Workers 'could be forced to pay £5 a week' to get benefits

Individuals would have their own personal welfare account to draw on if they lose jobs

Workers could be forced to pay at least £5 a week into a personal “welfare account” to get higher benefits if they lose their job, under a plan being considered by George Osborne.

In a report published today, the Policy Exchange think-tank proposes a shake-up of the welfare system to strengthen its original “contributory principle”, under which the amount people receive in benefits is linked to how much people have paid in.

Allies say the Chancellor is keen to extend “personal responsibility” in the welfare system. The report is being studied by the Downing Street Policy Unit and such reforms could be signalled in the Conservatives’ general election manifesto.

The Policy Exchange plan would set up a “compulsory collective insurance scheme”, into which everyone working more than 20 hours a week would pay £5 a week.

It would be run by private-sector providers such as insurers and fund managers, but guaranteed by the Government.

The think-tank calculates that the shake-up would save the Government £2.5bn a year as people became more self-reliant.

To head off claims of a back-door tax rise, the Government would offset the £5-a-week payments by reducing workers’ national insurance contributions.

The payments from workers would raise £8bn a year, £2bn of which would go into an unemployment insurance scheme. It would replace the £72-a-week contributory jobseeker’s allowance (JSA), currently payable for six months to people who have been in work for two years regardless of their savings. The 4.6 million self-employed would qualify for the first time.

The other £6bn raised would go into the individual accounts.

Under the proposed scheme, the jobless could increase their benefit by £20 a week by dipping into their personal welfare account and draw it for longer than six months.

If they wished, higher earners could pay in up to an extra £100 a week, and could use their fund to retrain if they lost their job or during other emergencies such as ill-health. If they did not need the money during their working life, it would provide a £10,000 top-up to their pension pot when they retired.

In the long term, the personal welfare funds could be extended to cover maternity, help with mortgage interest for the jobless and even social care, said the report.

Contributory benefits accounted for 41 per cent of welfare payments to working-age people in the late 1970s, but the proportion has fallen to 10 per cent.

“We need a benefits system fit for the 21st century,” said Steve Hughes, the report’s author and a former Bank of England analyst. “The current system does not reflect the contributions that people make through their working lives. It does not reflect changes to the modern-day labour market such as the rise in self-employment. And it does not meet the variety of needs that individuals have.”

He added: “Successive governments have tried and failed to improve the system from the top down. This has created a culture of something for nothing, with people becoming reliant on the state. Radical reform is needed to restore public trust in the welfare state. Personal responsibility must be at the heart of a change to the system. A new collective insurance scheme alongside personal welfare accounts will form the backbone of these reforms.”

Labour has promised to beef up the contributory principle by introducing a higher rate of JSA for workers who have clocked up years of national insurance payments. This would be funded by extending the two-year qualifying period for contributory JSA.

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