Revising the Welfare System
by Paul Hazelden

Introduction

(This is an updated version of one part of the response I made in October 2008 to the DWP consultation on their paper "No one written off". The full response provides more details about the features a successful welfare system must have, structured around the DWP paper. Another article, Fixing the Economy describes some of the related changes which need to be made in other areas, alongside these changes to the welfare system.)

It is very easy to describe a welfare system which meets the real needs identified in the consultation. Getting there from here is not quite as simple, but it should be achievable in three to five years through progressive steps.

The current system has two basic problems: it rewards the wrong behaviour, and it is too complicated. The proposals in the DWP paper fail to address either concern adequately: they offer some simplification, but not nearly enough, and they still contain a great deal which rewards the wrong behaviour.

Detail

  1. Deal With Individuals

All tax and benefits should only relate to one individual. If the individual chooses to get married or to live with someone else, or to live with a dozen other people, then all the better. You want to encourage them to live like this: all the research shows that, other things being equal, people are happier and healthier if they live with others. Payments for a child will go, of course, to a nominated adult.

The other reason why it is important for the benefits system to ignore other people lies in the nature of the information we are working with. While 'Are you married?' has a simple yes/no answer, it is often the case that the modern equivalent, 'Are you living with someone else?' does not. Therefore, it is not a helpful question to ask.

There are three main reasons why the modern question cannot usefully be asked in this context - two reason why you cannot give a simple yes/no answer to the question, and one reason why you don't want to.

Firstly, no two people will agree on what counts as living together. Do you have to spend four nights together in a normal week? (What is normal? And what about married couples where one works away during the week?) Is it when you leave your toothbrush for next time? (But what if you don't have a toothbrush? Or if you have one in each of ten different houses?) There is a continuum between a one night stand and living together, and it does not make sense to fix any arbitrary point in between as the place where your benefit entitlements suddenly change.

Secondly, these personal arrangements change. For some people they change on a weekly basis. Expecting people to remember all the petty details they filled in on some long form several months ago, and expecting them to tell you when those details change, is just a way of setting up a system which is certain to fail.

And thirdly, for most people these questions are, I suspect, a completely unacceptable example of the state prying into my personal life. I don't want to tell the state that the person who was staying over once a week is now with me overnight more nights than not. And all I probably know is that this is what they did last week: I don't know, and they probably don't know either, if they will do the same next week. Many people who end up living together go through a period of not being sure if they are living together - and if they don't know, how can they be expected to tell the govenment?

There is one final minor reason: most people want to keep their private life private, for several good reasons. They have a right to privacy, which should not be ignored. And when your private relationships affect your legal entitlement to benefits, we blur the boundaries we think we understand. Marriage is a legal contract, affecting your legal position in all kinds of ways. Living together is not. If living together starts to affect your legal rights, it becomes a legal contract just like marriage - but this is explicitly what people who choose not to get married do not want. The state should not take away their freedom to remain without commitment, if that is what they choose.

Marriage, of course, is different: 'Are you married?' is entirely valid as a question. Marriage is a public commitment, and the state should know about our public (and, we hope, permanent) commitment. But the state of our marriage should not affect our benefits, any more than our choice of TV programs should.

Of course, if the benefit in question relates to another person, then you must be asked about the other person - when you care for them, for example. but when the benefit is not explicitly about another person, then it should not be interested in anyone else.

  2. Benefits Must Be Standalone

Benefits should all be standalone. This works both ways.

Firstly, there should be no claw-backs. You should never be in the position where the gaining of one benefit means the cutting back or removal of another. Every benefit, and every tax should stand on its own.

Secondly, no benefit should be granted, even in part, on the basis that you qualify for another benefit. Doing so this creates complexities, and produces unwanted side-effects, as the one benefit is now playing two roles: its own job, and as a doorkeeper for another benefit. Database administrators will quickly recognise the importance of this rule.

  Implementing the changes

These first two changes would greatly simplify the whole benefits system, and remove a great deal of the cost of administration and also much of the fraud.

They can also be implemented piecemeal, a few related changes being introduced together, step by step. Progress can be made in these two areas while the other, more difficult aspects are being worked on.

A simple system will help to empower those who struggle with the complexities of the present system, and will make life much easier for those who give advice. Most people can understand: these are the criteria - if these things are true for you, then this is what you will get. End of story.

  3. Minimum Wage

The basic unemployment benefit should equal the minimum wage. That is what you should have to live on, wherever it comes from. After all, you cannot with integrity expect people to live on less than the minimum amount your research says they need to live on.

And this minimum wage should also equal the tax-free amount - what you can earn before you start to pay tax. After all, if this is what you need to live on, then the state should not take any of it away.

A valid criticism at this point is that the minimum wage should be more than the unmployment benefit - otherwise what is the incentive to work? If we just stop the reforms at this point, then the minimum wage and the tax-free allowance do need to be a bit higher than unemployment benefit.

But if we introduce number 5 ('Cut Out the Cut-Offs') then this problem is addressed simply and easily, and all three amounts can be the same.

  4. Operate One System

The tax and benefits systems need to be integrated. While you have two organisations making independent decisions about these two areas, they will never tie up correctly, and you will never get the welfare system right.

And it just does not make sense to have one bunch of people working for the government, trying to take money away from us, and another bunch of people, also working for the government, trying to give us money. And when the people taking money away from us have to introduce a credit system which leaves us with more money, they are doing the job of the second bunch, and the already complex system becomes even more absurd.

