6 December 2016

Britain needs to upgrade its benefits system

By Andy Cook

When the welfare state was established in 1946, one of its founding principles was that it was contributory – yes, the state would take care of you, but only if you had paid in at least 156 weekly contributions.

The social security system has evolved greatly since then. But it has always retained this contributory element: in particular, you can only qualify for the income-related components of Job Seekers Allowance (JSA) and Employment and Support Allowance (ESA) if you have paid in via National Insurance.

But the contributory benefits system is no longer working.

For one thing, there is now no relationship between the amount claimants receive and the amount they contribute. There is no reward for effort and responsibility: you get no more if you have worked hard and paid into the system all your working life than if you have done just enough to meet the NI threshold.

Equally importantly, over the decades, the value of the contributory portion of JSA and ESA has decreased dramatically. If you have been working all your life and then lose your job, the drop in income is an unexpected shock to add to the shock of unemployment – and it certainly isn’t the moment to find out you are not properly protected.

What we have now is a system which is over-complicated and pays out far less than most people would want or expect from a social safety net.

It is ripe for reform – which is exactly what we are proposing in our new report, Contributory Benefits.

We argue that it is time to abolish the existing system in favour of a social insurance scheme, in which people would be enrolled automatically – modelled on the system now in place for pensions.

Moving to this model would help ensure the benefits system supports those most in need, is seen as fair by the taxpayer, and supports people back into work.

The new social insurance model would require individuals to pay 0.5 per cent of their monthly income (approximately £11) into the product. Individuals would then be able to withdraw the money once they face an income shortfall.

The social insurance model benefits from the same law of averages that allows traditional insurance markets to function. Provisional estimates expect that someone on a salary of £27,000 would receive roughly £900 per month and £10,800 annually – 40 per cent of their original take-home pay. The same claimant under the old benefit system would receive just £404 per month, which is equal to 16 per cent of their old pay. This is a clear step forward.

For two-thirds of current Universal Credit claimants, the move will change little – they will automatically qualify for Universal Credit, and so their income would remain unchanged.

But for others on higher incomes the new model would act as a “rainy day guarantee”, protecting against the risk of future income shocks as a result of long-term sickness or unemployment.

It could also help mollify the problems around claimants’ savings limit – under Universal Credit, if you have savings or capital over £16,000, this makes you ineligible, since savings are a good indicator of employability and a history of being in work. Such families don’t want to be in the welfare system – but they do want to be protected.

Social insurance would restore the contributory principle on which William Beveridge founded the welfare state. It promotes responsible saving against adverse outcomes, whether it be losing your job, a health scare or a shock to your income.

By adopting an auto-enrolment model and increasing the size of the pool of policy holders, costs are driven down and pay-outs increase. Social insurance would enable the Government to reduce complexity, provide the best support to people, increase savings, and help make the welfare system fit for the 21st century.

The Centre for Social Justice’s new report, ‘Contributory Benefits’, is available here.

Andy Cook is the Chief Executive of the Centre for Social Justice.