“Some party, some government, will have to replace the welfare state by a less destructive alternative. The Fortune Account is the shape of its replacement.”
That was the conclusion reached in a 1995 Adam Smith Institute report on welfare reform. Fast forward 20 years and the report’s central message – that personal savings and insurance accounts, not centralised taxation and distribution, should form the basis of much of the nation’s welfare system – may be getting its best ever hearing in the corridors of power.
The ministerial cheerleader for this idea is Iain Duncan Smith. Bolstered by the Conservative Party’s recent election victory, the work and pensions secretary has not been afraid to discuss his thinking publicly – most recently, in a post-Budget Telegraph interview:
“We need to support the kind of products that allow people through their lives to dip in and out when they need the money for sickness or care or unemployment… We need to encourage people to save from day one but they need to know that they can get some of the money out when their circumstances change. This is not government policy but I am very keen to look at it, as a long-term way forward for the 21st century.”
The latest indications are that Number 10 wants to encourage discussion on what would undoubtedly be a controversial policy. Shortly after Duncan Smith’s Telegraph interview, the Guardian quoted David Cameron’s official spokeswoman as saying:
“I think the PM shares the work and pensions secretary’s view that we should be doing more to encourage people to take personal responsibility for how they manage their affairs… This isn’t government policy, it’s an idea that’s out there. It’s an idea that should be looked at. That’s where it’s at, at the moment.”
Meanwhile, the Chancellor is said to be taking a close interest in abolishing National Insurance Contributions and creating a single earnings tax – a reform that would be a necessary precursor to the introduction of personal welfare accounts (and which has been championed by the Centre for Policy Studies). The Telegraph reported this week that David Gauke, financial secretary to the Treasury, has written to the Office of Tax Simplification requesting that a review into the matter be published ahead of the 2016 Budget.
It is too early to say whether this debate will gather momentum. But neither side can afford to be complacent: the welfare state is undergoing its biggest shake-up for decades, with the prospect of more to come. Whether you intend to beat or advance them, knowing the arguments offered in support of personal welfare accounts is an important first step.
Enter the humble think tank report – four of them actually, courtesy of the Adam Smith Institute, Civitas, Reform and Policy Exchange. The first three set out full-blooded reform packages – under the banner of ‘Fortune’, ‘Personal Welfare’ or ‘Personal Protection’ accounts – while the fourth floats a smaller measure, called ‘MyFund’. After reading all four reports, here is Think Tank Review’s summary of the centre-right case for a welfare shake-up. Over the coming weeks, we’ll be posting a similar summary of the think tank literature arguing against personal welfare accounts. And if all of this makes your blood boil – or your head nod – please get in touch about posting a review on our website.
What makes for a good welfare system?
And where is the present system failing? Seven major themes emerge from the papers.
Most government welfare spending consists of ‘churning’ – taking income from individuals when their welfare needs are relatively low, and returning that income to them directly or in-kind when their welfare needs increase. Churning is not a bad thing. But the question is whether the state, or individuals and their chosen financial institutions, should take responsibility for this income smoothing function
“Hill calculates that the average person in the course of a lifetime self-finances 74 per cent of everything they draw out of the welfare system. Even the individuals who over their lifetimes make up the poorest 10 per cent of the population on average self-finance almost half of all the benefits and services they receive; the next decile up self-finances two-thirds of them.”
“[V]ery many households simultaneously receive government assistance from and pay substantial taxes to the Government. As Cox and Humphreys have argued, this money-go-round, or churning, is undesirable because it indicates that some government expenditure is unnecessary and this unnecessary expenditure leads to taxes having to be higher than otherwise.These higher taxes come with higher administrative and economic costs.”
All of the papers accept redistribution as the second fundamental function of a welfare system (the Adam Smith Institute authors flirt with the idea of rejecting this principle, before giving in to their inner socialist). The main point here is that personal welfare accounts are compatible with redistribution. The state can make direct cash transfers into the accounts of those individuals who are either unable to afford mandatory minimum contributions or who have exhausted their account funds (e.g. due to prolonged unemployment).
