Perceptions have resulted in a delegitimatisation of the welfare system which is now in crisis – both politically and financially. A solution could be time limited generous entitlements together with complementary reforms to increase the quality and intensity of work search, low redistribution (which could be achieved through other policies) and independence from the exchequer, writes Anna Rosso.
When the Beveridge Report came out in 1942, one fundamental principle was that anyone claiming benefits would be entitled to the same flat rate, freeing individuals from the hated stigma of means-tested help. In such a context redistribution would have resulted only from the fact that some individuals were more likely to be hit by shocks or live longer (see Mulheirn and Masters).
This scheme was introduced differently to Beveridge’s original blueprint. But more fundamentally, economic and social pressures eventually forced the system to evolve into something very distant from the original contributory idea. Moreover, especially in the later years, governments also started to rely more and more on means-testing to determine the benefit eligibility of individuals (see for example the introduction of Jobseeker’s Allowance).
The result is that nowadays, the system is perceived as offering ‘something for nothing’ to some individuals who have contributed little but receive significant, albeit means-tested benefits; but at the same time ‘nothing for something’ to those individuals who have made substantial contributions but receive very low levels of entitlements.
These different perceptions have resulted in a delegitimatisation of the welfare system which is now in a crisis – political if not financial. It is true that the existing ‘orthodox’ system of unemployment benefits can be attractive to policymakers in the short term, as it forces people back to work quickly, but at the same time it may have had damaging consequences on workforce human capital and productivity as often unemployed individuals find jobs in what would then result as a poor job match.
A contributory unemployment social security scheme should aim at being generous in entitlements, inclusive and politically sustainable. The UK system meets only the second criterion, as it is mainly working as a safety net for everyone, but is not particularly generous, and political sustainability is more and more in question.
A generous system can solve the problem of liquidity constraints faced by medium and high skilled workers suffering from temporary unemployment, possibly delaying reemployment but resulting in a better (more productive and better paid) job match (see Chetty). It is important to note though, that generous entitlements at the same time can raise the issues of moral hazard and create structural problems because of the long-term unemployed. A solution could be time limited generous entitlements together with complementary reforms to increase the quality and intensity of work search, low redistribution (which could be achieved through other policies) and independence from the exchequer (see Mulheirn and Masters).
What are the main issues?
While it has considerable attractions both politically, as witnessed by considerable interest across the political spectrum in the idea of restoring the link between contribution and entitlement, and economically, for the efficiency reasons described above, reversing the overwhelming trend of the last 30 years to move away from a contributory system would face numerous obstacles, practical, political, and ideological.
How much should the system aim at actuarial fairness?: The main attraction of such a system is that it restores the insurance principle. On the other hand, genuine actuarial fairness may not be achievable, certainly not in a voluntary system (those whose risks are low would just opt out). And part of the point of any such system is that it is cheaper to hedge risks collectively. So some element of “quasi-compulsion”, possibly on an opt-out basis (as with NEST) is likely to be necessary.
Is it politically sustainable? Over the life cycle, it has been estimated that individuals at the bottom two deciles of the income distribution get around 40% of their income from the state, while the top only get 3% (more recent figures are not available). The question which arises is how a collective systems can be politically sustainable and redistributive? The idea is that the bottom would still get the residual safety net that they are getting with the existing system, but in such a system individuals in the middle of the income distribution would be relieved from the credit constraints they suffer from with less likelihood of losing attachment to the labour market and being de-skilled by the unemployment experience. Through the individualization of the risk, issues of labour market efficiency would be solved and redistribution would still be in place. In such a context the main channels of redistribution should not go through the contributory system, but through the “safety net” system and other policy instruments. Whether this would make redistribution overall more or less sustainable is an open question.
What is a contribution? As pointed out above, one of the main issues in such a system is to deal with the ‘free-rider’ problem. Yet individual situations are much more complex and it is true that individuals may socially and not financially contribute to the system (i.e. carers and parents), so it would be important to credit social contributors into the system and avoid the residualisation of their benefits like in the case of non-contributors.
Longer search period, better outcome? Improvement of labour market efficiency should also be reached through reforms that can help individuals search for the right job. However it would be crucial to understand the effectiveness of these types of programmes and whether giving more time to individuals would actually result in a better labour market outcome.
This blog originally appeared on the NIESR blog is NIESR’s write-up of a seminar that took place on 2 December as part of an ongoing series on the subject of “Money and Poverty”. The series is part of the Joseph Rowntree Foundation’s ongoing programme devoted to the creation of strategies to eliminate poverty in the UK over the next 20 years. The idea of the programme is to find alternative solutions which could be a combination of different approaches in order to raise the capabilities and opportunities for people in poor conditions to access the resources they need for subsistence. This seminar was opened by Ian Mulheirn, with a brief presentation based on report “Beveridge Rebooted” and was attended by a number of experts in the field. The views above are entirely the responsibility of NIESR, not of Ian Mulheirn, JRF, or the seminar participants.
Note: This article gives the views of the author, and not the position of the British Politics and Policy blog, nor of the London School of Economics. Please read our comments policy before posting.
About the Author
Anna Rosso joined NIESR as a Research Fellow in 2012. She previously worked as a research assistant for the Centre for Research and Analysis of Migration (CReAM) based at UCL where she is about to complete the PhD in Economics.