Thomas Sowell: “The welfare state is not really about the welfare of the masses. It is about the egos of the elites”.
Why Social Protection Spending Matters
Social protection accounts for 35% of total government spending amounting to £257.6 billion in 2015.
Social Protection Spending, 2010-11 to 2014-15 (£ Million)
Source: HM Treasury
Even though the 35% of government spending on social protection sounds high, the UK spend is low compared with other European countries:
International Benchmarks of Public Spending on Social Protection, 2014 (% of GDP and % of Total Government Spend)
The largest part of the spending has a major upward pressure because of the ageing population. Spending on pensions will rise as a proportion of GDP even if pensions are held at today’s level.
The breakdown of social protection spending is likely to be different from the public opinion. Politicians and media focus on unemployment spending but this is less than 1.5% of the total.
Breakdown of Social Protection Spending, 2014-15 (£ billion)
Source: HM Treasury
It is possible to place this in an international context:
International Breakdown of Public Spending on Social Protection, 2014 (% of Total Public Spending)
The UK spending on old age, survivors and unemployment is significantly below EU levels, while spending on housing, family and children and other social exclusion is above EU levels.
Already there is an upward pressure on total social protection spending from the rising part of the population that has retired. This is an important part of total spending at nearly 46%.
Trend in Social Protection Spending, 2010-11 to 2014-15 (£ Million)
Source: HM Treasury
While spending on pensions is growing, the UK spends less than other European countries:
International Benchmarks of Spending on Old Age, 2014 (% of GDP and % of Total Government Spend)
A single-tier, flat-rate State Pension is being introduced which will affect people reaching State Pension age from 6 April 2016 onwards. In May 2014, Parliament agreed the Pensions Act 2014. The act:
- introduces a single-tier, flat-rate State Pension, which will replace the basic and additional pensions for people reaching State Pension age from 6 April 2016 onwards
- increases the State Pension age from 66 to 67 between April 2026 and April 2028
- makes provision for 5-yearly reviews of the State Pension age
Government figures show the increased importance of pension payments will rise further, even assuming current rates are adequate:
Office for Budget Responsibility Central Projections on Pensions Spending, 2013/4-2063/2064 (% of GDP)
Source: Office for Budget Responsibility
International benchmarks of pensions are difficult because different countries have different pension arrangements. In broad terms, there are three basic models of public pension provision:
- Earnings-related as in France, Germany and Italy. The pension is based on the earnings on which a pensioner paid social contributions. Schemes often have a ceiling (above which contributions cannot be made) to prevent excessive pension spending and a floor (below which the pension cannot fall) to protect low earners. Some, such as those in Canada and the US, have a redistribution mechanism so the pensions of the low-paid are higher relative to former earnings than those of higher earners
- Flat-rate as in Ireland and the Netherlands. Pensions are paid at a flat rate and claims depend on either a pensioner’s contribution or residence. In the Netherlands, the rate is determined by reference to the national minimum wage
- Means-tested as in Australia and Finland. The state guarantees a minimum pension but considers a claimant’s other income and assets (only income from pensions in Finland) to calculate the pension
Pension provider Aegon published a survey from 200 financial advisers in 2015 which suggested that just 4% believed the new state pension would still be in place in 30 years. Of the 96% that believed change would happen, 39% thought means testing would be brought back. Some 41% expected payments to be less generous and the triple lock will be removed. The triple lock at the moment increases state pensions for the next five years by whichever is higher, inflation, wages, or 2.5%.
In December 2013, the Government set out its policy on the age of retirement. It is based on people spending up to one third of their adult life receiving State Pension. Including increases in life expectancy, this implies the increase of the State Pension age to 68 in the mid-2030s, and to 69 in the late-2040s if current trends continue.
From October 2012, the Workplace Pension scheme started. At first an employee only gains a minimum of 0.8% of their earnings to their workplace pension. Their employer has to add a contribution that is the equivalent of 1% of the worker’s earnings. Tax relief adds another 0.2%. These amounts will increase to a minimum of a 4% contribution from the employee, 3% from the employer, and 1% in tax relief from October 2018. Industry advisers still report that these sums will be too low to provide for a full pension on retirement.
