Covid has exposed a need to return to ‘something for something’

The main question about the UK’s benefits system that has dominated the airwaves in recent weeks has been whether or not the chancellor should – and whether he will – extend the ‘temporary’ £20 a week uplift to Universal Credit. With many low-income families struggling financially in the face of ongoing health risks and economic restrictions, this is an important debate. But a new report – produced by the IfG with the Social Security Advisory Committee – argues that the fact that the uplift was introduced in the first place highlights deficiencies in the UK’s social security system, which the government should learn from and adapt the system to make it more robust to the next major shock.

Providing a cushion to those who lost their jobs

The original motivation for the £20 a week increase in Universal Credit was not because ministers wanted to provide greater financial assistance to all low income families – whatever the merits of that might have been. Rather – as a senior official from the Department for Work and Pensions has described ^[1] – the objective was to provide a greater cushion to people who were expected to lose hours of work and pay as a direct result of the pandemic. But for practical reasons, to facilitate rapid introduction of the more generous payment, the uplift was given to everyone receiving Universal Credit – creating a “windfall gain to existing UC claimants”.

The need to adjust payments in this way in the face of a major economywide shock highlights a long-standing feature of the UK benefit system that sets it apart from those in place elsewhere, particularly across continental Europe. The UK benefits system focuses on providing a relatively low, flat-rate of income that is heavily means-tested – with the level of income received being largely invariant to how long someone has been on benefits for. As a result, people who had no reasonable prior expectation of losing their job before the pandemic faced falling back on to a very low level of state benefits if they lost their jobs – and would have received no help at all if their savings exceeded £16,000.

In contrast, many other European social security systems provide benefits that are more closely tied to someone’s previous earnings. And these benefits are typically paid at a higher level when someone first loses their job – to help cushion a period of short-term unemployment – but then fall as the spell on benefits extends.

Greater short-term generosity reduces longer-term damage

Low levels of benefits from the first day of unemployment can encourage individuals to take any job, rather than one well-matched to their skills and experience. It can also encourage claimants to move quickly to a cheaper area to reduce their housing costs, but such moves can be counterproductive if good jobs are scarcer in cheaper areas. The need for individuals to retrench rapidly in the face of unemployment also takes spending out of the economy. There is therefore evidence that the UK’s low, flat-rate and heavily means-tested benefits lead to longer-term damage to both individuals and families – and potentially to the wider economy.

The government should therefore strengthen the remaining contributory elements of the UK benefits system. At the very least, the rate of contributory Jobseeker’s Allowance should not be allowed to remain below the standard allowance in Universal Credit, as it has been since last April, and contribution-based JSA should be available for a year, rather than the current six months. There is also a case for going appreciably further – without necessarily moving wholesale to the earnings-related systems that are common in Western Europe and Scandinavia.

We need to readopt the language of social security

Beveridge, in what became the founding document of the UK’s post-war welfare state, judged that the British people wanted a ‘something for something’ system – benefit in return for contributions. But that has been progressively eroded, under governments from across the political spectrum. The role of contributory benefits has shrunk as successive governments have attempted to control the overall size of the benefits bill.

The UK has lost the concept of ‘social security’. Instead the benefits system has increasingly come to be discussed largely in terms of ‘welfare’. In this context, ‘welfare’ is a term adopted from the US and carries connotations close to the opposite of its original meaning: not so much to fare well, as to be someone in receipt of somewhat stigmatised benefits – ‘in need of welfare’.

The use of language matters. Not least currently. Those who unexpectedly lose their job for the first time are looking for a degree of security in uncertain times, not for a handout for ‘scroungers’, as some parts of society have labelled the working-age benefits system.

Moving to something even approximating the sort of earnings-replacement systems that are in place elsewhere in Europe would require a significant increase in contributions as well as benefits. Such a radically different system may not be what the UK electorate wants and may not be politically sustainable, given the trajectory of policy over the past several decades. But the experience of Covid-19 shows that the UK benefits system is not currently well-designed to cushion and minimise the long-term damage of major macroeconomic shocks.

The system – from low levels of benefit and tight restrictions of savings – has been found wanting over the past year by those who believe they have ‘paid into’ the system but have now lost better-paying jobs or face losing them. The contributory aspects of the system should be strengthened to ensure that the UK social security system provides not only welfare but insurance for the many who are in work but who face the risk of unemployment when the next major shock hits.

1. The safety net in action? Universal Credit’s role in the crisis and the recovery - YouTube