Making welfare popular

It is time to model working age welfare on the pension system, argues Duncan O’Leary.

The political fallout from the Budget is a reminder of declining public support for the welfare system as a whole. The Chancellor believes he has found a winning formula with ‘a higher wage, lower tax, lower welfare country’. The Opposition may not like the policies but it fears public opinion more. It is hard not to conclude that the old system is on its way out and a new one will need to be built.

This position is the result of long-term trends. Over the last 25 years, more people have tended to agree that the welfare system encourages the wrong behaviours and rewards the wrong people. The public have become more concerned about ‘fiddling’ and more reticent about putting extra money into the system. As Demos and Ipsos MORI research has shown, there is a generational element to this. Every successive generation is less likely to agree that the welfare state is one of Britain’s proudest achievements.

The political class sees the problem but has no solution. Universal Credit seeks to simplify welfare by combining many benefits into one. This is noble and necessary but will not change many of the underlying incentives that the welfare system creates. People will have slightly stronger incentives to do some work, but weaker incentives to increase their hours. Decisions about whether or not to take jobs will be simpler, but work will not be significantly more rewarding.

Restoring faith in the welfare system requires confronting the big change in welfare over the last 25 years. The system has morphed from one designed to pool risk, through social insurance, to one designed to provide a basic safety net for poorer households, through means testing. This shift has weakened the relationship between what people put into the system and what they can take out of it. Many feel the system is no longer designed to protect them.

Defenders of the welfare system often criticise media and political discourse. But too often they ignore how the system itself has changed. The move from risk pooling to means testing has created the space for rhetoric which draws a distinction between those who pay into the welfare system and those who draw out of it. The point of the old system was to avoid this ‘them’ and ‘us’ dichotomy. Anyone drawing on social insurance had, by definition, already paid into it.

Today’s political debate is no longer about what kind of insurance system people want. Instead, it is how generous one group should be to another – or, at best, whether one group’s generosity is, in fact, harming those in receipt of benefits. When times are tough and resources are scarce, the public’s response is that a tougher, less generous approach is required.

Successive governments have sought to reassure the public by attaching tougher terms and conditions to welfare payments. For example, job seekers must attend job centres for ever-increasing numbers of hours each week, or face an increasingly tough sanctions regime. Conditionality is now being used not just to encourage people to find work, but also to work more hours.

These measures almost always command public support, but rarely address underlying concerns. Qualitative research reveals scepticism that tougher conditions will ever stop claimants playing the system one way or another. A tougher approach is seen as justified and worth a try, but unlikely to make a real difference. Polling shows people doubt that claimants will become contributors for very long, even if they do comply with sanctions and find work. Conditionality is a necessary part of any welfare system, but ramping it up to new heights produces diminishing returns and unintended consequences. Enforcing ever-tougher regimes is expensive for the government and frequently demeaning for those on the receiving end.

In the search for solutions, attention has turned to how best to revive the contributory principle. In the last parliament, Policy Exchange, the SMF, the IPPR, the TUC and Demos all looked at this. The Conservative MP Chris Skidmore produced his own proposal. The Labour Party included a pledge on contributory benefits in its manifesto. All used the Beveridge report as a frame of reference.

The answers that have been produced have always felt small and piecemeal by comparison to the scale of the challenge at hand. We have a system which is neither generous nor popular. The truth is that incremental changes are not going to change this. Moreover, none of the ‘back to Beveridge’ proposals, including my own suggestions in the past, have really got to grips with the way in which society has changed since the 1940s and 50s. In particular, the gap between low and high earners has increased dramatically. This means that an extra few pounds on Jobseekers’ Allowance (JSA) is still unlikely to feel like a decent insurance system for many.

What is required is a welfare system that deals with unemployment in a way that meets three key criteria: supporting people to return to work, protecting living standards in the meantime, and doing so in a way that accords with most people’s sense of fairness. This third point can only be achieved by restoring a degree of reciprocity. That implies less means testing and a reinvention of the contributory principle – but in a way that works with the grain of modern Britain.

One model for this could be the pension system. Following reforms in the last parliament, the pensions system now has a number of important features. First, the State now provides a universal, flat-rate pension with no means testing. When people save for later life they are no longer punished with reductions in the State pension. This recalls Beveridge’s plan for ‘benefits up to subsistence levels, as of right and without means test, so that individuals may build freely upon it’.

Second, people are auto-enrolled into occupational schemes, with scope to choose policies or opt out altogether. This recognises the problem of inertia but preserves the principle of individual choice. Third, individuals pay in but as part of a tripartite system. Employers contribute while the government uses the tax system to reward people when they put money aside. This enables and encourages people to build up significant contributions over time. So people are protected by a universal, basic floor and individual initiative is encouraged.

It is time to look seriously at how this model could be applied to working age welfare. A universal, non-means tested, flat rate of JSA would be the equivalent of the single, state pension. Individuals would be free to build upon this, by choosing income protection products provided by financial service companies or employee mutual schemes. As with pensions, there would be auto-enrolment, with freedom to switch schemes or opt out. Similarly, there would be a tripartite system, with individuals, employers and government all playing their part.

Such an approach could see more people protected properly against loss of income. Under the current approach, state entitlements are cut when people receive payouts from income protection schemes. Without the means testing of JSA, people would no longer be punished for insuring their income. Within a tripartite system, more people would also have the opportunity to access policies offering real protection should they suffer from illness or unemployment.

The new system ought to encourage more early intervention too, particularly in stemming the flow of people onto long-term sickness benefits. Despite the social and financial cost of this problem, the State has a poor track record of intervening early when people are off sick. It takes action too late, by which point people have often lost their job and drifted out of touch with work. It is precisely the problem identified by Danny Kruger in his essay on social reform. By contrast, companies due to pay out on sickness insurance would be likely to invest properly in early intervention, in order to reduce their own liabilities. This is the value of having skin in the game. A step change in this area could save the government significant sums in the long-run if fewer people find themselves on sickness benefit for long periods.

Finally, the new system would address public concerns over fairness. Everyone would have a stake in the system. No-one would be punished for having put money aside or insuring themselves against loss of income. Indeed, if the pensions system was replicated, contributions to occupational schemes would be rewarded in the tax system, adding a contributory element. Such incentives could be structured in such a way as to support low earners the most.

The pensions system offers a template, but there would be no shortage of detail to work out. Eradicating means testing for JSA and Employment Support Allowance (ESA) would need to be costed and paid for. Universalism would be more expensive unless the basic rate of JSA and ESA was cut. A new deal would have to be struck between individuals, employers and government on the contributions expected from each under any tripartite approach.

Answers would be needed for how to make the system work for those in informal, part-time and precarious work. Decisions would need to be taken about whether the tax system should support contributions from all individuals, or just those on low incomes. The right lessons would need to be learned from auto-enrolment for pensions, including how to make it work for small businesses. The regulatory framework would need to be rock-solid, to prevent concerns over mis-selling.

None of this is easy. Nor would it solve the equally knotty problem of whether tax credits are the right answer to in-work poverty. However, it is a plan that could start to detoxify welfare. The current system is inadequate and unpopular, but the old Beveridge model is not coming back. It is time for a new settlement which protects people from loss of income, which does more to get people back to work and which rewards personal initiative and contribution. The basic story of social security is a popular pension system and an unpopular welfare system. There is a lesson in this; it is time to learn it.