“To the extent that there remains some who simply cannot make financial contributions to cover their present and future needs, the state does have a redistributive or welfare role. It can fulfil this role most efficiently not by setting itself up as an insurance company or savings bank, but simply by transferring cash into the accounts of those who cannot make contributions themselves.”
Adam Smith Institute
“In another 2012 survey for the BBC, ConRes asked a sample of the British public if everyone should have the right to a minimum standard of living guaranteed if necessary by welfare payments, and 72 per cent thought they should while only 18 per cent disagreed.”
The papers sound an alarm that has been ringing in politicians’ ears for several decades now: without urgent reform, the nation’s pension system will go bust, taking down with it other areas of government spending. Several culprits are blamed for this sorry state of affairs, including the demise of the ‘contributory principle’ (taking out only in proportion to what you have put in), a reliance on inter-generational transfers, inadequate means-testing, and the demographic time-bomb posed by an ageing society.
“Today there is widespread and serious doubt whether we can much longer sustain a welfare state that is built on the principles of universal entitlement and inter-generational transfers.”
Adam Smith Institute
“[A]lthough Beveridge recommended that the new state retirement pension fund should be built up over twenty years, so an adequate amount of money could accumulate before pensions started to be paid out, this advice was ignored. Instead, the post-war Labour government introduced the new pensions immediately… This meant there would be no ‘pensions fund’ from which retirees would be paid. Instead the system would have to be financed on a ‘pay-as-you-go’ basis, paying pensioners not from their own past contributions, but from those being paid currently by younger people still in the workforce… As Aneurin Bevan, Minister for Health in the post-war Labour government, candidly observed: ‘The great secret about the National Insurance fund is that there ain’t no fund.’”
The papers cite three bureaucratic inefficiencies:
- we pay tax collectors to take our money, only to give it back to us at a later date (see ‘income churning’ above);
- employers must comply with two sets of rules – one for National Insurance Contributions, the other for income tax (see section four of this recent House of Commons briefing note for an excellent overview of the NICs debate); and
- claiming from a central, abstract entity (the state) encourages welfare fraud, which in turn requires the government to fund enforcement measures.
“When the government taxes people’s earnings, and then returns their money to them in the form of welfare benefits or services in kind, it has to take a slice off the top to cover its administrative costs. One bureaucracy is needed to take people’s money away, and another is needed to give it back again… there are also ‘compliance costs’ for employers who are required to act as unpaid tax collectors, and there are ‘enforcement costs’ for government in detecting and chasing people who fraudulently claim benefits. Moving to a system of personal accounts should reduce all these costs and, other things being equal, should leave people better off than they are under the current system…
Of course, a shift from state-managed to privately-managed savings will itself incur some new administrative overheads, but competition between financial service providers should drive down costs and charges. Even if it doesn’t, self-funding will reduce the expense entailed in detailed scrutiny of each individual’s personal circumstances, for when people are drawing on their own funds, there is less need to check whether they are defrauding them. Welfare ‘scrounging’ under a system of personal accounts makes little sense, for those who claim unnecessarily are only defrauding themselves.”
The papers are concerned with more than just the pursuit of technocratic solutions to a looming fiscal reality. ‘Fairness’ – broadly defined by the reports as the rightful public expectation that claimants should only get something out if they have (or are willing to) put something in – is positioned as a moral objective for the nation’s welfare system. Public consent will collapse if this system is not widely perceived to be fair, argue the reports. Universal Credit may make the system more efficient, but without a corresponding restoration of the contributory principle it will only add to perceptions of unfairness.
“There is a lack of faith in the welfare system, with many feeling that the contributions that they put in do not count. A sustainable system has to reward what people have put in, whilst not compromising a base level of welfare… The contributory principle is supported by the public. 49% of respondents to a 2012 poll believed that unemployment benefits should ‘only be available to those who have contributed into the system … regardless of their level of need,’ and a 2013 poll suggested that 68% of people believe that ‘you should only benefit from state services if you have been paying into the pot which funds them.’”
