To provide for Britain’s ageing population, Iain Duncan Smith should embrace the contributory principle in his welfare reforms
Among the many manifesto promises the Conservative party now unexpectedly finds itself in a position to deliver after May’s startling election result is to tackle Britain’s spiralling benefits bill, a challenge the Work and Pensions Secretary, Iain Duncan Smith, made a fighting start at in the last parliament.
The problem the UK faces is more serious than the immediate arithmetic. It is not just about where, in the empire of the needy, the next cuts can be made; whether they will pass muster with Duncan Smith’s colleagues; or how then they can be pushed and dragged through parliament and come out intact. None of this will be easy. The real problem is not that the benefits system is broke financally; it is that it is conceptually and structurally bankrupt. Worse, it is morally corrupt and corrupting. Without “regime change” to restore the original Beveridge principles linking benefit to — and making it depend on — contribution, there can be no real cost control: for every group “capped” or “cut back”, another waits in the wings to take its place. And for every benefit paid without contribution, the signal goes out that the state is still in the business of taking on the whole or partial responsibility of the household breadwinner. So if Britain is to meet the costs of its ageing society and the needs of other new claimants, regime change will be needed.
Duncan Smith is for now focused on the more pressing task: to cut the benefits bill of around £180 billion a year, just under a third of all current public spending, by £12 billion. So far the focus is on further cuts to working-age benefits, with total benefits for a family to be capped £23,000 a year and other benefits frozen, while housing benefit for 18-21-year-old jobseekers will end. These reforms will shave more than £1.5 billion off the bill. The rest will be no easy matter. Trouble is already brewing even on Duncan Smith’s own side. The Prime Minister has ruled out a plan to limit child benefit to the older two children in a family. Another plan, to tax disability benefit, is controversial, while the probable freeze on the tax credits which top up the wages and income of working families has already drawn flak from some Conservatives who object to the impact on “in-work” families with children. Further cuts to the housing benefit seem an obvious move, but they could, in the case of larger families, be an own goal for a government keen to end to child poverty. All the same, squalls blowing from the government’s own benches will be nothing to the storms to follow from across the political spectrum as the media shifts its focus to the hardship suffered by poorer people and families with young children, trying to score debating points by emphasising that many such families are indeed in work.
Duncan Smith has been over this lonely territory before. He won the day against his Lib Dem coalition partners, without much help from many of his own officials in the Department for Work and Pensions, or the full support of his own party. Backed as before by the Chancellor, he will probably see through what in fact amounts to the lightest of pruning. Even if he does, Britain’s real problem will remain the fact that successive governments have stripped the benefit system of the features which William Beveridge, its founder, designed so as to ensure its survival and success.
First and foremost, Beveridge conceived the system as one of contributory insurance, which would therefore pay for itself. Employees and their employers would pay a weekly sum, to be augmented by the state if it so decided. Designed to meet the consequences of hard luck in life, when earnings were temporarily interrupted (through sickness, disability or unemployment) and to provide income for retirement, contributions would accrue in a social fund from which benefit would be paid.
Benefit “in return for contribution”, said Beveridge, was what the British people wanted: entitlement to something for which they have paid, as in the private or mutual insurance field. That concept of entitlement and ownership would be underwritten by the rule that contributory benefits would not be means-tested. Indeed it was commonly recognised that the hated means test penalised the instinct to do better as well as the basic freedom enjoyed by millions, to save “pennies for the rainy day”, as Beveridge put it. Costs would be controlled as demand for higher benefit could only be met by one for higher contributions.
These principles are not the relics of a bygone age. They have returned to play an important part in today’s fiscal and economic debate, as politicians and economists consider strategies to help Western economies meet the costs — and expectations — of their ageing societies and pay their way in the future. In a recent Politeia study, Paying for the Future, Ludger Schuknecht and his colleagues in Germany’s Finance Ministry proposed that top-up co-payments and insurance schemes to meet additional need should be promoted along with structures to encourage competition among providers. Western economies must also continue to cut deficits and public spending levels if their economies are to compete and grow. Schuknecht’s economic analysis suggests that contributory systems are more effective at meeting need, although governments tend to prefer tax-funded systems because they and their officials think they can control the costs.
Schuknecht and his co-authors are economists, too dispassionate and polite to speculate on the further implications of their findings. But their study raises the question of whether state-owned and state-run systems are also preferred by politicians because they are more open to political interference and can allow the use of public funds to “buy” voters, despite the distortions in the labour market which follow, as recipients play by the rules or dumb down their efforts so as to qualify for benefit, and the dependency this entrenches. That trend is less likely where benefits are “owned” by the contributor and managed by a third party beyond the clutches of the national exchequer; but even here the authors propose that governments should desist from making subsidies.