The UK spends an average amount on sickness and disability:
International Benchmarks of Public Spending on Sickness and Disability Related Issues, 2014 (% of GDP and % of Total Government Spend)
Unemployment spending is dependent on two major causes:
- the number of people unemployed
- the financial package given to those unemployed
UK spending on unemployment is exceptionally low compared with other European countries:
International Benchmarks of Public Spending on Unemployment, 2014 (% of GDP and % of Total Government Spend)
The low spending in the UK, is only partly explained by the lower levels of unemployment:
International Benchmarks of Unemployment Levels, 2014 (% of Workforce)
The UK is also a slightly above the European average supporter of families:
International Benchmarks of Public Spending on Family Related Issues, 2014 (% of GDP and % of Total Government Spend)
UK policies mean subsidies for housing payments are far higher than elsewhere in Europe:
International Benchmarks of Public Spending on Housing, 2013 (% of GDP and % of Total Government Spend)
Forward Thinking Policies on Social Spending
The ideal way to reduce parts of the benefit spending is by creating a society where fewer people need benefits. Prevention rather than cure in this sense means:
- more people are working and earning a True Living Wage
- fewer people are reliant on housing benefit
- fewer people are reliant on income support
- fewer people are reliant on Employment Support Allowance (ESA)
- fewer people are reliant on Job Seekers Allowance
This only has a small role to play in reducing social protection spending because it only applies to parts of the budget. The ageing population will increase pension demands. Automation will challenge the prospect of full employment. More needs to be done to remove poverty among the vulnerable.
A welfare system that lives up to the name of welfare, needs major policy changes. The issues are not simple and need action on many areas. To offer welfare that rightly protects the vulnerable there is a need to control immigration, but the UK’s ability to do this will be dependent on the terms negotiated with the EU. It is unsustainable the UK has an open-door policy to immigration from Europe with no choice as to the skills capability. It is also openly racist by unfairly denying opportunities for non-EU residents, but the simple matter of controlling the numbers is an absolute base line for planning. The UK has to have the power to control immigration and welcome those with the skills that the UK needs. Immigration does not disproportionally rely on welfare, but the UK has finite resources. It cannot offer them to an uncontrolled number of people, nor should it discriminate against talents from non-EU countries.
Social protection spending in the UK is strongly below European norms. This inevitably means the vulnerable are suffering a lower standard of living. The situation is made worse by giving some of those payments to people who simply do not need the support, such as high earners.
The spending is large, and it takes a large part of the total public spending. The public are told that this is because of unemployment payments. This is simply not true. The word ‘benefit’ has become associated with the unemployed, yet they account for a small part of social protection spending. UK spending on unemployment is far lower than in other European countries and this is only partly a result of the levels of unemployment.
In the UK there is a public expectation that everyone is guaranteed a minimum standard of education and health care. There is no such expectation that society prevents destitution.
To protect the vulnerable at anything like a position whereby they:
- do not result in higher costs to other services such as the health service or housing support
- can live with dignity on a healthy diet
Major changes are necessary. Since the direct payments are so inadequate, then further complications arise, such as supplementing housing payments. There is no need for this if other benefits were at proper levels. This would reduce administration costs.
The principles of the welfare system are correct:
- to provide a safety net is integral to creating a just society
- to help people into work gives them dignity and personal fulfilment
- supporting the elderly and vulnerable is essential to a civilised society
So the wider issues of reducing dependency and poverty have to be the first objective. It has to be both cost effective and meaningful.
The benefit system fails both the recipients and the contributors. It is too complex and therefore expensive to administrate. There are administration costs including £3 billion in staff costs alone. The Department for Work and Pensions (DWP) which runs welfare benefits to around 20 million people estimates that in 2014/15 some £3.2 billion was overpaid. This included £1.1 billion in fraud, £1.3 billion in claimant error and £0.7 billion in official error. Simplifying the system would result in cost reduction.
The first past the post voting system leads to frequent policy changes and changes in direction. This is not conducive to removing poverty or creating a lasting structure to protect the vulnerable.
There needs to be a cautious approach when changing benefits. Under public pressure, in August 2015, the DWP released statistics on deaths and welfare changes. They showed an alarming 2,380 people had died after being found fit for work and losing benefits, between December 2011 and February 2014. This represents 90 deaths a month after their Employment and Support Allowance (ESA) claim ended. ESA had replaced incapacity benefit, income support and severe disablement allowance from 2008. The people who had died had received Work Capability Assessments (WCA) to decide if they were eligible to receive ESA. Some 1,340 of these deaths came after appeals against their decisions, though it is not known how many of those appeals were successful or not because the Government will not qualify the data.
