Demos Daily: Squaring the Circle

The relatively new Universal Credit system is being tested to its limit as hundreds of thousands of new applicants sign up, many of whom have lost their job due to the shutdown. The system has benefitted from being mostly online, but criticism of the way it’s been managed continues: some people have found themselves worse off having lost entitlements, while the suggestion remains that the amount people receive is not always enough to live on.

In 2013 Demos published a report looking at the problems our welfare system is facing and, in particular, how we tackle the fact that it’s both expensive and relatively ungenerous. 

You can read the executive summary below, and the full report here.

Executive Summary

This paper looks at the potential benefits – and challenges – for policy makers of involving the private sector in helping to boost financial wellbeing and security for the UK workforce. It uses as an example the current beneficial role that sickness and illness income protection products play on behalf of consumers, employers and government. The British welfare state is undergoing a period of dramatic reform. While bringing down the overall cost of welfare is politically popular and enjoys a broad consensus among leading policy makers it carries inherent risks.1 There are major problems with the UK welfare state that demand solutions:

• Declining support – public support for the benefits status-quo is diminishing and in decline, particularly among the ‘squeezed middle’.2
• Relatively ungenerous – despite popular opinion to the contrary, the UK’s benefits system is relatively ungenerous when compared with peer economies.3 This is particularly problematic
  for wage-dependent families facing unemployment and for families where the primary earner is unable – for reasons of accident or ill-health – to return swiftly to the workforce.
• Too expensive – despite the above, it remains the case that the UK’s total benefits spend (around £111.7bn each year) is unsustainably high and likely to be the target of future spending cuts.4

In order to sustain and rebuild public support for a welfare settlement, the Government must find ways of addressing these tensions between generosity, reciprocity and public trust.5

The Government should look at how to encourage workers to take up products designed to protect their long-term financial wellbeing against risks such as the inability to work. But industry must also respond. Insurers should work to make products simpler, more widely available and affordable, and look at
whether products that protect against a greater range of forced redundancy circumstances can be developed and brought to market.

Greater take-up of protection products – and the development of forced redundancy products to work alongside existing income protection products – would offer a hybrid model to British workers. It would improve reciprocity for those protecting themselves, reduce the cost of welfare to the taxpayer and may help to reduce voter dissatisfaction with welfare. But there remain huge challenges. Financial protection products suffer from a relatively low level of consumer awareness
in the UK. This reduces demand in general and pushes up the cost by limiting the number of group policies facilitated by employers. There are also high levels of ‘insurance apathy’ among consumers.6 While support for state-based welfare has declined in the UK,7 middle earners remain suspicious of private sector involvement.

This research leads to a number of important questions for consideration – which should form the backdrop to any effort by policy makers to promote personal financial protection in the UK workforce:

• Should the Government seek to involve the private sector further in meeting welfare needs? This paper lays out some evidence of the need for private sector involvement in welfare – from the expense of the welfare state to the relative lack of generosity of our benefits system and its knock-on impact on living standards and demand. Nonetheless, many remain concerned that further private sector involvement in the welfare state may undermine fundamental principles of state provision. Should the Government instead seek to raise state-benefit levels? Can the taxpayer afford a welfare system that continues to be primarily statebased? Does the public still want a state-based welfare system?
• How can we incentivise private protection? Demos has made the case in the past for up-front incentivisation (via National Insurance (NI) rebates on protection products). Is this the right approach? Or should the Government concentrate on removing disincentives – such as tax levied on income protection payments – in order to remove the tax system’s bias towards state dependency?
• Is there scope to ‘nudge’ individuals into financial protection? This paper draws a number of parallels between financial protection and pensions. As the Government proceeds with the roll-out of NEST (National Employment Savings Trust) – an ‘opt-out’ approach to pensions that will draw the previously unprotected into a pension scheme – is there scope to learn from this ‘nudge’ approach and apply a similar scheme to financial protection? Should employees be auto-enrolled into income protection products in order to achieve greater social benefits?
• Can the income protection model be sustainably extended beyond sickness, ill-health and disability? What are the barriers that may prevent the insurance industry designing successful, mass-market products to extend the principle of income protection beyond the incapacity market? Are there incentives to the insurance industry – to design products that fit the Government’s social agenda – that can and should be offered? Can the income protection model be expanded to cover no-fault redundancy in general?
• How can the Government persuade other stakeholders – such as employers – to take a role in promoting financial wellbeing? A key reason for inaction among employers on income protection is the lack of demand exhibited by employees. This dampens the incentive for promoting financial education in the workplace and facilitating or supporting long-term financial planning and protection – it also potentially reduces the benefits available to responsible employers.

Notes

1.  Kellner P, ‘A quiet revolution’, Prospect, 22 Feb 2012, www.prospectmagazine.co.uk/magazine/a-quiet-revolutionbritain-turns-against-welfare/ (accessed 9 Jan 2013).
2.  Ibid.
3.  Wind-Cowie M, Of Mutual Benefit, London: Demos, 2011.
4.  Wheeler B, ‘Tory Conference: George Osborne in £10bn benefit cut row’, BBC News, 8 Oct 2012, www.bbc.co.uk/news/ukpolitics-19865692 (accessed 9 Jan 2013).
5.  Rogers S, ‘British Social Attitudes Survey – how what we think and who thinks it has changed’, Guardian, 17 Sep 2012, www.guardian.co.uk/news/datablog/2012/sep/17/british-socialattitudes-historic-data#welfare (accessed 9 Jan 2013).
6.  Association of British Insurers, Accident and Health Insurance Statistics, 2009.
7.  Rogers, ‘British Social Attitudes Survey’.