The case for a standalone National Insurance Fund

—In recent years the contributory principle has returned to mainstream debates about welfare policy. So far, concrete proposals have largely focused on particular areas where a ‘something-for-something’ approach could be extended or created. Few, though, have considered the design of the system as a whole. Yet arguably without deeper institutional reform, any change risks being viewed as marginal or easily swept away.

Britain’s national insurance system dates back to David Lloyd George’s Liberal government over a century ago, before being expanded by the Attlee administration after the war. This was based on the Beveridge report’s contention that: ‘benefit in return for contributions, rather than free allowances from the state, is what the people of Britain desire’.

However, in practice the national insurance system has never been distinct from general government finances, and decisions about contribution rates and benefits levels have not been directly connected. Over time, the difference between contributory and non-contributory entitlements has been eroded, as means-tested benefits have grown.

The retreat of the contributory principle over the last three decades has partly been the consequence of economic and social changes. But it has also been the result of a political alliance between those on the left motivated by poverty alleviation and those on the right concerned about targeting scarce resources. However, stagnation and austerity have changed the terms of the debate.

Public hostility to welfare is, in part, rooted in the sense that too much is given to those who have not contributed and too little to those who have. And, unlike most continental European countries, Britain does not have a strong social insurance system that protects working people from the insecurities of capitalism. The contributory state pension is the exception, maintaining its financial value and popular roots.

In the face of a sustained onslaught of benefit cuts by the coalition, Labour needs an assertive alternative. Such a strategy could be built from the remnants of the old national insurance system, while taking advantage of more recent innovations. In a quirk of government accounting, the National Insurance Fund continues to exist. It records national insurance contributions paid in and contributions-based benefits paid out, alongside long-term projections of both, based on a range of trends and scenarios.

The government’s actuary department is shortly to publish new long-term projections, but latest estimates showed the fund coming into balance on an annual basis over the next few years. At present, the fund has no practical effect, given that any surplus is simply lent to the government through gilt purchases and any deficit is made up by a Treasury grant.

However, an architecture exists, with a long British tradition, which could be revived to reassert the distinction between social insurance and social assistance benefits, reconnect contribution levels and benefit rates to ensure affordability, while deepening democratic control over resources in a way which protects entitlements from trust-sapping Treasury raids.

The centrepiece for such a reform would be to give the National Insurance Fund guaranteed independence from the rest of government accounts, while halting work on the integration of income tax and national insurance contributions. The fund would be governed democratically, actively involving contributors and parliamentarians, with responsibility for setting contribution rates and benefit levels (and other eligibility rules). Its constitution would require that the former be sufficient to support the latter, on an annual basis in addition to maintaining a working balance, out to an agreed forecast horizon based on independent projections.

There are a number of governance options, but an institutional innovation along these lines could allow for fuller democratic discussion about the levels of mutual protection provided to ‘members’ of the fund – in the event of job loss, retirement and so on – based on how much they were collectively prepared to pay.

Crucially, this reform would draw a sharper distinction between national insurance benefits, where entitlement is earned on the basis of contributions, and means-tested benefits, paid in respect of need. Under such a plan, national insurance benefits would be taken out of the proposed ‘welfare cap’ and kept separate from the universal credit, moving towards an explicitly two-tier system.

Much detailed modelling and many design issues would need to be resolved before advancing this reform, not least the financial trade-offs between contribution levels and benefit rates. But there are reasons to think it could provide one plank of an assertive rather than defensive social democracy: tapping into popular sentiment and facing up to the challenge of fiscal constraints, while giving stronger, democratic and institutional form to the protective roots of social insurance.

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Graeme Cooke is research director at IPPR and a contributing editor to Progress

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