A cautious approach means there is a need for short-term adjustments while the long-term changes effect is assessed. This is only possible with the stable government created by proportional representation.
Short-term General Adjustments
In the short-term there needs to be a greater tightening of benefits paid to the highest earners. Child benefit is phased out for people earning £50,000 a year and removed on earnings of £60,000. A similar change to other benefits such as winter fuel allowances is needed to make sure the money is reaching the people who need it. Means-testing needs to be based on a multiple of the True Living Wage.
State pensions need to be means-tested against income. This is already done in Finland. If people have other income of £32.470 (twice the living wage though Forward Thinking would adjust this to twice the True Living Wage), then they have no reliance on the state pension. That income could change and the testing needs to adapt to the earnings. Means-testing the state pension, to target state benefits more precisely on those in need, is a sensible and desirable policy. Government figures on state pensions paid to the highest income households are difficult to find, but calculations by Forward Thinking suggest this would at minimum reflect a redistribution of some 6% of the payment.
Long-term General Approach
The Citizen’s Income Trust suggests one long-term solution to benefits. It recommends an unconditional income paid to every individual as a right of citizenship. Potentially it addresses the increasing pension needs, and the challenge to full employment that will arise from increases in automation. It suggests a Citizen’s Income which would be changed by Forward Thinking to a Basic Household Income. The scheme would replace as many state financed cash benefits as possible, and would be paid automatically to everyone. Forward Thinking would amend this to exclude the highest earners.
The argument for a Citizen’s Income is based on a three-pronged attack on poverty with the Trust suggesting the scheme would:
- end the poverty and unemployment traps, so boosting employment
- provide a safety net for all UK citizens
- create a platform on which all citizens are free to build
The Trust proposes that a Citizen’s Income scheme would encourage individual freedom and responsibility and help to bring about social cohesion. Everyone would be paid an untaxed Citizen’s Income, though it would contribute to total earnings that could place an individual into a tax bracket. The Trust claims a Citizen’s Income would be simple and efficient and would be:
- affordable even within current revenue and spending constraints
- easy to understand. It would be a universal right based on citizenship that is non-contributory, and non-taxable. The Trust would not means-test the income, but Forward Thinking believes it should be phased out only for the highest earners and kept for most earners to remove any stigmatisation of the payment
- cheap to run and to automate
The trust proposes the Citizen’s Income would vary only with age and there would be additions for disability.
In its basic form, the idea needs two major changes to be acceptable to the public:
- that everyone should get some starting point of financial support from the state, even if they choose not to do anything to try to earn money for themselves. This already happens to some extent
- the basic marginal tax rate should be substantially higher than it is now (Forward Thinking would increase funding public income from a Land Value Tax and other sources)
The idea is that everyone has a right to basic subsistence like they get education and health care. The state should be giving people access to a basic income unconditionally, just as it gives access to basic education and health care. However, it must encourage people to build on this basic income through market earnings.
The form of the idea proposed by The Citizen’s Income Trust would be expensive. It could lead to a flat tax rate on earned income of some 40% if housing benefits are excluded from the payment, and perhaps 50% to include housing benefit. These costs are too high and a compromise form needs to be found. Simplification of benefits is a strong positive, but to undertake a non-means tested income is unnecessary and wasteful. Abolishing housing benefits is a needed part of the simplification.
Some form of basic income benefit to replace the existing raft of benefits would simplify and reduce administration costs. It needs to include replacing housing benefits so it has to apply to households rather than people. So the first move has to be to reorganise the entire tax and benefit system to a household level. France and Luxembourg already apply Income Tax at a household level. It is a radical change to the UK system, but it is a first step in developing a structure for the long-term future. Rather than apply it to Income Tax, it is more efficient to change the system to the Land Value Tax.
Benefits are already moving towards protecting a household income, but there has been no such move for tax to move in this direction. Forward Thinking would replace Income Tax and this will be even fairer because it is charged to a household. Redistributing taxes to indirect taxes and a Land Value Tax will create a fairer tax system which stops avoidance and evasion.
The difficulty is setting the basic income at a level that encourages people to work, yet still provides an acceptable standard of living. That standard should not add to the costs of other public services such as the health service. Forward Thinking also believes the part intended for food and groceries should be made through food only credit. This should be paid on a specific debit card and because every household gets the credit would not create an undue stigma.
