The UK’s social security system offers relatively little protection when people fall out of work and current overhaul plans do little to improve the situation, according to the Institute for Fiscal Studies (IFS).
Government proposals for a new unemployment insurance offer an opportunity to improve things, but would still offer little income protection by European standards.
In its review of the plans the IFS emphasised that Labour’s enhanced unemployment insurance (UI) would reward jobseekers while reducing support for long-term claimants of contributory disability benefits.
As a result the fiscal savings from time-limiting the new UI will far outstrip the cost of the proposed higher benefit level, potentially cutting benefits paid out by as much as £3bn per year.
Proposals for new unemployment insurance
The government’s proposals for a new UI that would replace the existing working-age contributory benefits for those not in paid work.
New style jobseeker’s allowance (NS JSA) and new style employment and support allowance (NS ESA) would offer time-limited support at the higher NS ESA rate, currently only available to those assessed to have work-limiting health conditions.
But the IFS maintains these proposals would still offer little income protection by European standards. The proposed rate of £140.55 a week, up from £92.05 a week for NS JSA, amounts to an increase from 12% to 19% of average (mean) earnings, equivalent to a third (33%) of full-time earnings on the National Living Wage.
While this is a very big increase on the current state, most European countries have graduated UI schemes that replace around 60% to 80% of previous earnings up to a cap, which generally exceeds a third of average full-time earnings.
Claiming the benefits
The government is also still to decide on how long individuals will be able to claim the new benefit for.
NS JSA is currently available for up to six months, and NS ESA is available indefinitely for most claimants.
Taking these together, four in five current benefit claimants have been in receipt of the benefit for at least one year, with 88% of NS benefit spending going towards these long-term claims. Nearly two-thirds of claimants have claimed for five or more years.
As there are so many long-term claimants, the IFS says time-limiting the new UI benefit would be likely to result in fiscal savings that far outstrip the cost of higher benefit levels or extending the benefit to the self-employed.
The IFS estimated that replacing NS benefits with a six-month UI would reduce spending by around £3bn a year in the long run, after any transitional protections are exhausted. A 12-month UI would reduce spending by around £2bn in the long run.
Reset the clock
It adds that if the reforms only applied to new claimants, with existing NS ESA claimants unaffected, savings would take many years to materialise.
One option the IFS put forward was to reset the clock for existing NS ESA claimants, moving them onto the new UI and allowing them to claim for up to the new maximum benefit duration, to give them time to adjust to any falls in income.
It added that low-income households should be protected, as they would be able to claim universal credit at the same rate as the NS ESA Support Group rate.
For a 12-month UI, this would mean a fiscal cost of £1.5bn in the first year due to higher rates and expanded eligibility, with the £2bn savings only materialising in the second year.
Bolder on benefit duration
Given the likely fiscal savings from the reform, the IFS said government can choose to be bolder on benefit duration – for example, by offering the new UI for 12 months rather than six.
Just over half (53%) of workers who lose their jobs find another job within 12 months, so a 12-month UI benefit would cover about half of workers for their entire out-of-work spells.
But the IFS says the reform offers an opportunity to improve some of the policy design issues in the current system – such as the time period used to assess an individual’s National Insurance contributions record and the treatment of earnings while on the benefit.
It adds it will be important that the new UI is closely integrated with universal credit, to ensure that low-income households who have made sufficient contributions also benefit from higher rates and to avoid unintended effects on work incentives.
Little income protection
Overall, the IFS concludes that the current UK social security system offers relatively little income protection after job loss.
Across all OECD countries, single homeowners who have just lost their jobs retain 55% of their in-work incomes on average, falling to 22% five years into unemployment.
In the UK, this replacement rate is 12% in both cases, as means-tested benefits available for those on low incomes are low relative to average earnings and non-means-tested contributory benefits available to those who have previously paid in are not set at a higher rate.
While slightly more generous for renters with children, the UK system still has the joint fourth-lowest replacement rate immediately after job loss among OECD countries.
At the same time as taxes have risen to a post-war high, and are expected to rise further, spending on contributory benefits has fallen to just 0.3% of national income and to 6% of the working-age benefits bill.
This is down from 1.3% of national income and 41% of working-age benefits in 1978–79. Contributory benefits are now less generous relative to means-tested benefits, eroding the link between contribution and reward that originally underpinned the welfare state.
