Monday Jun 18

EXCERPT FROM Broken Benefits: What’s Gone Wrong with Welfare Reform?

The benefits system wasn’t working as it should in 2010, and in 2020 it will be more dysfunctional still. The safety net has been punched full of holes; it is increasingly unresponsive to variations in household need; it frequently punishes behaviours which (even by the standards set by the government of the day) ought to be rewarded; and, in many respects, it is becoming increasingly complex for claimants to navigate.

Yet despite all this, it should be a system in which we take pride. Amidst all the problems, it is easy to forget that it is the benefits system that every day keeps millions of people from destitution, and enables those with additional needs to play a full role in society.

I have already presented a number of immediate recommendations that aim to help improve this ever-evolving system. Regardless of whether or not those immediate changes are implemented, I want to conclude with some wider themes that emerge from this book, that may help to direct future reform.

There is more than one goal to the benefits system

The benefits system is often presented as being a ‘safety net’ for preventing destitution. Of course, it does provide this (although too often fails at it), but this is not the only reason it exists.

As suggested over the course of this book, there are at least two more reasons for providing benefits – to equalise inequalities of need, and to reward behaviours deemed socially desirable.

A benefits system that only provided a minimum safety net and nothing else would be very partial and inefficient. It would be one that did not provide additional support to address variations in need (such as children or disabilities) for households living above a minimum threshold. It would also be one that failed to provide incentives for low-paid work (since those whose earnings only reached the minimum threshold of need would be left no better off than those receiving that minimum level of support through welfare).

This misconception of the role of the benefits system can lead to misunderstandings about how best to fix it. For example, some think that the key question is how to increase pay to the point where we no longer need benefit top ups (at least for working claimants). A better question to ask is how the benefit system can be effectively integrated with the labour market, in order to provide financial support alongside and as a supplement to earnings for those with higher levels of need.

Cuts tend to make the system less efficient, and undermine the process of reform

Cuts to the benefits system have made it simply work less well. For example, as we saw in Chapter 16, reductions in income disregards in Tax Credits have significantly increased the complexity of the system and the level of overpayments. Similarly, ‘trimming’ around the edges of the benefits system in order to reduce costs has undermined reforms which, properly funded, would have the potential to deliver positive outcomes. The clearest example of this is the introduction of Universal Credit. The new system was supposed to make the system fairer, and provide clearer, smoother work incentives. However, chronic underinvestment has meant that, for many households, it achieves the reverse. For example, reductions in work allowances under Universal Credit have significantly undermined the additional work incentives originally planned for the new system (particularly since, in the end, the same reductions were not made to Tax Credits). In this case, rather than Universal Credit being used as an opportunity to improve work incentives and encourage the ‘right’ behaviours, it was being used as a way of deferring the introduction of cuts to provision, where the immediate introduction through Tax Credits was proving politically difficult.

Reductions in support for disabled people in work have similarly undermined work incentives. In particular, as shown in Chapter 13, the removal of the limited capability for work element in Universal Credit significantly reduces in-work provision for disabled people.

The government has also so far failed to make a longterm decision about the future of free school meals under Universal Credit, to avoid creating one of the largest ‘cliff edges’ in entitlements for low-income working claimants that the benefits system has ever seen. This seems to be driven by unwillingness to make the investment that would be needed to address this problem by extending free school meals to all families in receipt of Universal Credit.

Intergenerational inequality is an issue, but not so much of an issue as economic inequality

Yes, intergenerational inequality is an issue – much of the money saved from cuts to working-age provision has simply been shifted across to paying for rapid increases in the value of the State Pension. However, crucially, we have seen that not all older people are gaining. In particular, low-income older people in their early- to mid-sixties (and older people on a low income living in a ‘mixed age couple’) are losing out by effectively being reclassified as ‘working age’.

This is principally an issue of economic inequality. At the same time as inequalities in life expectancy are widening, it is some of the most socially disadvantaged who are seeing their effective retirement age increase the most. Furthermore, even when those on a low income do reach retirement age, if they have a younger partner, they may be denied any retirement income until their partner also reaches that age.

Meanwhile, those who gain the most from the rapid escalation of the value of the State Pension are those pensioners with a high level of independent income (placing them outside of the means- tested benefits system), who are also disproportionately likely to have a long life expectancy at retirement. In combination, this means that this group are likely to gain the most, both from increases in the value of the State Pension, and from the length of time it is paid.

We have moved a long way from an insurance-based system

As discussed in Chapter 2, the founders of the post-war benefits system believed that it should, first and foremost be built on insurance-based provision. However, decisions that were made early on sowed the seeds for means-tested provision to dominate. These included the decision not to vary contribution-based benefits to reflect regional differences in housing costs, and the decision (hotly contested at the time) to limit unemployment insurance payments to around six months.

Recent decisions have further undermined insurance-based provision. These include the introduction of a restriction on the period of entitlement to contribution-based Employment and Support Allowance (ESA) for those in the work-related activity group (which, as we showed in Chapter 15, is probably the biggest single factor contributing to the overall decline in sickness benefit claimants in the last few years).

Crucially, the decision to consider most contribution-based benefits as ‘unearned income’ for the purposes of Universal Credit, and to deduct them in full from entitlements, means that contribution-based benefits are worth nothing for increasing numbers of benefit claimants. Additionally, where such benefits are also taxable, claimants can be left worse off as a result of receiving them instead of their means-tested counterparts. This is fundamentally unfair to those who have paid into the system through National Insurance Contributions.

It is important to understand that the problem with contribution-based benefits today cannot be addressed simply by increasing their value – to do so would be to misunderstand their interaction with the means-tested benefits system and the tax system. Such a change within the current context would risk leaving many of the poorest claimants either not gaining at all (while better-off households see their incomes increase), or at worst, it may even leave them worse off than before.

No one government can be held solely responsible for problems with the benefits system – all political parties need to have a better understanding of how the system works

While cuts to provision introduced since 2010 have made many problems worse, it is important to recognise that many of the most fundamental problems within the benefits system have developed over many years.

For example, the problem of some contribution-based benefits being deducted in full from means-tested provision, and then taxed, is also not a new one – although the introduction of Universal Credit makes the problem significantly worse.

Similarly, the decision to increase the Pension Credit age in line with the equalisation of the State Pension age for women – which has trapped many low-income older people on working- age unemployment or sickness benefits – was made well before 2010 (although it began to be introduced in that year).

Across all political parties, better understanding of social security policy is needed in order to make the benefits system work better.

Simplifying the benefits system shouldn’t be the goal – simplifying it for the claimant should be

Finally, and as explored in the last chapter, claimants don’t need a simple system – they need a system that is simple to use. It is an important difference, and one that is poorly recognised by policy-makers.

Someone needs to understand the mechanics of the system, but too often among policy-makers, researchers and lobbyists, this knowledge seems to be missing (and may even contribute to the desire for system simplification).

If we are going to fix this creaky, often unloved, but utterly vital machine, we have to try to understand its internal workings. It is a hard job, but I hope this book will make a small contribution to it.

Sam Royston is the Director of Policy and Research at the Children’s Society and Chair of the End Poverty Coalition, UK. Broken Benefits; What’s gone wrong with Welfare reform? is available from the Policy Press, University of Bristol

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