Germany is not Britain. Their memory of the Nazi regime means Germans are suspicious of collective experiments. Like France, Germany promotes voluntary institutions, competition and independent provision in healthcare and pensions, and diversity in education, far more so than Britain, which has difficulty in shaking off the language and indeed the policies of 1940s collectivism.
German economists have been at the forefront of recent analyses of the implications of a smaller state and lower levels of public spending for economic competitiveness and growth: it is here, as part of this bigger economic picture, that proposals for greater competition among benefit providers, and for schemes to promote co-payments, top-ups and additional insurance fit. On the other hand, they have also shown themselves to be the guardians of the conditionality on which a sustainable system of welfare rests. It was another German economist, Lars Feld, one of Germany’s official economic advisers, who criticised the relaxing of conditions for the pensions system in the 2013 German coalition deal.
Britain’s benefit system has no such guardians. Though obliged to pay a national insurance contribution, people have had no protection, legal or otherwise, against governments which over the decades abandoned the Beveridge rules. By whittling away contributors’ entitlement to benefits, governments stripped the system of the main assets bequeathed by its founder: its contributory principle and the conditions linked to benefit. They also bent the rules to favour those who had not observed them.
The obligations on the state implied by the system were ignored. Revenue from contributions was expropriated for general expenditure and did not therefore accrue in a fund. Contributors’ entitlement to benefit was squeezed — their retirement pension at one stage was lower than that awarded to non-contributors. Many found their child benefit began to be taxed under the Coalition. Even more seriously, the Coalition’s Lib Dem pensions minister, Steve Webb, abolished the contributory retirement pension. Although the new flat-rate retirement pension is to retain some conditions, including a notoriously short qualifying period of contributions or exemptions, it is not clear that the rights earned by contributors over a lifetime will be fully recognised and protected, nor that higher earners will all be entitled to the additional pension for which they have paid. Indeed, all who have worked, earned and saved over a lifetime will now live in fear of the means-testing which will inevitably follow them into retirement.
Contribution conditions were at the same time eroded for the regime’s favoured groups as politicians gave way to the demands of different “rent groups”, voters who wanted more than the smaller non-contributory assistance sum. Caving in to the pressure began in the late 1940s with the pensioners who had not yet met the 17 years of contributions conditions to qualify for a full pension. Attlee’s government set the precedent. Successive regimes followed, introducing more generous and additional benefits, not tied to conditions.
No responsibility appears to have been shown by those in power to the duty of protecting the system or the rights of those who paid for it. The list of benefits increased in variety and number: from those for incapacity to those in respect of workless households, headed by parents (often lone) with children, to housing benefit. In the last decade a dizzying array of in-work benefits was introduced, designed to overcome the perverse incentives of a system in which people out of work and on the dole could be better off than those in work. The state is paying the price for having used its power in a way Beveridge saw as morally wrong.
So changed has become the language and practice of state morality that Beveridge’s assumption of a household breadwinner and a system to tide people over the temporary downturns of working life has disappeared. New generations of voters seeking that for which they have not paid, supported by campaigning groups and media, have contributed to the change, as the governing classes have moved away from the language of moral responsibility to the shifting ground of “fairness”, the meaning of which depends on the ideology of the speaker. The upshot today is a system with too high a proportion of people living beyond their means, and contributors to the NI system doing less well from the system than those they support, in what Beveridge labelled a “something for nothing” society.
Although the government’s priority is now to cut the deficit, not to change the way Britain pays its keep, its ambitions for the country are certainly more than just to “get by”. If it wants to deal with the problem of benefits, it could go in for a step-by-step reform, along the lines set out by the German economists. Or it could risk regime change, which Schuknecht and his colleagues suggest can sometimes be necessary if reform proves impossible.
A bold Chancellor like George Osborne could — with Duncan Smith to help him — choose regime change and transform the NI system into a personally-owned, independently-managed, fully- funded scheme. Not only would this move be popular with his own party, it would be supported by many trade unionists and has been proposed by Labour’s former welfare reform minister, Frank Field. There is evidence that such regime changes work, from Chile, Singapore and Australia. The funds which have accrued are not only good for pensions, but they can provide the backbone for sovereign wealth funds and investment, and for that elusive growth for which successive British governments strive, as they face the conundrum of paying for the future.
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