitled to the benefits. Other groups are excluded for not having made the right number of contributions at the right time, for example women who leave work to bring up children or people who give up work (or who reduce their hours to work part time) to care for relatives.

Strengths of the contributory principle
Entitlement to social security payments based on national insurance contributions has a number of advantages:

• there is a greater sense of ‘ownership’ of entitlement, with the right to benefit being ‘earned’. This can apply even where entitlement is also determined by credits - it being recognised that people can contribute to the common good by means other than paid employment;
  
• there is less stigma attached to contributory benefits, with need based on circumstances (ie, ill-health, unemployment) without a means test. Social inclusiveness is supported;
  
• the absence of a means test means there is less scope for fraud. CPAG has questioned the reliability of estimates of social security fraud and has been critical of some anti-fraud measures. However, means-testing does increase the scope for error and fraud;
  
• take-up of benefit is higher than for means-tested benefits. DSS estimates suggest that up to £3.5 billion a year in means-tested benefits may go unclaimed. Low take up is not, however, restricted to means-tested benefits;
  
• the support for payment of national insurance contributions (there is no obvious support for replacing the liability by taxation) is evidence of the continued support for the principle of social insurance. It is acknowledged that some believe that national insurance contributions help pay for the NHS. The principle has been discredited in part because of the perceived negative attitude of previous governments. As Ruth Lister has noted, the notion of willingness to contribute has never been tested fully due to the fact that contributions are compulsory.

A consequence of restricting entitlement is the perception of a 'moving of the goalposts' in the national insurance 'contract'. This whittling away of eligibility undermines confidence in the insurance principle.

Can we afford contributory benefits?
A crucial touchstone for the effectiveness of a social security system is its capacity to prevent poverty.

One of the arguments against contributory benefits is that they go to people who do not ‘need’ them – the argument goes that benefits can be increased if they are better ‘targeted’ (ie, through means-testing).

The view that benefit sometimes goes to people who may not need them lies behind the proposal to partially means-test occupational and private pensions. The Disability Benefits Consortium, in its responses to the Welfare Reform Bill, has shown that with the partial means-testing of incapacity benefit, benefit will start to be reduced when income from incapacity benefit and an occupation or private pension goes over £116.75 a week. As the Consortium points out, this is less than half average gross earnings from employment.

It is worth noting that actual expenditure on incapacity benefit (or invalidity benefit, which it replaced) has fallen by an average of 2.9 per cent a year in real terms over a five year period up to 1998/99. Over this period, the expenditure on invalidity benefit/incapacity benefit as a proportion of spending on disabled people fell from 41 per cent to just under 30 per cent. The DSS estimates that expenditure on invalidity benefit/incapacity benefit in real terms (at 1998/99 prices) will fall from a high of £8.97 billion in 1994/95 to £6.72 billion in 2000/01 and £6.83 billion in 2001/02.

Benefits that are not means-tested are received by people across all income groups, but as the latest Social Security Departmental Report shows, there is still a ‘bias’ towards low income households – the bottom 40 per cent of households receive around 50 per cent of all non-income related expenditure.

Contributory benefit expenditure is met largely from the National Insurance Fund. When expenditure exceeds contribution, the cost is made up by a payment from general revenue.

DSS expenditure plan estimates show that for 1998/99 and 1999/2000 no top up to the Fund from general revenue is required. Indeed, since 1997/98 it appears that net contributions to the Fund have exceeded contributory benefits expenditure. Unless unemployment rises, it appears that this trend can continue. In the longer term, it is expenditure on state pensions which is predicted to increase.

There should be a restatement of the importance of supporting and strengthening the tools to maximise mutual support and protection. The value of investing to minimise risks for all should be emphasised, even if the contributions of some are greater. The best guarantee is a form of collective provision.

The requirement to make contributions guarantees a source of revenue. A review of the contributory principle puts this revenue at risk and a direct transfer to income tax may be politically unpopular. A transfer to indirect taxes may be regressive.

As the Welfare Reform Bill shows, the ‘savings’ from cutting contributory benefits are not necessarily redirected to poorer claimants.

While national insurance is in place, the existence of an upper earnings limit should be addressed. The failure in the past to raise the upper earnings limit in line with the increase in earnings has meant that the highest paid have contributed less. The lifting of the upper earnings limit would raise a significant amount of additional revenue (estimated at up to £4.2 billion a year) which could fund improvements in an updated social insurance scheme (see below).

A higher rate of benefit could be paid to people with high earnings (as with the intention of SERPS additions, for example for invalidity benefit prior to 1995), if this meant that the social insurance principle was strengthened. The case for considering higher rates could, however, only be feasible if the upper earnings limit were lifted or significantly raised.

‘Modernising’ contributory benefits
It is recognised that the contributory principle is limited by the necessary connection with paid employment. The contributory principle continues to have a role, but changes are required to reflect employment patterns and unpaid roles.

There is a strong case for recognising the value of unpaid care and voluntary work by extending credits - this would be consistent with the principle that people ‘pay into’ the system by contributing to it, even though they do not make a direct financial contribution. It would be an explicit way of recognising the importance of unpaid work.

The following groups should be included in the scheme or the existing provision of credits should be improved:

• self-employed people. The system of contributions for self-employed people should be simplified;
  
• people participating in training and education;
  
• carers (including periods of respite care)
  
• recognised voluntary work (people who work overseas for VSO currently receive credits);
  
• people in low paid work earning below the lower earnings level. This could be achieved by a banded credit system between, for example £30 a week and the lower earnings limit or by extending to people who work a minimum number of hours a week (ie, a minimum of eight hours).

The Chancellor plans to raise the LEL to bring it in line with the personal allowance for income tax, but has stated that entitlement to contributory benefits will be protected for people who will no longer earn above the limit.

The transfer of responsibility for collecting national insurance contribution from the Contributions Agency to the Inland Revenue need not presage a hidden agenda in the eventual abolition of national insurance and the replacement by taxation.

Tax and benefit integration
Tax and benefit integration need not be at the cost of undermining the contributory principle. There is a difference between improving means-tested provision and extending it by erosion of contributory or non-contributory benefits.

Financial support for children
CPAG has welcomed the commitment to review the financial support for children. The aim to create an ‘integrated, seamless payment’ for children, that is universal and paid to the mother provides an excellent opportunity to improve the financial support for families with children.

CPAG would like to see the creation of a guaranteed income for children – building on the best of child benefit. A form of guaranteed income for children should be non-means-tested and should be at a level to reflect the direct and indirect costs of children. We would like to see financial support for children taken out of the means-tested system. There will continue to be a role for means-testing (until such time as contributory and non-contributory benefits levels are improved), but the means-test should apply to other members of the household (ie, additional support is built on the guaranteed payment for children).

The child dependant additions currently paid with some contributory benefits (eg, incapacity benefit) could be included in the payment.

The guaranteed income for children would obviously not be based on the contributory principle, but we believe that, together with a modernisation of the contributory principle, support for social security and the wider objectives of redistribution would increase.

In his Beveridge lecture at Toynbee Hall in March, Tony Blair declared that he wanted to make welfare popular again: The Welfare State was popular in Beveridge’s day. Because Beveridge made it popular. The principle of social insurance is popular. It is based on the idea that contributions are made in order to draw out when in need. A right to claim is established even if the precise contribution rules are unclear. The aim to make welfare ‘popular’ will not be achieved by an extension of means-testing.

Martin Barnes
Poverty 103 Summer 1999