Forward Thinking stands for the long-term development of a Household Basic Income. It should provide for a basic standard of living for all households with an income of less than £100,000. This would allow people to retire substantially earlier than they are able to now. It offers better opportunities for retirement and release jobs for the unemployed.
The ageing population inevitably means the need to fund pensions will increase. Retirement ages need to reflect longer life expectancy, but there is a further problem in those advances in automation and artificial intelligence will increasingly challenge total employment levels. This suggests the prospect of simply increasing the retirement age will merely increase other social protection costs.
The inescapable truth is that we are under funding pensions. Yet pensions account for almost 46% of social protection spending. International pension comparisons do not reflect local living costs. UK pensions are low compared with other countries even as a proportion of the average wage, which does take into account local costs:
International Benchmarks of Maximum State Pensions as a Percentage of Local Average Wage, 2013 (%)
A major reason for the low pensions in the UK is that in each European country in the graph pensions reflect the payments made. Pensions in other countries are higher than the UK, because they have higher tax contributions to fund it.
International Benchmarks of Social Contributions, 2014 (% of GDP and % of Total Tax)
State pensions are clearly inadequate in the UK. They are nearly half the living wages. People dependent on the pension are unlikely to be able to contribute to any care requirements they have later in life. This therefore merely shifts the state funding to a different area.
By removing Income Tax the affordability of a higher employee based pension contribution is clear. Increased contributions should be directed to workplace pensions (rather than National Insurance). This results in a contribution-related pension as well as the state pension. Workers should lose the right to opt out of workplace pension schemes to ensure that people who can provide for themselves do so. This reduces the needs of other state assistance.
It will take years before the recently introduced workplace pension pots are enough to give an acceptable income so there needs to be short-term changes. Besides, this does address the pensions of those on the lowest earnings (or no earnings). Means-testing would increase the available funds, and this should be redistributed to the rest of the pension claimants.
Incapacity and Sickness
UK incapacity and sickness benefit payments are roughly in line with European norms.
Major difficulties have arisen in recent months to individuals as the Government has looked to redefine qualification for incapacity. Qualification needs reviewing by experts from within the service rather than politicians and civil servants.
The only practical effort any Government can have on reducing spending on sickness is through coherent policies to remove poverty, preserve a vibrant health service, and to encourage healthy diets and levels of exercise.
The UK is a low spender on unemployment both in total terms and in proportional spend, by European comparison.
It is not the Government’s role to provide employment that is the role of agriculture, industry and commerce. The Government can encourage overseas investment into the UK (removing Corporation Tax, would make the UK more attractive). It can also create a background for company progress through a skilled and educated workforce.
There is a need to make sure spending is as effective as possible. Any measure that makes spending more fair, even if it has little impact on overall spending, is important. Saving small sums of money while reducing anomalies is worthwhile, if only to help improve consumer attitudes to the welfare state.
Means-testing benefits is therefore essential to create fairness. It should include all types of payments for those who can keep a strong standard of living without them. Means-testing must reflect income and not savings, otherwise it discourages saving for retirement. Those with an income that supports a suitable standard of living without social protection should forgo that benefit to increase the funds available for others. Means-testing for child benefits should be at three times the living wage. This is £48,700 rather than the £50,000 applied at the moment. However, the threshold will increase when the True Living Wage is calculated.
Child benefit should only be available for two children a household at any one time, but this needs long-term planning. Clearly no Government term of office could cover an adequate period, of 18 years. This is no reason not to bring in the policy for the long-term control of costs. There needs to be a delay of nine months from announcement so pregnant women are not penalised.
A very small cost reduction will arise from exiting the EU. Nationals of other EU countries who are resident in the UK (but not their children) can claim child benefit in the UK. This is one of the many absurdities of the EU, since the benefit reflects UK costs rather than local costs to where the child is domiciled. The Government had succeeded in reducing this for four years of residency as part of its negotiations before the 2016 referendum.
The UK policy of paying such low benefits in other areas (such as pensions and unemployment) means people cannot support themselves. At the same time, the inefficiency of the housing market has resulted in rampant house price inflation. In turn, this has increased rental prices. The solution is partly to introduce the Land Value Tax. This will slow house price inflation by encouraging more house building. Other benefits, including pensions, need to be increased at the same time.
In the longer term introducing a Basic Household Income to include housing costs will remove the need for this benefit.
Forward Thinking would introduce means-testing for the winter fuel allowance (at double the living wage, currently £32,470 but to change to double the True Living Wage). It would further exclude all nationals living outside the UK.