Notes and Brief Reports

cial assistance benefits provided to needy individ- Proposals for Social uals with little savings and income to assist with normal, day-to-day living expenses. Recipients Security Reform in the generally are not working or are in limited em- ployment. The government proposes to introduce United Kingdom* an benefit that would simplify the payment of assistance benefits and eliminate the In June 1985, the Conservative government of the wide array of benefit rates presently existing uc- United Kingdom presented to Parliament a Green der the Supplementary Benefit scheme. And, for Paper, “Reform of Social Security,” intended to serve those with exceptional needs, the government pro- as the basis for discussion of the government’s proposed poses a social fund to provide assistance in such revamping of the social security system. The most sig- areas as day care or funeral expenses. nificant aspect of the reform proposals is the elimina- : Separate payments given to those who qualify for the Supplementary Benefit tion of the State Earnings Related Pension Scheme to help with the costs of rent and local govern- (SERPS), the second layer of the state pension scheme ment taxes. The government wants to make these based on covered earnings, in favor of mandatory pri- benefits easier to understand and administer and vate pension plans with defined contributions instead of more equitable by using the same income test used under the proposed income support scheme. defined benefits. The government cites in its Green Family Income Supplement: Supplements paid to Paper the increasing costs to the state of current benefits low-income working families with children to and of future pensions given the demographic shift to- help them meet some of the additional expenses ward an aging population with fewer workers to support incurred in raising children. The government the payment of pension benefits. It also recognizes that would like to substitute a family income credit the current system of social assistance benefits has that would ensure that families have more income from work than from welfare. grown confusing and too complex to be easily under- stood and that it does not provide adequately for the truly needy. Background to the Reform Social security in the United Kingdom encompasses The reviews of and the proposed changes to the social not only social insurance programs but also a wide security system have been perceived in the United King- range of health, social assistance, and housing benefits. dom as perhaps the most extensive to be put forward by Over the past 18 months, the government has conducted a government since the Beveridge Report in 1942. In his a series of public inquiries into the future of the British now-famous report, Lord Beveridge recommended a welfare state. The reform proposals contained in the comprehensive social insurance system to replace a Green Paper reflect the conclusions of these inquiries patchwork of state and private provisions, characterized and therefore represent a major statement by the gov- by widely varying qualifying conditions, that had ernment regarding the proposed reorientation of the so- evolved in the United Kingdom up to the outbreak of cial security system. The proposed reforms affect four World War II. The Act of 1946 major programs: adopted the principles of the Beveridge proposals and instituted a social insurance system in which flat-rate l State Earnings Related Pension Scheme (SERPS): This second tier of the state pension contributions guaranteed minimum pensions, albeit at scheme is based on covered earnings and supple- subsistence levels, for the working population. It also ments a basic pension provided by the state to all encouraged workers to make additional pension ar- workers upon retirement at age 60 for women and rangements through collective bargaining agreements. age 65 for men. The government proposes to re- tain the basic pension but to gradually eliminate Since that time, the British social security system has the earnings-related layer and substitute occupa- increased the number of different benefits paid and has tional or personal pensions with defined contribu- required an ever-increasing share of the national budget tions and annuities based on accumulated pension each year. National Insurance (NI) social security fund reserves. spending has increased five times as fast as the cost of l Supplementary Benefit: This is the group of so- living since the system’s inception in 1948. The total * By Daniel Wartonick, International Policy Staff, Office of Re- cost of the social security system today is more than search, Statistics, and International Policy, Office of Policy, Social ~40,000 million (US $51 billion), which is almost one- Security Administration. The author wishes to acknowledge the assist- ance of Mercedes E. Bern, who provided background information for third of all public spending for the year. For the period this note. from 1978-79 to 1982-83, total expenditures on benefits

