It is hard to trust anything the Conservatives say about welfare, after George Osborne’s budget swiped £13 billion from low and middle income families. But this time Iain Duncan Smith may be onto something. Over the weekend the Work and Pensions Secretary floated the idea of personal accounts for people to dip into when faced with loss of earnings. It is not something the left should dismiss out of hand, because it is already part of the answer when it comes to pensions.
For retirement the UK now has a three-part system, which is increasingly effective at preventing poverty and replacing past earnings. There are private pensions (heavily regulated and subsidised by the taxpayer), the state pension (earned through National Insurance contributions) and means-tested top-ups. Ongoing reforms are gradually reducing the place of means-testing and most retirement income will in future be funded by the two contributory systems, one private, one public.
The contrast with income protection in working life could not be more stark. Private contributions are meagre: most people’s savings would last for around a month of unemployment; and the insurance markets for income protection and critical illness are very small. Meanwhile the public system of earned entitlements is now residual. The Budget slashed the value of Employment and Support Allowance for many claimants. But even before that, the government was spending less than £6 billion annually on Maternity Allowance, contribution-based ESA, and contribution-based Job Seeker’s Allowance.
As a result, almost all the protection people have from unemployment or sickness comes through means-tested social security, soon to be unified in the monolith of Universal Credit. Means-testing is vital – to support families both in and out of work – but it is totally inadequate as a system of insurance for most workers. Eligibility is restricted by savings or a partner’s earnings and the income provided is a small fraction of the wages of mid-income workers.
So there is both market failure and state failure, making IDS right to alight on the issue. Now the left should join the debate, both to define the nature of the problem and shape solutions. This could start with a reinvigorated National Insurance system, with proper protection in exchange for contributions. National Insurance is often seen as just another tax, but it now buys a decent, earnings-linked state pension. We should debate a similar ‘something for something’ deal for enhanced working-age entitlements. But personal accounts of the kind IDS has floated may well be part of the answer too. Protection based on state and private contributions could be complements rather than alternatives – and neither should be a substitute for a means-tested safety net.
The accounts-based approach is working well for pensions, with the state pension supplemented by new opt-out workplace pensions, where employers, workers and the taxpayer all contribute. When it comes to working-age, IDS talks of similar savings accounts, but it would make sense for any new system to also encompass insurance, in order to pool the risk of losing work. Some insurers and employers suggest they would not even need to individually assess risk, implying there could be some socially-beneficial cross-subsidies in any new scheme.
So when the workplace pension system is reviewed in 2017, there is no principled reason why contributions for working-age protection should not be rolled in. As with pensions, people could be offered an account, but with the right to say no. The main challenge is one of affordability, after years of stagnant wages. Buying extra protection for working life will mean forgoing earnings today, regardless of whether it is organised through private contributions or National Insurance. And on top of that, levels of pension saving may still be too low, so employee and employer contributions may need to rise there too.
None of this is an excuse to ignore the possibilities, however. We mistrust the Conservatives’ motives, because they are in the midst of gutting their own Universal Credit, and undoubtedly some on the right would like Singapore-style accounts to be a substitute not an addition to means-testing. But from the perspective of a typical mid-income worker, the real crisis of welfare is that the protection it offers is totally inadequate. The left may not end up agreeing with IDS’s version of contributory income protection, but it is the right debate for him to be kicking-off. Let’s join it.