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Restoring Fairness to Social Security

  • Personal welfare accounts should replace NI to resurrect the contributory principle
  • Universal state pension is unaffordable; saving for retirement should be compulsory
  • Use sale of banks, Royal Mail and other assets to top up taxpayers’ private pensions

National Insurance should be abolished and replaced with a system of personal welfare accounts that would provide people with an income during periods of joblessness, parental leave, higher education and retirement, a new Civitas report argues.

The accounts, designed to restore the contributory principle which has been all but lost from NI, would be used for saving, insurance and even loans – helping people spread costs across their lifetime.

Based on the new workplace pensions, the core function of the accounts would be to save for retirement. But they could also provide cover for short-term unemployment, sickness and parental leave. People would be able to borrow against them to meet higher education costs and provide an income during sudden unemployment. They could also be used to insure against old-age costs.

The personal welfare accounts, proposed by Civitas professorial research fellow Peter Saunders in Beyond Beveridge, are designed to be introduced alongside the abolition of National Insurance Contributions and contributory unemployment and sickness benefits.

“A move to personal accounts would overcome many of the weaknesses and problems in the current NI system while strengthening the vital ‘contributory principle’ at its core. It would reduce pressure on the public finances as well as delivering an effective system of social security which is responsive to people’s needs and widely regarded as fair by the public,” Saunders writes.

“Moving to a system of personal welfare accounts would give people more control over their own savings. It would be more efficient than having the government doing it for us, it would strengthen work and savings incentives, and it would promote a stronger sense of personal and civic responsibility.”

Saunders says that NI – which no longer bears any semblance of the insurance system it was intended to be – is “no longer fit for purpose” but that the contributory principle behind it must not be lost.

“National Insurance is in a sorry state. Its design no longer fits current needs and it requires a radical re-think. But to allow the whole thing to collapse without rescuing and restoring the contributory principle at its heart would be a major mistake for which future generations would rightly chide us,” says Saunders.

“It has been subject to so much change and tinkering over the last 70 years that it is now almost unrecognisable from the one we started out with after World War Two. It is no longer fit for purpose, which is why many observers think the most sensible option is to scrap it altogether.

“But there is something uniquely important about Britain’s National Insurance system which must not be lost. It is the principle that people establish a right to benefits by making regular contributions into a fund throughout their working lives.”

Saunders proposes that everybody in work should be compelled to save into a private pension as the universal state pension becomes increasingly unaffordable.

Means-testing the state pension is not only sensible but may soon be unavoidable as the cost to the taxpayer continues to escalate, he argues.

But shifting to a means-tested system will require an end to the right to opt-out of workplace pension schemes, in order to mitigate the risk of moral hazard.

“The unfunded liabilities of the state pension scheme are now so large that it is difficult to see how future state pensions can realistically be paid unless people start to take more responsibility for their own retirement,” says Saunders.

“The UK government currently owes more than £5 trillion in pension obligations. Nearly all of this – £4.7 trillion – is unfunded. This debt is the equivalent of 342% of the nation’s current GDP.

“Means-testing the state pension, to target state benefits more precisely on those in need, is not only a sensible and desirable policy; it may be an unavoidable one.”

The proposal to make retirement saving compulsory is intended to rescue and strengthen the contributory principle, weaning the nation off benefits dependency and encouraging people to take more responsibility for themselves.

“The right of workers to opt out of workplace pensions should be ended. With a means-tested state pension, saving in private retirement accounts has to be made compulsory to minimise moral hazard. Compulsory saving is needed to ensure that people who could make provision for themselves do so, and do not end up claiming state assistance instead,” Saunders writes.

“Making retirement saving compulsory could begin to rescue and strengthen Beveridge’s contributory principle. Getting people to take more responsibility for themselves, and weaning the nation off its dependency on government benefits, thus requires both a means-tested state pension and a mandatory private one.”

Saunders also says private pensions should be topped up out of the proceeds from the sale of public assets, such as Royal Mail, the part-nationalised banks and mobile phone licence auctions.

“Any free allocation of bank shares should be limited to people who are working and paying taxes, for it was taxpayers who bailed the banks out in the first place,” Saunders writes.

“Current workers are going to have to foot the huge state pension bill in future years, even though they will forfeit the right to a universal state pension for themselves if and when the pension starts to be means-tested. It would therefore be fair and equitable if some of the shares from forthcoming privatisations were credited to their pension accounts.”


Peter Saunders is Professor Emeritus at the University of Sussex, where he was Professor of Sociology until 1999. His previous publications for Civitas include Social Mobility Myths, Social Mobility Delusions and The Rise of the Equalities Industry.

Beyond Beveridge: Restoring the contributory principle to retirement pensions and welfare benefits is published by Civitas on Monday 25 November.


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