Social Security Bulletin, August 19851Vol. 48, NO. 8 Legislated in 1975, SERPS was designed to supplement Program Profile the basic social security pension as well as to provide a General. Social security in the United Kingdom pension more closely associated to actual earnings. consists of: (1) old-age, survivor, and disability Workers and their employers may opt out of the earn- insurance; (2) health, cash sickness, and maternity ings-related layer in favor of an occupational pension programs; (3) unemployment insurance; (4) work that must meet certain minimum requirements fixed by injury, known as “industrial disablement;” and law. In return for accepting this option, a portion of the (5) family allowances, known as the “child bene- National Insurance (NI) contributions are rebated to the fit.” employer. For example, if an employer has established Administration. The Department of Health and an approved contracted-out scheme, 6.25 percent of the Social Security (DHSS) provides general supervi- employer’s NI contributions will be rebated. Roughly sion and administration of benefits for all pro- half of all workers are covered by employer schemes. In grams except unemployment. The Department of 1998, SERPS is expected to reach actuarial maturity and Employment administers the unemployment will be required to pay full benefits (amounting to ap- program through its regional offices. The Inland proximately 25 percent of indexed earnings) to those Revenue Service collects contributions to the earn- who have made contributions throughout their working ings-related layer of the OASDI program. DHSS lives. The scheme pays 10 percent of indexed earnings to collects contributions to all of the other programs. an employee retiring now. Financing. National Insurance (NI) contribu- tions from employees and employers of 9.0 A “New Partnership” in the percent and 10.45 percent of covered payroll, re- spectively, and government contributions from Social Security Program general revenues of approximately 13 percent of In its proposals for reform of the pension program, costs finance the administration and the basic cash the government proposes a “new partnership” between benefits of the program (OASDI, sickness, mater- the state and the private sector in providing adequate re- nity, industrial disablement, and unemployment). tirement benefits for workers. The state would continue The government covers the entire cost of the child to provide a basic retirement income but younger benefit and 85-90 percent of the cost of the Na- workers would be required to contribute to an earnings- tional Health Service. related pension plan, either through an employer- All employed persons who have met a minimum sponsored plan or under individual arrangements. The level of contributions in any one year are covered government’s major proposals with regard to the cur- under the cash sickness, maternity, and unemploy- rent old-age pension program are: ment programs, which pay modest flat-rate bene- fits. l Coverage. The government proposes to set up two earnings-related systems beginning in 1987; one would continue SERPS coverage for older almost doubled from &lo,900 million to f19,OOO mil- workers within 15 years of retirement who would lion. Social security retirement pensions alone account lose the most if SERPS were phased out, and the other would insure younger workers who have for two-thirds of this spending. time to build up credits under a new system. For A problem of particular concern is the payment of those at ages between these two groups, the gov- pensions in future years, when a greater proportion of ernment would provide partial credit under workers will be receiving benefits from and a smaller SERPS to make up any benefit shortfall that proportion will be contributing to the state system. At would result from not being fully covered under either system. The basic flat-rate retirement bene- present, there are 21.8 million contributors and 7.3 mil- fit would be retained, however, for all groups of lion pensioners; by 2025, the number of contributors is workers. The SERPS coverage would continue expected to grow marginally to 22 million while the num- for employed men aged 50 or older and employed ber of pensioners will nearly double to 12.6 million. Thus, women aged 45 or older and would continue pay- the ratio of contributors to pensioners will fall from a cur- ing benefits to those who qualify under its provi- sions. For men aged 40-49 and women aged rentratioof2.3:1tol.8:1inthenext40years. 35-44, the state would provide partial SERPS en- The government faces not only heavy current ex- titlement to avoid a sharp divergence in the penditures, which are being met in part from general amount of retirement benefit received by those revenues, but an even greater burden in the coming still covered by SERPS and those workers just un- years in funding the state pension provisions. The state der the cutoff age. This partial benefit would add a maximum number of 7 l/2 years of SERPS pension program consists of a basic flat-rate pension, credits for a man aged 49 and a woman aged 44 currently E35.80 (US $45.82) per week, and SERPS, the and would decrease gradually to just 1 additional earnings-related benefit, accumulated at the rate of 1.25 year of credit for a man aged 40 and a woman percent of indexed earnings per year, starting in 1978. aged 35. For workers younger than these ages,

46 Social Security Bulletin, August 19851Vol. 48, No. 8 SERPS would be eliminated starting in 1987. This tween 60 and 70 and provide actuarially reduced younger worker would be required to provide for or increased benefits for retirements initiated be- a pension either by joining the occupational plan fore or after a common age of 65 for both men set up by the employer or by making private ar- and women. The government suggests that either rangements for a personal pension. The govern- a reduction or increase of 8 percent per year ment envisions that these arrangements will be would be appropriate, depending on whether the made for as wide a range of employed workers as employee opted for retirement before age 65 or possible but concedes that it would not be prac- continued working. The government does not tical to provide coverage for casual or part-time propose, however, eliminating the current