To put it bluntly, government is always tempted to buy votes by increasing benefits to levels beyond those which the system itself will support.
Adam Smith Institute
“All of these non-contributory benefits (income-based JSA, income-related ESA, child tax credits and working tax credits) are in turn now being replaced by a new single benefit, the ‘Universal Credit’, which is being phased in between 2013 and 2017. This new benefit also replaces Income Support and Housing Benefit. Contributory JSA and ESA will continue (at least for now), but Universal Credit is set to become the principal component of our welfare system. Like the various benefits it is replacing, it is means- tested and tax-financed. If you can demonstrate need, you will qualify for it, and the greater your need, the more you will get. Past contributions will be wholly irrelevant.”
What type of returns are you seeing on your hard-earned welfare contributions? Do you pay in more than you get out – and if so, by how much? Unless you’re an enthusiast for ONS statistics and extrapolation, you probably don’t have an answer to those questions. That’s not good enough, argue the papers. Solidarity is no excuse for opacity. Separating the income-smoothing and redistributive functions of welfare contributions – compulsory personal savings accounts for the former, taxation for the latter – would shine a light on what is portrayed as a murky system.
“The new system should be utterly straightforward and understood by the electorate, and nothing should be hidden. That in turn implies that the system should be narrow in its focus, stripped of all non-insurance or non-savings elements, and directed purely towards the provision of minimum pensions for the retired population and minimum social insurance benefits for all.”
Adam Smith Institute
“Many employees are unaware of the full extent of the deductions being levied on their earnings… The true situation would be more obvious if, instead of paying into one, big government pot, we separated out the money we pay for redistribution to other people from the money we pay to finance our own future needs. The first set of payments would take the form of tax deductions which would be used to fund targeted welfare benefits for other people less fortunate than ourselves; for the average person, this would absorb just one-quarter of the taxes they currently pay. The second set of payments would go straight into our own, personal, welfare accounts, where it would be used to buy a retirement annuity, purchase health insurance, and build up savings to be used if and when our earnings are interrupted by some misfortune. For the average person, this personal welfare account would absorb the other three-quarters of the money they currently give the government in taxes.”
Freedom and flexibility
The papers position themselves as being on the right side of the twenty-first century. Beveridge built his system for an era of single-income households, mass (stable) employment, uncompetitive financial markets and voter deference to a paternalistic state. Society today is defined by greater personal freedom and looser ties: divorce rates are up, employees switch jobs more frequently (or, increasingly, move between periods of employment and self-employment), and the information explosion has left individuals better placed than ever to make decisions for themselves. All of this cries out for a more individualised and flexible welfare system, according to the reports.
“The era which saw the birth and growth of mass state welfare was a period characterised by more uniformity of life style… there is a need for a more varied and flexible system.”
Adam Smith Institute
“The vision of welfare contained in Beveridge’s 1942 report reflected an economic and social environment of low and generally short-term unemployment and where couples with children and a single male breadwinner were the most common family type. These conditions no longer apply; with families being more diverse and concepts like a job for life and a complete exit from the labour market upon retirement becoming increasingly outdated. Research presented earlier this year, for example, pointed to the idea of the “death of retirement”, with one in three 45-65 year-olds saying that they wanted to keep working in new jobs “on their own terms” after the official retirement age. Welfare models need to adapt to allow a more flexible approach to life… The need for flexibility also puts into question the central role played by employers in the welfare system.”
“Beveridge’s mistake was not that he expected people to finance their own benefits, but that he made workers pay their contributions into a single insurance fund placed in the hands of the government. By pooling everybody’s contributions in a government-run insurance scheme, rather than allowing individuals to build up their own savings accounts, he stripped people of the power and responsibility to organise their own lives, forced them instead to place their trust in politicians and bureaucrats who have continually fiddled with the rules and devalued future returns, and blunted the work and savings incentives which would have been created had individuals been given control of their own money.”
