Paul Johnson: It's time to bin the last vestige of Beveridge - national insurance

This week marks the 70 years since publication of the Beveridge report. And the focus on welfare spending has never been sharper. Not surprising, perhaps, given that the social security and tax credit budget of more than £200bn is much the biggest in Whitehall, accounting for 30 per cent of all government spending.

Next year sees – yet another – "biggest overhaul since Beveridge", as the introduction of Universal Credit has been labelled. This week may see further cuts to welfare as the Chancellor struggles to balance the books. And, we are promised – yet another – pensions white paper before Christmas.

Politicians of all stripes are keen to wear the mantle of Beveridge. Yet, in truth the current social security system owes almost nothing to his vision. His ambition for a system of social insurance in which, in return for contributions, benefits would be paid to those experiencing unemployment, sickness or old age did not prove robust to changes in the economy, in demography and in the labour market. It is time we recognised that and for an honest debate about our welfare system.

It is also time to get rid of the last major vestige of Beveridge – national insurance contributions. They no longer play any serious role in determining eligibility for benefits. They just act as another complex, opaque and costly tax on income. Unless we are to have a genuine revolution in our system and reverse the direction of travel pursued by governments for more than 30 years, it is time they went.

Published by parliament on 1 December 1942, the Beveridge report proposed a system of national insurance in which flat-rate benefits, paid for by flat-rate contributions, would provide support in the event of unemployment, ill health or old age.

His proposals were made for a country in which, for the most part, men worked and married women didn't, the only lone parents were widows, and life expectancy was lower than the pension age. The UK today is a very different place.

Working age men in work has fallen from 96 per cent in 1949 to 76 per cent, while for women it has risen from around 40 per cent to 66 per cent. At the time of the report fewer than one in 20 births was outside marriage; today more than one in five children grows up in a lone parent household. Male life expectancy has climbed from around 63 in 1940 to 78 in 2010, but the male state pension age remains the same.

A system based on the contributory principle could not accommodate the growing number of lone parents and long-term unemployed in obvious need of support but without a history of contributions. Instead, successive governments have relied increasingly on means-testing to determine eligibility.

Of this year's £95bn budget for working-age benefits and tax credits, more than £75bn will be means tested. Less than £10bn will be spent on contributory benefits. In 2011-12, the Government spent £22bn boosting the incomes of families in work through tax credits, an idea that would have seemed bizarre to Beveridge who assumed those in work would not need support.

The history matters. It helps us understand the complex interweaving of today's benefits. It should lead us to be humble in our future plans – any system put in place now will not be right for 2082. And it has left us with the national insurance anachronism, which act like an additional income tax for most people. This is complex, costly and distorting and seems to be used primarily to make tax rises less transparent.

To have intelligent and robust reform we need to recognise that we have moved on since Beveridge. We need to recognise the contributory principle for what it has become – a fiction.

Paul Johnson is director and Andrew Hood is a research economist at the Institute for Fiscal Studies

Beveridge at a glance

Lord Beveridge's 1942 report proposed that all people of working age should pay a weekly national insurance contribution. In return, benefits would be paid to people who were sick, unemployed, retired or widowed.

It recommended that Churchill's government should find ways of fighting the five "Giant Evils" of Want, Disease, Ignorance, Squalor and Idleness

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