Proposals for Social Security Reform in the United Kingdom
Total Page:16
File Type:pdf, Size:1020Kb
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 income support 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- Housing Benefit: 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 National Insurance 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.