“As society becomes wealthier and people aspire to higher standards for themselves, their families, and other members of society, it is quite possible that other uses can be added to the basic [personal welfare] account. This is yet another virtue of a flexible, funded system. Making contribution and benefit systems respond to changing social needs is always much more difficult when the decision involves a play-off between one set of future beneficiaries and a different set of future taxpayers. Where the contributor and the beneficiary are the same person, it becomes much more a matter of personal choice than of pressure-group politics.”
Adam Smith Institute
What exactly is a personal welfare account?
And how would it work? The papers differ in the scope of their recommendations and the anticipated pace of change. In order to make sense of what is on offer, it helps to break a hypothetical account into four layers: retirement savings, contingency savings, insurance and borrowing. Each of these layers would serve the income smoothing function for one or more areas of an individual’s welfare needs. Redistribution would continue to be organised centrally via a rationalised tax system (out with National Insurance Contributions, in with a single earnings tax). Relatively recent reforms – such as auto-enrolment in workplace pensions, annuities liberalisation, Pension Credit, Universal Credit, tax credits, welfare-to-work and ISAs – must all be factored into (and in some cases could provide the starting blocks for) the new system.
In a nutshell
The personal welfare account is compulsory property – a bank account of sorts, containing funds that are:
- privately held by the individual;
- managed by approved financial services institutions; and
- regulated by the government.
The role of the individual
Every adult in the UK would be obliged to pay into such an account in order to self-fund, so far as possible, one or more aspects of their welfare needs.
The role of financial institutions
For-profit and mutual financial institutions would compete to manage the funds held in each account. Account holders would be free to choose between approved financial institutions and their investment products (for example, an account holder might choose a provider or investment strategy guided by strict ethical criteria). Private financial institutions might also have to compete with a NEST-style default public option.
The role of government
The government would set the rules of the game, including (among others): the permitted welfare-related purposes for which an individual could withdraw funds from their account; minimum and maximum contribution levels (the former as a percentage of the individual’s income); risk management and insolvency protection rules for any approved financial institution managing account funds; and the amount of (means-tested) public assistance available to individuals in need.
Personal welfare accounts are put forward as the solution to the UK’s most pressing welfare problem – an unsustainable pensions system. The introduction of auto-enrolment in workplace pensions by the Coalition government provides a foundation on which to build. Next steps could include: making participation compulsory; setting up accounts for the unemployed; abolishing National Insurance Contributions in order to make way for a higher minimum contribution level; and directing government cash transfers (funded out general taxation) into the accounts of those individuals unable to meet the mandatory minimum contribution level.
State pensions would remain in place for anyone currently (or soon to be) in receipt of one – though means-testing could be introduced to cut the national bill. All non-pensioners with a record of National Insurance Contributions would be switched to the new system, but with the right to claim (in proportion to their contribution history) either (i) a lower state pension in the future or (ii) a government bond that would be deposited in the individual’s personal welfare account and set to mature when that person reached the state retirement age. Anyone with no history of National Insurance Contributions would be automatically entered into the new pensions system.
The Adam Smith Institute paper suggests that every newborn child should have a personal account opened in their name. The government would deposit a starting sum in the account, which in turn could be topped up by parental/guardian contributions. The Centre for Policy Studies recently developed this idea into what it called the ‘Lifetime ISA‘. This cradle-to-grave savings vehicle would allow individuals to invest a maximum of £30,000 each year, of which up to £4,000 would be paid in by the government (on the basis of a 50p top-up for every £1 of the first £8,000 saved). Savers would be free to withdraw sums from their ISAs at any point, but tax incentives would encourage them to wait until their sixties.
“The first element of the account will be savings for retirement. These savings are invested and added to over the person’s lifetime until the account contains an amount large enough to purchase an annuity income of a certain minimum size. That minimum income would have to be at least the level of present-day income support levels in order to ensure that the annuitant never became a charge on public welfare funds, but it could be set higher.”
