The poison in the welfare state

Means-tested benefits just encourage people to cheat. There is another way, says Frank Field MP

THE underclass, a category of people that vanished in the post- war era of full employment and welfare reform, has reappeared in Britain.

There are families now that have totally abandoned the idea that paid work has any relevance for them at all, such is the impossibility of finding a job. There are schoolchildren who, because no member of the family is in work, have not the slightest idea of what it means to earn one's living. I have become hardened to the brave men with laughing mouths but wintry eyes who tell me that it doesn't matter that they may never work again. I try to be equally hardened to the men who simply cry before me. What kind of hope can you build into a person's life if there is not chance of work?

Britain now has ghettoes. Three decades ago most poor people lived outside officially designated poor areas. That position is now reversed. Most poor people live in areas which are becoming poorer and more polarised, where there is more crime, more unemployment and shorter life expectancy.

The reaction of young men and women arriving at the foothills of adulthood and living amid such desolation is marked. Many young women are moving away from their parents and starting their own families, often with a succession of boyfriends. Their male counterparts have three main options: they can leave home and become drifters, often ending up begging; they can try their hand at the drugs trade or they may be forced back on to their parents and into a state of permanent adolescence.

In the face of all this, our welfare system is broken-backed. The number of claims soars and so, therefore, does the bill, edging its way towards the £90bn mark. It costs working taxpayers £15 each day and yet still the number of people on very low incomes rises inexorably. Half the population now lives in households drawing one of the principal means-tested benefits.

A deadly lesson is being taught: the only way to survive is to cheat. Because means-tested help is reduced as income rises, people on low or no wages have no incentive to improve their lot. Suppose that a married wage earner with two children earns £60 a week. With means-tested benefits, the net family income will be £125 a week (after housing costs), which is not much more than he would get without a job. Just to add £10 per week to the family income, he would need to increase his gross wages by around £140 a week and earn a total of £200 a week.

The alternative - unless he decides to sit tight and do nothing - is to take work but not declare additional income. This is fraud. And fraud is a criminal offence. Welfare is therefore having the opposite effect from that for which it was devised. The welfare state was constructed as a means of extending full citizenship to the entire population, many of whom might otherwise remain outside civil society. Welfare fraud now acts as an expelling agent, encouraging people into criminal activity.

Means tests poison the welfare state. They paralyse self-help, discourage self-improvement and tax honesty. They reward claimants for being either inactive or deceitful. They penalise all those values which make strong, vibrant communities. Those with savings above a certain level do not qualify. Those who have jobs, or have put aside a little money for a rainy day, or work beyond retirement age to gain an additional pension - they can qualify, but only if they lie. And the second lie is always easier than the first.

The cumulative impact of such deceit is the further erosion of pride, respect and self-worth, already under attack because of long-term unemployment.

The starting point of welfare reform must be an acceptance of the great forces that drive human nature. These include self-improvement and altruism but self-interest is fundamental. The present system rewards lying, cheating and deceit. The challenge is to allow self-interest to operate in a way which simultaneously promotes the public good.

There should be comprehensive insurance cover so that families are in a position to improve their own lot legally and by their own efforts. And there should be an income floor to replace the income ceiling which is created by means-tested welfare.

We should, therefore, phase out means tests. Instead, a National Insurance Corporation, comprising representatives of employers, employees and government, should run a new national insurance scheme. Those paying into it should be known as "stakeholders". They would receive protection against unemployment, illness and disability. But levels of benefits should be clearly linked to levels of contributions. In other words, stakeholders should be clear that the money they pay into the scheme will not be used to redistribute their income to other people.

What about those who cannot pay adequate contributions - because their wages are too low, because they cannot get jobs, because they are sick or disabled or because they are caring for elderly relatives? The Exchequer would pay contributions into the scheme on their behalf. In this way, redistribution would be clear and above-board. It would come, and would be seen to come, from general taxation and not from some sleight of hand within the national insurance scheme.

Alongside this, a Private Pensions Corporation should universalise private pension provision to run alongside the state scheme. This body would be independent of the government and would organise the task of spreading private pension provision within a framework of compulsory contributions by employees and employers.

Income support should continue but should be transformed into an opportunities agency developing career plans. It should act as a life-raft taking people back into work rather than, as at present, as a sink into which they are dumped.

In addition social security fraud should be recognised as the very big business it is. Imaginative counter-action needs to be driven by a core of SAS-style anti-fraud officers. Benefit savings from successful anti- fraud campaigns should be ring-fenced and used for tax cuts and increases in child benefit.

The growth of individualism is not going to be arrested by talk about rebuilding the community. Welfare has to be shaped so individual wishes can simultaneously promote new senses of community. The stakeholder welfare scheme proposed here does precisely that. Real power is delegated to stakeholder boards - which should eventually be directly elected - running both the new insurance scheme and the universalisation of private pension provision. Stakeholder welfare provision ushers in a period of popular or social, as opposed to state collectivism.

Only in this way can the country's burgeoning underclass be linked back into mainstream activities. But this programme will also appeal to mainstream Britain, where the old order of jobs for life has already passed. The uncertainty implicit in a flexible labour market needs to be countered by a certainty offered from a flexible welfare state.

Extracted from "Making Welfare Work", Frank Field, published this week by the Institute of Community Studies, 18 Victoria Park Square, London E2 9PF, £10.