retire- workers. Details on what range of earnings would ment age difference for the basic pension avail- be covered and at which age coverage would start able at age 60 for women and age 65 for men. Left have yet to be worked out. However, the govern- open for debate is the question of whether the ment believes that these aspects would not differ worker will be allowed to continue in full-time greatly from the present provisions under SERPS. employment and receive the basic, flat-rate pen- l Contributions. For those employees continuing sion or whether an earnings test should be applied under SERPS, the Nl combined employer/em- before age 65. The government makes clear, how- ployee contribution rate for all social security pro- ever, that it is committed to eventually eliminating grams would remain roughly the same at 19.45 this earnings test for those who continue working percent of covered earnings or could increase by after age 65. at least 1 percentage point. Under the new earn- ings-related pension arrangements, the total NI Reform of Social Assistance Benefits contribution rate paid by both employer and em- ployee for all NI social security programs would In the Green Paper, the government also proposes an be approximately 16.5 percent of covered earn- overhaul of the three major social assistance programs: ings. In addition, a minimum contribution amount for the new pension system, to be phased Supplementary Benefit (SB), Housing Benefit, and in over a 3-year transitional period, would start Family Income Supplement (FIS). Determination of eli- with a combined 2 percent for both employee and gibility for these benefits is currently based on need. In employer in the 1987-88 tax year, rise to 3 percent general, families out of work or only in part-time em- in the second year, and to 4 percent in the third ployment may qualify for SB based on income and capi- year and thereafter. Employees would have the option of contributing an additional amount if tal assets. If they qualify for SB, they automatically they desire. If an employer sets up an occupation- qualify for the housing benefit. Full-time, working mar- al pension plan, the current contracted-out contri- ried couples and single parents with children are entitled bution rate rebate to the employer of 6.25 percent to FIS for 1 year based on income and hours worked would be gradually phased out. The effect would either as wage earners or in self-employment. Following be to increase employer costs for pensions. are the major changes proposed for these benefits: l Benefits. Credit for benefits under SERPS would continue to accrue at the same rate as at present. The contributions paid into each employee’s oc- l Supplementary Benefit. The government pro- cupational pension or personal pension fund un- poses to replace this benefit with two separate sys- der the new system would be invested to build up tems referred to as an income support system and retirement reserves, which would be used to pur- a social fund. It envisions that these programs chase a retirement annuity when the employee would be easier to administer and understand and chooses to retire. This differs from the current would better address the needs of the claimants practice in occupational pension plans, which than the present SB system. Under income sup- provide a defined benefit as a proportion of earn- port, benefits would continue to be subject to ings. Under the new arrangement, the employee both an income test and a limit on capital assets, would be able to identify total pension savings at but a more liberal disregard of both would be any time. Under the new system, employers would used. Beneficiaries would be classified, on the ba- be required to certify that the amount in an em- sis of their various needs, into such client groups ployee’s pension fund is on average no less than as the unemployed, pensioners, single parents, the required minimum contribution. The size of and the sick and disabled. Benefits would vary ac- the benefits would not be regulated by the govern- cording to each client groups’ needs as defined by ment but would depend on the performance of the the government. For example, an unemployed investment. In the event that an employee changes single worker under age 60 would have different jobs, the accumulated reserves would be trans- needs and responsibilities and hence receive a dif- ferred to a personal pension set up for this pur- ferent benefit than an unemployed worker over pose. This would provide the portability that has age 60 with family responsibilities. In addition to been lacking in the existing contracted-out system income support benefits, a social fund would be of occupational pensions. established to assist claimants with exceptional l Retirement age. The government is proposing a needs such as day care, funeral expenses, and greater degree of flexibility in retirement age than other emergency expenses. Eligibility for assist- presently exists and finds particularly attractive ance from this fund would be determined on a dis- the idea of a “retirement decade.” A retirement cretionary basis with a greater degree of flexibility decade would allow individuals to retire on their than now exists under the current system of SB. occupational or personal pensions at any age be- Both schemes would be administered by local De-

