Contributory benefits and social insurance in the UK (29 October 2020)

Contributory benefits and social insurance in the UK

Insight

Published Thursday, 29 October, 2020

Spending on contributory benefits accounts for around 9% of social security expenditure on working-age adults and children.

Let me walk you through this, Mr Rose. Unless you can prove that you contributed, you don’t qualify.

So says an unemployment benefit official in the first season of the Canadian TV show, Schitt’s Creek. One of the main characters, former video rental tycoon Johnny Rose, has lost his business and wishes to claim Canadian unemployment benefit (Employment Insurance).

The official explains that in order to be eligible, Rose needs to have paid sufficient contributions. In doing so she describes the concept of contributory ‘insurance’ benefits in a nutshell.

In the UK, the main ‘safety net’ benefit for people who become newly unemployed is Universal Credit (UC). However, a claimant’s eligibility for UC depends on a means test of their income and savings, rather than any insurance contributions they may have made. There are, however, some benefits (‘contributory benefits’) where eligibility depends upon claimants having a sufficient National Insurance record.

The coronavirus pandemic, and its impact on household finances, has prompted new demand for these benefits. From the middle of March to the end of April, 250,000 people claimed contributory New Style Jobseeker’s Allowance (JSA).

This Insight gives an overview of contributory benefits in the UK for people of working age and situates them within the wider benefits system.

Contributory benefits in the UK

As the quote from Schitts Creek makes clear, contributory benefits are awarded to people who have paid a minimum amount of contributions. This basic principle is also known as ‘social insurance’, which describes a wide range of different models used internationally.

In the UK, contributory benefits are funded centrally through the National Insurance Fund by contributions from workers and employers, and in some years with a supplement from the Treasury. They are available primarily to support people who lose earnings for specific reasons, like unemployment or sickness, and are not usually affected by their income or savings.

The most significant contributory benefit in the UK – accounting for expenditure of almost £100 billion a year – is the State Pension.

The main contributory benefits for people of working age are:

Beveridge and the ‘contributory principle’

The UK benefits system, as we know it today, was founded upon the contributory principle.

The National Insurance system, first introduced in 1912, was extended significantly as part of the post-war welfare state, built on the model proposed by William Beveridge in 1942. Beveridge envisioned it as: “first and foremost a plan of insurance – of giving in return for contributions benefits up to subsistence levels, as of right and without means test, so that individuals may build freely upon it.”

This insurance system was designed to pool resources to fund benefits for unemployment, disability and sickness (amongst others), across Great Britain and Northern Ireland.

The development of the social security system

Despite being the founding basis of the modern social security system, contributory benefits for people of working age have gradually become less important.

Beveridge’s vision was never fully realised, for various reasons. Benefit rates were never set fully at subsistence levels and so could not provide enough income protection. And some of Beveridge’s assumptions have been eroded over time, including reliance on a largely male workforce acting as breadwinners.

From the 1970s, other forms of social security, including in-work benefits, tax credits, and non-contributory, non-means-tested disability and carer benefits, have also crowded out contributory benefits for people of working age.

At the same time, successive governments have sought to control spending on benefits and restrict eligibility by targeting resources at people most in need of support through means testing. Thus, the post-war insurance system has been gradually superseded (although not completely replaced) by means-tested benefits, culminating in the introduction of Universal Credit from 2013.

Contributory benefits in the current system

Spending on contributory benefits currently accounts for around 9% of social security expenditure on working-age adults and children (£8 billion in 2019/20). By contrast, in many developed countries (including Canada) unemployment insurance benefits (many of which are linked to previous earnings) are a more significant part of their social security systems.

Contributory benefits' share of non-pensioner welfare spending has fallen

There is evidence that some people are unaware of the availability of contributory benefits. A recent University of Salford study has found that a majority of people who had applied unsuccessfully for UC during the coronavirus crisis had not even considered applying for New Style JSA/ESA.

In recent years there have been calls from the Fabian Society and others to “relaunch” contributory benefits in the UK as a “parallel and complementary offer” to UC.

Coronavirus and the future of social security in the UK

The pandemic has reignited public debate about how the state can best protect and support people’s incomes. Although from a social security perspective, the Government has stated its intention not to change the fundamental design of UC or the existing benefits system.

Nevertheless, there have been various proposals to reform current social security provision. While the current crisis has prompted calls for the introduction of a Universal Basic Income, there has also been renewed interest in the social insurance model.

To take one high profile example, Jonathan Reynolds, Labour’s Shadow Secretary of State for Work and Pensions, signalled in June that he was interested in the contributory principle when thinking about future reforms to the existing benefits system.

As the coronavirus crisis continues, it looks likely that there will be further debate on the role and form of social security support in protecting people’s incomes.

IRRV Alert - week ending 30th October 2020

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