Compulsory NIC-based insurance – can it work?
The Policy Exchange have released a radical report arguing for a new welfare system based on contributions rather than means testing “Making Contributions Count”. The “My Fund” scheme is mainly addressed to meet unemployment but other options could be included for example income protection against illness and provision of rehabilitation services. My Fund would be a compulsory social insurance system paid for through contributions from all employees and the self-employed. As well as unemployment insurance (and possibly income protection), each working individual would receive at least £250 a year into their My Fund account. This would be their money that could accumulate like a small retirement pot (they estimate around £10k). Benefits would be paid for the first three months. Half of these costs would be met from the insurance element and half from the personal pot of My Fund. It would continue to pay benefits for those contribution-based claimants who, under the current system, would be cut off from financial support after six months and give individuals with sufficient contributions the option to top up their benefits by up to £100 a week.
My Fund would be delivered through a small number of partnerships between Trade Unions, business representative bodies and financial institutions. Administrators of schemes would be paid a fee and all profits from management of the fund would be distributed between My Fund accounts. The Government would act as ‘lender-of-last-resort’ to ensure the viability of the scheme – for example if there were a return to mass unemployment.
From a consumer point of view there are however some pretty obvious issues that would arise. First, as all employees would contribute a proportion of their earnings each week to the scheme, hard pressed low and middle income households would see the scheme as an additional unaffordable tax. They would gain at claim stage as the amount they would get would typically be higher than their level of contributions but this would not dull the pain when they are in work. Higher-income households would gain from a more flexible and supportive system – but they can do this anyway through IP and ASUs.
Second the scheme would not replace Universal Credit. UC will typically pay out quite significant sums for families with children and My Fund payments will substitute rather than top-up Universal Credit. As such payments from My Fund would be deducted pound for pound from Universal Credit. In practice, therefore, many people would be no better off getting My Fund as opposed to UC. They would have paid into a scheme which gives them no financial benefit. Even more irritatingly they would see their My Fund savings pot decrease for no benefit to them.
From an insurer point of view the scheme would be much bigger than the current ASU/IP market but a compulsory scheme would be highly regulated. Charge caps would be inevitable. In addition, if it were a commercial market, it would likely follow the EU practice of complex risk equalisation schemes. These schemes compensate those insurers who take on higher risk pools through centrally administered cash transfers. Finally existing individual and group insurance markets would become even more niche. The wealthy may choose to buy them as top ups but it is difficult to see others doing so.
Finally, for Government, the aim of encouraging self provision and reducing the benefits bill could seem attractive. But it would be a very radical decision to move to an EU style Social Insurance scheme. And for those people who are not entitled to UC the stated policy aim of making work pay would undermined.
All in all, valuable think tank wonk but unlikely to have many takers.
Written by Richard Walsh. First published in Cover Magazine, Nov 2014