Social Security Bulletin, August 1985/Vol. 48, No. 8 47 partment of Health and Human Services (DHSS) transitional benefit, with a single lump-sum payment of offices. El,000 (US $1,280). The government proposes greater l Housing Benefit. Claimants for the new housing flexibility in the payment of a widowed mother’s allow- benefit would qualify automatically if they were ance for the widow with children, beginning payment receiving the new income support benefit, which is the case currently under the SB and housing from the time of death instead of after the current 6- benefit regulations. Claimants would be eligible month waiting period. Both of these reforms, it is for a reimbursement of 100 percent of their costs believed, would assist with the immediate financial for rent and 80 percent of their local taxes, if they problems that a widow faces after the death of a spouse. qualify for full income support. Those with in- comes above the income support threshold would With regard to administration of the social security face a reduction in the housing benefit according program, the government suggests that the streamlining to the increase in their incomes or, as the govern- of the social security system proposed in the Green ment refers to it, an “income-related taper.” In Paper would help implement a proposed, long-term light of the possibility that landlords or tenants computerization of the system. Currently, approxi- might take advantage of these rebates, the govern- mately 81,000 employees of the Department of Health ment proposes that local authorities bear a greater responsibility for ensuring that the housing is not and Social Security administer the social security pro- extravagant or unnecessarily expensive. The gov- gram. They pay benefits to approximately 9.3 million ernment proposes to set the direct subsidy to local NI retirement pensioners, among others. To administer authorities at less than 100 percent of costs. The the full range of income security and social assistance government believes that local authorities would have a greater incentive for cost containment and benefits more efficiently, the government is proposing improved efficiency to make up the difference in to embark on a wide-ranging computer modernization funding, since local authorities administer the program, which they believe would give them the most present scheme and would continue to provide the up-to-date data-processing systems in the country by the administration under the reform proposals. mid-1990’s. In making reference to the present “state of l Family Income Supplement. The FIS scheme the art” in British administrative techniques at local so- would be abolished under the government’s pro- posals and be replaced by a family credit system. cial security offices, the government declares: “As for The allowance would be included in net earnings administration, much of the social security system is run as an offset to taxes and NI contributions and from local offices which largely lack the kind of aids would be paid through the employer, in principle, which modern computer science can provide. The result similar to the negative income tax. A similar in- is that the service for the public too often fails as the come test as that used under the proposed income support scheme based on net earnings would be staff hunt for files in a Dickensian paper-chase.” used to assess entitlement for the family credit system. The thrust of the new family credits is to Comment better ensure that working families with children Since the release of the Green Paper, some critics will not fall into the poverty trap of being better off out of work than in work. The government is have pointed out that the proposed reforms may not placing the emphasis on providing adequate re- save money and may, in fact, be more expensive than sources for families to decide on how best to meet anticipated. However, given the fact that no cost anal- their needs, rather than deciding on their behalf ysis of the reforms has been presented in this paper, this through the provision of social services and a point is not yet clear. Other critics have decried the pro- complicated array of other means-tested benefits. posals for dismantling elements of the British welfare Officials of DHSS will make the determination of eligibility for the new family credit scheme. system by shifting the burden of old-age protection away from the state to the employer and employee and eliminating certain universal benefits in favor of bene- Additional Proposed Reforms fits for more needy categories of the population. Oth- In addition to the proposed changes in the assistance ers, however, support certain aspects of the reform such programs noted above, the government is suggesting as the creation of a “retirement decade,” which they be- changes to three other benefits. First, the government lieve could provide greater flexibility in retirement deci- proposes to replace the current maternity grant of 525 sions and also help to promote equal treatment of both (US $32), available to all families, with an increased men and women under the pension system. benefit payable only to families who qualify for benefits Because these proposals have been presented in the under the proposed income support scheme. Second, form of a discussion document, the debate as well as the the government would like to eliminate the universal formulation of alternative proposals will continue. In death grant paid at varying rates to families of deceased all probability, the government will introduce prelim- persons in favor of providing for funeral expenses from inary legislative proposals at the beginning of the next the proposed social fund to families who truly need as- Parliamentary session in the fall of 1985. Final legisla- sistance. Finally, the government proposes to replace tion is not expected to be in place before the middle of the current widow’s allowance, which is a short-term next year.

48 Social Security Bulletin, August 19851Vol. 48, No. 8