A welfare system fit for the 21st Century

February 6, 2015

The welfare state needs to be made fit for the 21st century. This requires the next government to make social security simpler, fairer, more effective, and more affordable. The centre piece of any reforms should be a bigger role for the contributory principle, meaning that what a person pays into the system is better reflected in what they get out.

The welfare policies of this Parliament can broadly be regarded as good progress. Work incentives have been strengthened, more comprehensive employment support has been implemented, and decisions to reduce the cost of benefits in both the short-term and long-term have been made. But there is a long way to go, and this week Policy Exchange published 23 recommendations on how to improve the design of the welfare state.

We have argued that to be more effective at getting people into employment requires greater personalisation of support. This means that when somebody who is unemployed goes to the jobcentre their individual circumstances and needs are more comprehensively and better assessed. This happens in Australia, where a diagnostic tool is used to identify the risks of long-term unemployment, and support is tailored accordingly. The Department for Work and Pensions has trialled this approach with limited success, but should continue with its efforts. A one-size fits all approach is not the best way to help the hardest to help.

Equally, those out of work should be doing all they can to find employment. Polling tells us that the principle of reciprocity – something for something – underpins public attitudes to fairness within welfare. This is why conditionality, where jobseekers are required to do a minimum amount to look for work, and sanctions, where jobseekers are penalised for not meeting the conditions, are necessary. But this needs to be proportionate, and there is evidence that the current penalties are causing hardship when benefits are wrongly removed for minor offences. A more balanced approach would be to use non-financial sanctions, such as daily sign-on requirements, for first-time offenders. This would be a much more positive method of penalising somebody that did not meet their work search requirements.

Of course, the welfare state is not just about jobseekers, and over £200bn is spent on an array of programmes each year, with over 40% of the total earmarked for the State Pension. An ageing population means that this proportion will rise in the coming decades. The government should be more transparent about this by including the cost of the State Pension in its fiscal envelope, known as the Welfare Cap. This does not mean cutting the State Pension; it does mean presenting a more accurate picture of the main drivers of welfare spending.

There are no easy options to realise actual savings. We have suggested making the Winter Fuel Payment opt-in, so that those eligible have to make a choice to receive it or not, and capping Child Benefit at four children and tapering the payments. This has the potential to save a few billion pounds over a Parliament. Not massive savings in the grand scheme of things, but still worth doing to address some areas that contribute to a lack of faith in how the welfare system works.

To truly restore trust in the welfare system, however, requires something more than straightforward eligibility changes. It requires making sure making sure that a person’s contributions truly count. 41% of working age welfare payments in the late 1970s were underpinned by contributions, compared to just 10% today. Our idea is a new model of welfare provision, overhauling unemployment benefits and replacing them with a combination of compulsory collective insurance scheme and personal welfare accounts. Every employee in the UK would pay a small amount of their weekly earnings into this initiative, with part of the cost being offset by a reduction in National Insurance Contributions. Those that did not draw down on their welfare accounts would be able to use their pot to supplement their retirement income.

Welfare is a vast area of public policy, and the issues discussed here only scratch the surface. Our manifesto goes further, outlining how the design of Universal Credit should evolve, how the Work Programme could be made better, and how the Benefit Cap could better reflect regional differences in the cost of living. Whatever the outcome of the general election, there is still much to do.

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