Adam Smith Institute
“Once National Insurance is scrapped, people will cease to build up any new entitlements to a state pension. But many people will already have made contributions up to that point, and these entitlements will still need to be honoured… Whichever way existing entitlements are managed, it is important that they should be explicitly acknowledged by future governments as part of total public sector borrowing. Governments should be required to factor the cost of these pension entitlements into their calculations when setting their borrowing, taxing and spending plans…
It is important to be clear that, like state pensions, private retirement savings funds will still be vulnerable to a shrinking working-age population, for when individuals retire and seek to convert their bonds, shares or other assets into an income stream, there will be fewer workers around to buy these assets, leading to a fall in their value and lower retirement annuities. However, unlike a Pay-As-you-Go state pension scheme, which can only draw on the output generated by British taxpayers, a private pension fund can invest across the globe, seeking out higher returns from countries with younger or more productive workforces. Retirement incomes are therefore likely to be higher if we make the switch from a state to personal funds.”
As Iain Duncan Smith described it in his Telegraph interview, this is all about helping people to “dip in and out” of a savings pot when particular life events arise. Contingency savings are only appropriate when those life events present non-catastrophic costs (see the insurance section below). This could encompass both core welfare needs – such as funding oneself through the initial months of unemployment or paying the equivalent of a ‘deductible’ on the cost of NHS treatments – and areas of ‘discretionary’ spending, such as saving for a housing deposit or paying for adult training and education. Contingency savings would be separated from long-term retirement savings: while the former could be drawn down to zero, the latter would be required to meet an annual threshold in order to ensure a socially acceptable minimum income in retirement.
Policy Exchange’s proposal serves both an insurance and contingency savings function. In return for a one per cent reduction in National Insurance Contributions, every worker in Britain would be required to make a new two-part contribution: the first part would be used to pay the premium on a nationwide short-term unemployment insurance scheme, while the second part would be invested in a ‘MyFund’ account. This personal savings pot would complement the aforementioned insurance scheme during periods of unemployment, as well as providing a potential pool of surplus savings for other contingency events (such as retraining or emergency household costs). The pot would be managed by a private financial institution.
One aspect of the scheme, however, would seem to run counter to the stated aim of reinforcing the contributory principle. Every participant would have an equal sum of savings deposited into their MyFund account, irrespective of the actual value of the one per cent contribution levied on their pre-tax income. In other words, the government would calculate the total amount of money raised by the new system, subtract the sum needed to fund the nationwide unemployment insurance scheme, and then divide the remaining money equally among all participating workers’ MyFund accounts. Any account surplus remaining at the time of retirement would be transferred to the individual’s pension pot.
“Risks which are currently covered by state benefits but which might lend themselves best to a savings model are those where there is currently a high level of lifetime income churning (i.e. where most people end up financing most of the state benefits they claim through their own tax payments)… The obvious example is the use of personal accounts to provide retirement income, although savings accounts need not be limited to providing pensions. They could also be used to meet the costs of everyday medical expenses, to pay for education or training courses taken later in life, to provide an income during brief periods out of the labour force due to sickness, unemployment or maternity, to provide a deposit to buy a house, or to pay school fees for one’s children.”
“The Fortune Account holder will also accumulate savings that can be drawn in the less predictable events of unemployment, disability, or medical expenses. This contingency savings element of the account may be sufficient to cover losses only for a short period; but it greatly reduces the cost of insurance against the time when those events become long-term or turn highly expensive.”
