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‘Benefit in return for contributions, rather than free allowances from the State, is what the people of Britain desire’
Sir William Beveridge, 1942
Published by parliament on 1 December 1942, the Beveridge report proposed a system of national insurance in which flat rate benefits, paid for by flat rate contributions, would provide support in the event of unemployment, ill health or old age.
70 years later these foundations remain visible in some elements of the welfare state. Entitlement to contributory Jobseeker’s Allowance, contributory Employment and Support Allowance and the state pension is still determined by National Insurance (NI) records. However, even this continuity is something of an illusion. The Basic State Pension (BSP), by far the largest of the remaining “contributory” benefits, is no longer contributory in any real sense – it is virtually universal. The unemployed, the sick and those caring for children all build up BSP entitlements as though they were making NI contributions.
In truth very little of today’s welfare system bears even a passing resemblance to the system envisaged in the Beveridge Report. To some extent this is the product of the substantial differences between the context in which the report was written and the world we live in today. His proposals were for a country in which, for the most part, men worked and married women didn’t, the only lone parents were widows, and life expectancy was lower than the pension age. The UK today is a very different place. From 96% in 1949 the share of working age men in work has fallen to 76%, while the share of working age women in work has risen from around 40% to 66%. At the time of the report less than 1 in 20 births was outside marriage; today more than 1 in 5 children grow up in a lone parent household. Male life expectancy has climbed from around 63 in 1940 to 78 in 2010, but the male state pension age remains the same as in Beveridge’s day.
These changes in employment, family structure and longevity exposed the limitations of the report. A system based on the contributory principle could not accommodate groups in obvious need of support but without a history of contributions, such as lone parents and the long-term unemployed. And as early as the 1950s, the pension demands of an ageing society led to the abandonment of any actuarial link between contributions and benefits. National Insurance Contributions stopped being flat rate in 1961.
As the role of the contributory principle in the welfare system has declined over time, successive governments have relied increasingly on means-testing to determine eligibility. This shift has been particularly dramatic for those of working age, as illustrated by the figure. Between 1978-79 and 2012-13, the share of expenditure on working-age welfare payments accounted for by means-tested benefits has increased from 26% to 80%. Of the £95 billion budget for working age benefits and tax credits this financial year, more than £75 billion will be means tested, compared with spending of less than £10 billion on contributory benefits. (Note that we have included Child Benefit in the set of means-tested benefits for 2012-13). Much of the increase in the share of means-tested expenditure is the result of extending the reach of the social security system beyond tightly defined groups (the unemployed, carers etc.) to all those with low incomes. In 2011-12, the government spent £22 billion boosting the incomes of families in work through tax credits, an idea that would have seemed bizarre to Beveridge who took it for granted that those in work would not need support.
Note:All social security spending on pensioners is excluded, not just that on specific pensioner benefits. Child benefit expenditure in 2012-13 is counted as means-tested.
Source: Authors’ calculations from Department for Work and Pensions Benefit Expenditure Tables and HMRC accounts.
Why does this history matter? For three reasons. First, because the result of appending a means-tested system to a social insurance framework is more complexity and less transparency than necessary. Second, because we maintain the fiction of an insurance system through National Insurance Contributions, which in fact act just like an additional income tax for most people most of the time. As we have argued previously, this is complex, costly and distorting and seems to be used primarily to make tax rises less transparent. And third because this history should lead us to recognise the need for our welfare system to adapt in a planned way as the world changes.
70 years after the Beveridge Report, the government faces some big choices as it seeks to make substantial cuts to the social security budget. These decisions need to be taken with the long term in mind and with a view to creating a coherent system that is both affordable and effective in meeting the needs of a changing population.
View all Observations in the series
Does offering higher teacher salaries improve pupil attainment?
In new work published today, IFS researchers analyse the impact of offering higher teacher salaries on pupil attainment. We examine salary scales and pupil attainment in primary schools in and around London. For these schools, and for the salary differences of just under 5% that we observe, we do not find evidence that higher salary scales for teachers have much impact on pupil attainment. This suggests that if individual schools offered salary differentials on this scale across-the-board, they would not necessarily attract more effective teachers.
The next five years look better but tough fiscal choices remain for Scotland
The latest public finance forecasts published by the Office for Budget Responsibility (OBR) in December presented a better outlook for the UK than had been suggested by their March forecast. This is good news for the UK and Scotland in the short-term but much of the improved short-term outlook comes at the expense of reduced scope for economic recovery after 2018–19. Also the one area of greater weakness in the OBR’s latest forecast – revenues from oil and gas production – has substantially more adverse consequences for Scotland’s fiscal position than for the UK as a whole. In short, the new forecasts do little to diminish the tough choices that will face Scotland (and, to a lesser extent, the UK) if it is to achieve long-run fiscal sustainability.
50p tax – strolling across the summit of the Laffer curve?
Ed Balls and Ed Milliband have cited recent HMRC statistics which show those paying the 50% income tax rate are estimated to have paid some £10 billion more in tax over the three years 2010-11 to 2012-13 than was projected to be the case back in 2012 when HMRC analysed how much the tax was raising. Is that an indication that the 50p rate was more successful in raising revenue than HMRC concluded in their analysis?