It is time for more radical ideas to make welfare fit for purpose

October 17, 2014

We need to find ways of making the welfare state fit for the 21st century. It needs to be made more relevant, more flexible, more transparent, and more cost effective. Only after this is achieved will public trust be restored in the way benefits are managed and paid.

As it stands, the contributions that somebody puts into the system are barely recognised outside of the State Pension, with 41% of working age welfare payments in the late 1970s being underpinned by contributions, compared to just 10% today. The needs of a modern labour market are also absent from the current design, as the self-employed, who are growing in number and now make up 15% of the UK workforce, are ineligible for some benefits purely because of their employment status.

Policy Exchange has developed a new model of welfare provision to address these problems. The idea is to overhaul the unemployment benefits, by replacing Jobseekers Allowance with a combination of a 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. This payment would buy the insurance cover, and accrue £250 of funds within the individual’s account each year.

Should somebody find themselves out of work, the first three months of unemployment would be funded half and half from the insurance policy and from the funds built up in the personal welfare account. This would work alongside the current welfare reforms, so that somebody with a poor contribution record and insufficient funds in their personal account would be supported – if eligible – by the state through Universal Credit. If somebody has a strong record of contributions then they could top-up their payments until their funds were exhausted; alternatively, they could choose not to draw down the funds, meaning that there is choice and flexibility as to how to utilise their own money.

To put some figures on it, our modelling of the policy suggests that less than seven years of basic levels of contributions would be enough to fully fund six months of unemployment with a £20 top-up on the current levels of weekly payment. If somebody spent 35 years in the labour market, and had two six month spells of unemployment, then they could have £10,000 in their personal account at the end of their working life, providing a boost to their pension pot in retirement.

The scheme would not be administered by Government. Instead, to encourage providers to compete for customers based on their service and tailored options, and to ensure the collective funds are sufficiently large to act as effective social insurance, a small number of providers should be licensed to offer schemes to every individual. Each scheme would be run on behalf of the scheme members, with administrators paid a fee for running it. Any returns from fund growth would be distributed evenly between all scheme members. Established insurers and fund managers should be encouraged to bid for the licenses and license conditions should favour consortia based on a partnership between the administrator, trade unions and business representative groups.

The component parts of this system do have international precedent. The social security system in Sweden (and Nordic countries more generally) has a strong history of voluntary unemployment benefit schemes. The so-called Ghent system, relies on voluntary contributions with schemes typically run by trade unions, with an element of state subsidy. In Singapore the emphasis of the welfare system is that of self-reliance and a belief that government help should only be given as a last resort, and individuals invest their own money and earn interest over their working life, so that they can pay for their own benefits when out of formal work later in life. While both of these schemes have limitations, they provide important examples of how welfare systems are designed and implemented in other countries.

If the policy outlined here were to be introduced and proved to be successful then it would be a stepping stone to include a wider range of benefits in the future, such as Maternity Allowance and Maternity Pay. Not only this, but there could also be the opportunity for individuals to use their personal funds to pay to upskill or to support career transition as their working life progresses.

There are few easy answers to reforming the welfare system, but we need to think of solutions to its current problems that lie outside of its current structure. We are where we are today after 70 years of incremental change, and it is time for more radical ideas to make welfare fit for its intended purpose. Restoring contributions so that people can see how their payments are used will go some way to achieving this.

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