Reforming Social Security

The new Government’s Social Security Bill published in July was inherited from the Conservatives. Originally titled the Social Security Modernisation Bill, it lost the "M" word as soon as Labour reintroduced the legislation. Why? After all modernisation is one of New Labour’s hottest buzz words.

The answer is simple. The new Government plans a much bolder and far reaching reform of social security. No need to waste so evocative a word on something as mundane as Peter Lilley’s plan to tidy up some loose ends of decision taking in the benefits system. We are a little less sanguine though about the Bill’s contents. Although it simplifies the complicated system of different adjudication authorities - by consolidating all decisions under the Sectretary of State - it threatens to eliminate an important safeguard for claimants: that decisions on entitlement to benefits are taken by officials who are independent of the Executive Agencies that administer the benefits.

But this is small beer compared with a greater political prize. Labour aspires to a fundamental restructure of "welfare" which goes far beyond the limits of social security to embrace pensions, personal taxation and perhaps even healthcare. With social security there are three main goals.

The first has a powerful provenance. Tony Blair believes that earning a living is not just preferable. Work involves social and moral duties. Being without work "detaches people...from citizenship itself". The Government sees its welfare to work strategy as an anchor for achieving more social justice by recreating individual economic self-sufficiency.

The second reason is macro-economic. The Chancellor argues that consumption expendenditure is wasteful but investment spending generates further wealth. The highest levels of the new Government hold to this belief that one of the public sector’s best investment efforts comes from its commitment to boosting the quality of human capital: "education, education, education." So a long term goal is to divert a large amount of the social security budget (perhaps £10bn of the £90bn+ presently spent) to education and training (gross expenditure, including local authority schools £?bn).

The last goal of the Government is a little more practical. For many claimants, the benefit system itself gets in the way of people trying to enter employment or to better their chances of gaining work in the future by undertaking training or education. Despite many efforts by the Conservatives to reform and modernise the social security system, it is has been plagued by two trends which have only worsened what the Tories used to arrogantly call "dependency" but what we would describe as trapping people on benefits.

The benefit system has become increasingly out of step with developments in the labour market. Compared with the flexibility required in the world of work, benefit entitlements are cast in a rigid mould. This assumes that unemployed claimants have left reasonably paid and long held jobs, will have received a redundancy payment, that they will consequently have some savings and that they are tenants and not mortgagees. It also assumes they will return to a full-time job, that they are unlikely to suffer subsequent further spells of unemployment and will normally command earnings which meet their individual and household needs.

Wrong. The labour market has seen a collapse of securely tenured jobs, the growth of self employment and part-time working, falling wages and an aggressive hire and fire mentality by too many employers. Allied to this are increasingly punitive benefit qualification rules and the spread of means-testing benefits. Taken together, claimants face a combination of financial disincentives in their transition from benefits into work coupled with an administration regime so complicated that few even in the Government’s service fully understand it.

As Matthew Nimmo’s submission to the Government’s tax and benefits review outlines (pages 8 to 12 of this issue), reforms to the benefit system need to be bold. The sort of measures that have been routinely discussed in recent years (like extending the earnings disregards or the Housing Benefit run-ons) are little more than tinkering. These sorts of minor adjustments and incentives make little difference to claimants who instinctively feel that quitting welfare for work is a hazardous business that could leave them far worse off - particularly if they need to make a subsequent claim for benefit.

This new Government’s welfare to work policy is a flagship manifesto commitment. So it has to succeed. Modernisation of social security has to simplify the system and make it match the realities of the labour market. And the Government’s New Deal programmes will work best on the understanding that "taking the unemployed off welfare and into work" needs real jobs paying realistic wages. Not because this an ideological mantra. Instead, it is the only way to remove people from the tentacles of system that - through the rules of in-work benefits - creates the disincentives of high marginal rates of tax and benefit withdrawl.