Adam Smith Institute
“Contributory Jobseekers Allowance should be replaced by a new system of individual accounts, with a 1% reduction in the main National Insurance rate to offset the impact on workers. This would allow individuals to build up a specific ‘pot’ which belongs to them and represents their contribution into the system. The funds in these accounts should be used for two purposes: purchasing short-term compulsory insurance against unemployment, and providing a ‘pot’ of resources which can be drawn on. At initial unemployment benefits would be drawn equally from both, followed by the pot being gradually drawn down…
The system should recognise employment rather than ability to pay. To achieve this, the funds which do not go on the insurance program should be split equally between the accounts of all those contributing, ensuring that the system remains redistributive and rewards a week’s work identically for anyone who is part of the scheme…
This system should be used to provide extra flexibility and tailored support for individuals. The pot could be drawn down to provide more flexible support, including retraining, purchasing of goods in an emergency, or to cover interim costs when returning to work.”
Personal responsibility can go only so far: there will always be unfortunate individuals who fall victim to catastrophic life events. The pooling of risk is the best way to accommodate such events. A portion of individuals’ account contributions would therefore be used to pay the premiums on various insurance schemes, such as for disability or old age care. This would require the UK insurance industry to offer a broader range of products – an issue explored further in a report of the Insurance Industry Working Group, co-chaired by then Chancellor Alistair Darling.
“Part of the Fortune Account holder’s regular contributions will go directly to purchase insurance cover for just such big-ticket insurable events. Once again, in order to remove the risk of people becoming a charge on public funds, the government will wish to ensure that such coverage is at least as good as that presently provided by the state under the national insurance scheme; but it could well set the minimum benefit rates and conditions more generously.”
Adam Smith Institute
“Age UK estimates that only 16 per cent of people aged over 85 will end up needing residential or nursing care, although this proportion may rise as more of us live longer. But for those who do need it, the cost can be eye-wateringly expensive: in 2013 the average weekly charge for residential care was £580, and £700 for nursing home care…
Rather than tackling this problem head-on, the Coalition government has come up with an unsatisfactory compromise which will increase government welfare spending without resolving the inequity. In future, individuals’ lifetime care costs (but not the cost of board and lodging in care homes) will be capped at £75,000, and the state will pick up the tab for any excess. But home owners will still have to meet most of the cost of care out of their own resources (normally by selling the family home), for assistance will only be offered once the elderly person’s assets have been run down to £123,000. This new scheme therefore exposes the taxpayer to increased claims while doing very little to solve the original inequity… Compulsory old age care insurance would be a much better solution…
Insurance could be offered by the government, or by private sector insurers with the government’s role limited to external regulation. Either way, premiums could be paid out of personal welfare accounts (financial institutions offering these accounts could package age-care insurance in with them). Everybody in employment would be required to insure themselves up to a certain level, but the choice of insurer and the comprehensiveness of cover beyond this basic level could be left up to individuals to decide for themselves.”
“Yet there are limits to the use of private insurance for social policy purposes. The Joseph Rowntree Foundation conducted an analysis that suggested that public social security offered better value for money than proposed private welfare insurance schemes. Certainly, a greater role for private insurance in the welfare system implies a need for the insurance industry to provide more and better products to fill the welfare gap. Further, as Söderström and Rikner note, private insurers will not be willing to cover all income risks, or may only want to partially cover particular segments of markets, as not all risks are insurable. This may be because of moral hazard, collective risk, adverse selection and political regulation.”
The Civitas paper floats the possibility that individuals could borrow against their future earnings via their personal welfare accounts. This option would serve a similar function as contingency savings – for example, a young person might take out a loan to provide bridge financing between the end of their studies and their entry into the labour market. The government would regulate the total amount of debt that an individual could acquire in this way. It would be fair to say that the debt option is raised in principle, but not developed in detail.
“Loans are the mirror-image of savings, for they offer an appropriate way of funding costs incurred earlier in life, before individuals have accumulated much capital, but when they can still anticipate many years of future earnings. Students in higher education already take out loans to cover their university fees, for example, just as households already borrow substantial sums relatively early in life in order to buy housing, paying off the loan from later earnings. In principle it might be possible to extend the use of loans into other areas of provision currently covered by welfare benefits, such as short-term unemployment… if every worker were making regular contributions to a compulsory personal welfare account, loans to cover short periods of unemployment or sickness could be secured against future payments into this account (although it would still be necessary to limit total indebtedness if spells of unemployment lengthen).”
