Taking control – welfare and personal responsibility

5 February 2015

Beveridge’s welfare state was built on the contributory principle: it was “first and foremost, a plan of insurance – of giving in return for contributions benefits up to subsistence level, as of right without a means test, so that individuals may build freely upon it.” This founding principle encouraged personal responsibility – there was a reward for doing the right thing. By paying into the system when you are in work, you received benefits when, due to sickness, unemployment or age, you were unable to work. But incentivising good behaviour was only part of the story, by creating an insurance scheme, you pooled risk and could afford more generous protection for individuals than they could get by acting alone.

Today the contributory principle has largely disappeared. Contributory benefits account for about 10 per cent of spending on welfare compared to a third in the 1980s. Unlike systems elsewhere in Europe, the benefits paid vary very little depending on whether or not you have paid National Insurance. If you have paid National Insurance for two years, you are automatically entitled to JSA, but only for six months and at the same rate of means tested JSA: £72.40 per week. In Germany’s contributory system someone who has paid into the system is entitled to receive at least 60 per cent of their net salary for at least six months.

If you want more generous protection than that offered by the State, then either you or your employer will have to pay for it. If you want more than just the State pension you need either to be contracted in and pay a higher rate of National Insurance or contribute to a pension. If you want to go beyond the Widow’s Pension and means tested benefits in the event of death then you either need your own life assurance or take up your employer’s death in service benefits.

Whilst there is a lively debate about restoring the contributory principle and rewarding those who pay in through higher benefits, the fiscal costs of this limit its restoration to a token gesture. We won’t see German style benefits, or higher payroll taxes, here.

But there is an alternative model we could use to encourage people to take personal responsibility and achieve Beveridge’s vision of enabling people to build on state provision: auto-enrolment. This model works at two levels – adopting the philosophy of personal responsibility by deciding whether or not to opt-out, but also using the plumbing that enables contributions to be collected at source and then being used to secure additional benefits. For pensions, auto-enrolment enables people to build up their own pension pot, supplementing the Single Tier Pension.

At a basic level, we could use the auto-enrolment pipework to enable people to put money aside for a rainy day. This would provide people with resilience to withstand shocks to their wages or spending without having to resort to high cost credit. This, like a pension, is building up an asset. But a similar approach could be used to buy protection: pooling risk as Beveridge sought to do. For example, Statutory Sick Pay covers an employee for up to 28 weeks of sickness and pays £87.55 per week. Some employers do offer more generous schemes, but where these aren’t in place then employees could take up a more generous package paid for by salary deductions at source.

Of course, Beveridge’s model of the welfare state required compulsion to facilitate the pooling of risk and although personal responsibility was rewarded enrolment was automatic with the only opt-out being not working. The challenge for embedding personal responsibility today is to find the right mechanism that encourages people to put protecting their future above spending for today.

Mark Hoban MP, former Minister of State

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