What is the best way to change the welfare system?

  • The think tank, Demos, gives a report on the problems with the current welfare system and believes the solution could lie in introducing private companies to the welfare system.

    The review on the welfare system highlights the common consensus that too much is spent on out-of-work benefits, and that not enough is achieved with that spending.

    The British welfare state is undergoing a period of dramatic reform. While bringing down the overall cost of welfare is politically popular and enjoys a broad consensus among leading policy makers it carries inherent risks.

    There are major problems with the UK welfare state that demand solutions:

    • Declining support – public support for the benefits status-quo is diminishing and in decline, particularly among the ‘squeezed middle’
    • Relatively ungenerous – despite popular opinion to the contrary, the UK’s benefits system is relatively ungenerous when compared with peer economies. This is particularly problematic for wage-dependent families facing unemployment and for families where the primary earner is unable – for reasons of accident or ill-health – to return swiftly to the workforce.
    • Too expensive – despite the above, it remains the case that the UK’s total benefits spend (around £111.7bn each year) is unsustainably high and likely to be the target of future spending cuts.

    In order to sustain and rebuild public support for a welfare settlement, the Government must find ways of addressing these tensions between generosity, reciprocity and public trust.

    Only 28% now believe that the Government should spend more on welfare benefits, compared with over 50% 20 years ago. However, it is clear there are significant disagreements when it comes to deciding how best we can reduce expenditure on benefits while maintaining fairness and providing the opportunities for a return to work where appropriate.

    There are a number of important questions for consideration – which should form the backdrop to any effort by policy makers to promote personal financial protection in the UK workforce.

    • Should the Government seek to involve the private sector further in meeting welfare needs? This paper lays out some evidence of the need for private sector involvement in welfare – from the expense of the welfare state to the relative lack of generosity of our benefits system and its knock-on impact on living standards and demand. Nonetheless, many remain concerned that further private sector involvement in the welfare state may undermine fundamental principles of state provision.
    • Should the Government instead seek to raise state-benefit levels? Can the taxpayer afford a welfare system that continues to be primarily statebased?
    • Does the public still want a state-based welfare system?

    Despite all three of the main parties agreeing that there needs to be dramatic changes, it is clear there are significant disagreements when it comes to deciding how best we can reduce expenditure on benefits while maintaining fairness and providing the opportunities for a return to work where appropriate.

    The Government’s radical approach to welfare reform is focused on merging multiple benefits into a single stream Universal Credit, capping benefit income, reforming disability benefits and changing the way in which individuals are assessed for incapacity. As a programme of change it is both ambitious and dynamic.

    But in its efforts to realign the benefits system in general with the moral intuition of the public this programme risks alienating individuals – particularly those in the ‘squeezed middle’ – from the welfare state and creating or exacerbating perverse incentives that punish those who have done ‘the right thing’. For example, these reforms will not end the £16,000 means test, which the Institute for Fiscal Studies describes as a ‘disincentive to saving’.

    Many households would simply be unable to survive a period of unemployment and reliance on state benefits while maintaining their living standards under universal credit. Welfare payments are vital not simply to keeping individuals and families afloat in difficult times but also to maintaining demand in the consumer economy by keeping disposable income in the pockets of the unemployed. Significant reductions in benefit levels put at risk the system of ‘automatic stabilisers’, which sustains demand during recessions

    There is huge scope to provide a more robust welfare offer for UK workers, built out of a combination of state and private provision. Doing so may involve using the state to encourage mass take-up of protection products by individuals, and facilitation of these products by employers, but the potential benefits are significant and mutual. The Government stands to save considerable expenditure by enabling individuals to lift their unemployment income and reduce their exposure to financial risk.

    To increase the generosity of welfare payments across the board would involve massively ramping up the direct cost and financial risk to the Exchequer of unemployment benefits at a time when further cuts are likely to be needed. Only around a quarter of the population agree that such a course is advisable. To privatise the whole of the system – and to remove the state entirely from the welfare equation – is equally unsatisfactory.

    To do so would obviously put at risk the level of care that we provide to those who will never, and can never, work. But furthermore, it would seriously risk the financial security of workers in very low-paid employment.

    Products such as income protection, which can provide a vital safety net for workers earning average wages and less, are unlikely ever to be reduced in price sufficiently to become the rational choice for those in part-time or short-term work.

    See full Demos publication by Max Wind-Cowie.

     

     


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