Welfare reform on this scale would leave any Cabinet riddled with political headaches. Voters of all ages and income-levels would be directly affected by the changes; warnings about privatisation and the administrative and IT ‘chaos’ involved in such a shake-up would likely add to the scepticism. The papers point to the experiences of other countries – particularly Chile and Singapore – to counter this fear of the unknown.
“The first, and probably best-known, compulsory, personal, retirement savings scheme was established in Singapore in 1955, when it was still under British colonial rule. Strictly speaking, it is not a system of personal accounts as such, for individuals cannot choose where to put their money, and they have no say in managing their funds. Rather, workers and their employers are required to deposit a percentage of monthly earnings (up to a specified income limit) into individually-earmarked accounts run by a government-managed Central Provident Fund (CPF). The CPF then invests this money on their behalf… Since 2012, most participants have had to pay 36 per cent of their total wage into their accounts (20 per cent from the employee and 16 per cent from the employer), but contributions are lower for those over the age of 50…
These contributions are split between the three linked funds: ‘special’ accounts, which take between 6 per cent and 9.5 per cent of salary, are used to finance retirement; personal medical savings (Medisave) accounts, used to pay for hospital expenses and other approved medical insurance, take between 7 per cent and 9.5 per cent; and ‘Ordinary Accounts’ (absorbing 12 per cent to 23 per cent of salary, depending on the member’s age) can be used for a variety of purposes including house purchase, education, insurance and investment. Once people have saved enough in their special (retirement) and Medisave accounts to cover their retirement and health needs, further deposits can be used to boost personal investments through their ordinary accounts…
In 1981, Chile followed Singapore’s example by introducing a privatised retirement pensions system, but unlike Singapore, this involved a transition from an existing pay-as-you-go state system, which was threatening to collapse into insolvency. In 1924, Chile was the first western country to introduce a pay-as-you-go contributory state pension scheme; in 1981, it became the first to abandon one. Workers were offered the option of remaining in the old state system if they preferred, but despite trade union opposition, more than nine out of ten of those eligible to move did so, and most of the rest followed soon after. Their existing state pension entitlements were turned into government ‘recognition bonds’ which could be cashed on retirement.”
Five things to watch out for
- Cuts and Universal Credit. The welfare reform agenda will continue to be dominated by these two issues. However, the troubled roll-out of the latter may have dampened enthusiasm within government for another round of systemic change during this parliament.
- The Office of Tax Simplification report on NICs and the Treasury consultation on pensions tax relief. The OTS report – and George Osborne’s reaction to its recommendations – could be an important bellwether of the government’s intentions. Throwing out National Insurance Contributions in favour of a single earnings tax would fulfil a long-held ambition for centre-right tax reformers – and spark a wider debate around the role of taxation in the welfare system. Likewise, the Chancellor’s response to the pensions consultation will indicate whether he is committed to a radical simplification of the tax system, or further tinkering to encourage retirement savings.
- More think tank reports. Policy Exchange’s MyFund proposal has shown that personal welfare accounts are not an all-or-nothing proposition. Look out for more policy recommendations in this spirit of gradualist reform.
- Iain Duncan Smith. Will he survive the next Cabinet reshuffle – and, if not, who would be left at the top table to champion personal welfare accounts?
- Leadership elections. Moreover, who will be deciding the composition of the 2020 Cabinet? Cameron has promised to step aside, opening the way for a pre-election Conservative leadership battle. It remains to be seen whether welfare reform will receive much attention during those hustings. But it certainly has during Labour’s current leadership election – as was demonstrated by the party’s divided response to the second reading of the Welfare Reform and Work Bill. A wholesale shift towards personal welfare accounts – ‘privatisation’ by another name – would be deeply unpopular with the party’s base. The really interesting question, though, is whether smaller steps in that direction would attract similarly fierce opposition – and whether the new leader would be prepared to lead the resistance.