Benefits targeted for radical shake-Up: Imperfect system with options for change: Groups from across the political spectrum highlight areas of concern and offer suggestions on how current arrangements might be improved (CORRECTED)

CORRECTION (PUBLISHED 6 AUGUST 1993) APPENDED TO THIS ARTICLE

THE QUESTIONS:

1. What is wrong with the pensions, child benefit and 'safety net' benefit systems?

2. What should be done about it, for example taxing, targeting or changing the system altogether?

3. What do you think this Government is realistically likely to do, given its small majority, in the lifetime of this parliament and, if the Conservative Party is re-elected, beyond the next election?

IN ORDER TO discover what the left, right and independent researchers are thinking about the future of the social security system, the Independent put a series of questions to three influential think-tanks - the left-of-centre Institute for Public Policy Research, the 'free market' or right-wing Adam Smith Institute, and the independent Institute for Fiscal Studies.

They were asked a series of questions focusing on the benefits paid to most people at the greatest cost - pensions, child benefit and the collective 'safety net' or 'poverty trap' benefits which include income support, unemployment benefit and housing benefit.

Institute for Public Policy Research

Funded in roughly equal parts by business, individuals, trade unions and charitable foundations plus income from the sale of publications. It is administering Labour's Social Justice Commission's inquiry into the future of the welfare state. Anna Coote, a researcher, answered.

Question 1: 'Although the social security budget totals nearly pounds 80bn, neither recipients nor contributors (often the same people) are satisfied. The retirement pension alone cannot meet retired people's need; without other sources of income, elderly people are forced on to income support or housing benefit. An inadequate child benefit does not prevent over one in five children, and over three-quarters of those in lone-parent families, from living in poverty (as defined by the European Commission). The social security system fails to protect families against parents' unemployment or low earnings.'

Question 2: 'Social security needs to become a springboard to economic opportunity and financial independence, rather than a safety net. To solve the problems of the tax and social security system, unemployment must be tackled. We must reform private and public earnings- related pensions to ensure everybody has access to a secure income above the basic retirement pension. IPPR has suggested investing Serps contributions in special government bonds. Universality and secure funding must be assured.

'Generating jobs and then making it possible for benefit claimants to become workers is central to social security reform. This could be achieved by providing more affordable child care and removing disincentives such as the loss of benefits to working mothers and wives of unemployed men.'

Question 3: 'The Government's preferred route (for reform) is apparently to privatise the welfare state, but this dodges the real issue. Private security would cost at least as much as social security. A recent IPPR study suggested the administrative costs of personal pensions were four times as high as the national insurance system. The idea of privatising unemployment insurance is nonsense; the people who are at greatest risk of unemployment are precisely those least able to afford the premiums they would be charged.'

Adam Smith Institute

Financed 50 per cent by corporate donations and subscriptions and the rest from book sales and profits from conferences. Dr Madsen Pirie, president, answered.

Question 1: 'Critics point out that the universal benefits give state money to those who do not need it. Child benefit and the basic pension, for example, are paid to the rich as well as the poor. More subtle, social criticisms highlight the lack of flexibility and choice in the monolithic state systems, out of touch with a changing lifestyle and changing problems. They see the state unintentionally fostering a culture of welfare dependence. If people try to pull themselves out of poverty by adding to their income, they risk losing their benefit.'

Question 2: 'Taxing benefits would not solve the problems. It is intended as a crude form of targeting, in that only those who pay income tax would lose. Apart from the nonsense of handing out cash with one hand in order to take it back with the other, it does nothing to redress structural faults in the system.

'Targeting is a solution in theory but threatens unacceptable administrative costs. There are also political problems in that people in receipt of benefits are upset to lose them, whether or not they were needed.

'One possible solution involves gradual privatisation. Job-related benefits such as statutory sick pay and industrial injuries benefit could be made the responsibility of employers, with a corresponding reduction in the national insurance contributions. People could be permitted to choose a private basic pension, and private job-seekers' insurance as alternatives to the state schemes, in return for a modest incentive in reduced contributions.'

Question 3: 'The Government will undoubtedly try to keep to its pledges to upgrade child benefit with inflation during the lifetime of this Parliament, and to maintain the value of basic pensions made available to all. A move toward voluntary privatisation of certain benefits could be started, provided the state alternatives were still available to those who wanted them.

'Given its pledges and its small majority, it is doubtful if child benefit can be overhauled until after a general election. The Government could prepare a policy to convert child support into some form of childcare vouchers, and put this forward in its manifesto.'

Institute for Fiscal Studies

A charity supported by the government-funded Economic and Social Research Council, by members and from research contracts. Christopher Giles, a researcher, answered.

Question 1: 'The state pension scheme is both expensive and inadequate. The basic pension alone costs almost pounds 27bn yet this provides a pension worth less than a fifth of male average earnings. Although popular, child benefit may be vulnerable simply because it goes to rich and poor alike. With the safety-net benefits, cost is the major issue. The recession accounts for some of the growth in spending, but even when recovery comes, spending on housing benefit and on benefits to lone parents and the long-term sick looks set to continue rising. While they cost large sums they still leave many with low living standards.

Question 2: 'Changes to pensions need to be made slowly, with commitments already made honoured in full. In the longer term, rather than pay an inadequate basic pension to 15 million pensioners, the state pension could be restructured to give a decent standard of living to the poorest pensioners with help withdrawn gradually from those on higher incomes.

'If society wants to support families with children as a group, child benefit is probably the best way to do it. If concern is more to protect the poorest children, more effort needs to be given to ensure that means-tested benefits reach those who are entitled to them, and that the levels of benefit are adequate. Much work also needs to be done to devise a system of child care that is affordable for the country and can help low-income families escape the means-tested benefit system.'

Question 3: 'Little can be done to control pension spending over the next few years. With an eye on the 21st century, the Government may well announce a levelling up of the retirement age for women to 65, saving around pounds 3bn a year, together with new, though modest financial incentives to encourage people to opt out of the basic state pension.

'A manifesto commitment suggests that child benefit will continue to be uprated until the next election. Thereafter some form of targeting, perhaps by concentrating money on the under-fives, is a strong possibility. Among safety-net benefits, those relating to housing are likely to be squeezed. The easiest way to do this would be to cut housing benefit for those just above income-support levels by increasing the speed at which housing benefit is withdrawn.'

CORRECTION

In our report 'Benefits targeted for radical shake-up' on Wednesday 4 August, we incorrectly stated that pensioners on income above the Income Support level were not entitled to free prescriptions. The Department of Social Security has pointed out that all pensioners, regardless of income, are entitled to free prescriptions.

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