  5. Cut Out the Cut-Offs

Remove all the cut-off points. Every time a small increase in income produces a large decrease in benefits, you have created a poverty trap. Benefits should always taper, just as with tax. Up to a certain amount of income, there is no reduction, and beyond that point you lose (for example) 30p of benefits (total benefits, not 30p from each benefit) for every £1 you earn. That way, you know everyone will always be better off in work, and you know they will always be better off by working harder and earning more. Once they know that, they have a real incentive to work, and to work harder.

In fact, why not simply use the tax system? It is already designed to do this job. There should be two types of benefit: the means-tested ones, and the others. The means-tested benefits are simply other forms of taxable income, and should be treated as such. They are income you recieve from the state: the state knows how much it is giving you, so you only need one additional piece of information - how much you are paid - and the calculation can be easily done.

Also, if you can qualify (in all other ways) for a benefit but not be paid anything because you earn too much, this will remove one of the major psychological barriers to employment: the fear and cost of re-applying for all the benefits if you try employment but it does not work out for you.

The very real fear for many people is that you may well not get the same benefits back as you had before you started work. the granting of benefits often feels like an arbitrary decision, even when it is not, because of the complexity of the system. And even if you do get the benefit back (usually after a lot of interviews and form-filling), there is always a lot of delay before everything is sorted out again.

But a benefit which tapers off means that there is no reason why you should not remain 'on' the benefit for some time while receiving nothing. In this situation the moment you lose your job, the benefit is there for you again. If you know you have this safety net, you will be more willing to risk getting a job. If we take away the risk, we will increase the number of people trying to get a job.

In passing, I would like to note that the current system of tax bands was created to be operated in a pre-degital world where everyone has to be able to look up all the figures they need in complicated sets of tables. This approach makes no sense in today's world.

Instead of several tax bands, we should have a smooth line defining the tax rate for each successive pound of income. This way, you never hit the point at which a new, higher rate of tax suddenly kicks in, and hence you never motivate people to find some way of avoiding going into that next band. The simple way to do is is a straight line, but I suspect a sigmoid curve would produce better results, and would enable greater fine-tuning of the system.

  6. Employ Carers

Employ those in a full-time caring role. Employ them as carers. Support them, encourage them, supervise them, train them. That way, they will get less burned-out, they will enjoy a dignity and status they currently miss, and they will have an employment record for when they are no longer needed to care.

And if carers, and those being cared for, have regular contact with a trained supervisor, it will make many of the current tragic examples of elder abuse much easier and faster to identify. This is not be the primary aim of this reform, but it would be an important side-benefit.

  7. Decide when adulthood starts

Related to these changes, you need to decide when childhood ends, and implement that consistently. I suggest 16 is the obvious age, but 17 or 18 would also work.

Whatever age is decided upon, that is the point when you are deemed to be an adult with the right to work full time, the right to join the army, the right to marry and the right to vote. At that point, you should pay the adult fare on the bus and in the cinema, and be paid the same minimum wage as everyone else.

The current method of phasing in adulthood means that needy young people constantly fall down the gaps between provision for children and provision for adults. You can retain the current policy of providing additional support to people up to the age of 25 (extra help for the difficult early adult years makes a great deal of sense), but you must give the rights and responsibilities of adult life at the same time if you want young people to respect the system they are becoming a part of.

  8. Keep the Benefits Simple

It is much better to have many simple benefits than one complicated one. You can list the benefits, and people can look down the list and see which ones are or might be relevant to them.

There is nothing to stop you from combining several benefits together onto one form, if that is helpful, as long as each benefit continues to stand on its own feet.

  9. Deal with the Complexities of Employment

After this, the reforms start to get a little more complicated: we need to deal with the complexities of the employment and tax system, and the reality that many people have many employers.

A lot of earnings are currently not declared. This is partly the result of deliberate fraud, but also partly because the system is so hard to understand and difficult to use even if you want to do what is right.

The solution to this complexity is to put the calculations where they belong. The current system requires us to pretend that one employer is the real employer for tax purposes, and the other employers don't count, and then at the end of the year you do some complex sums to work out how much tax should have been paid during the year, and then you make the adjustment. The individual may be owed a large amount of money, or may owe the state a large amount - either way, this generates hardship, work and worry. Why design a system in which you plan to not tell people how much they should give to the state until after the end of the year in which they should have given it? In the past, perhaps, there was no alternative. Today, there is.

These days, it makes much more sense to provide an online system: each employer provides the information about what they are to pay each individual - for most employees, this will only need to be supplied once a year - and the system then calculates the appropriate amount of tax to be paid.

And if you can plug in the banks and building societies, then you have a system where the amount the individual receives each month is correct, and you never have to worry about the end of year tax return, or about running up a massive debt purely because of the inadequacies of the system.

Conclusion

If everybody would be better off in work, and if we are providing work that can be done by the people looking for it, and if we are providing subsidies for employers, where necessary, to ensure that the right jobs are made available to the right people, in the right places, then I am sure we can achieve much better than the current 80% target employment rate.

And if we can devise a system which is simpler, cheaper and easier to operate, delivers benefits more reliably to the people who need them, and is less prone to fraud, then we will have more people doing useful, productive work, and this will benefit both the economy and our quality of life.