Calling time on benefits culture: work must always pay and be seen to pay

Millions of people abandoned on welfare will benefit from the most radical overhaul of the system in a century, as Work and Pensions Secretary Iain Duncan Smith set out plans today to revolutionise the existing benefits system.

Set out in a Command Paper entitled 21st Century Welfare are a series of options which focus on ensuring work always pays and is clearly seen to pay. They include allowing people to keep more of what they earn as they move into work whilst withdrawing benefits at a single, more reasonable rate as people start to earn more money.

Launching the paper at a visit to the Bromley by Bow centre in East London Iain Duncan Smith said:

"A system developed to help the most vulnerable and support people in times of need is trapping people in a cycle of dependency. We now have children growing up in households where neither parent works and where the only future is one stuck on benefits. This is a tragedy that we must bring to an end.

"We are proposing to change forever how the system works. Not tinkering around the edges but a fundamental change from the top to bottom. Making it easier to help people into work, fairer to those who pay for the welfare state and continuing to provide unconditional support to those who need it.

"This will affect everybody which is why I want everyone with a view on the way forward to contribute. I believe these changes will make work pay and end the poverty of aspiration that has trapped too many people for generations."

The options in the document could see a major reform of the number and type of Tax Credits and benefits available and the way in which they are withdrawn when people move and progress in the workplace. They would:

• Combine elements of the current income-related benefits and Tax Credit systems;
• Bring out-of-work and in-work support together in a far simpler system.
• Supplement monthly household earnings through credit payments reflecting circumstances (including children, housing and disability).

The system could improve incentives to get a job as people would see no reduction in their benefit until they earn over a certain level.

Over a certain level of income a taper would be applied to reduce benefit. This taper would apply to earnings, rather than number of hours worked.

It could remove the very high Marginal Deduction Rates, ensuring that work pays for everyone and encouraging people to progress in their employment by not limiting the hours people can work.

The payment system will be modern and automated, bringing it into line with the standards we would all expect from our banks, and will allow flexibility so that people can be assured of the right support even if they take on temporary work.

This simplified system could reduce the amount of fraud and error in the system and also lessen the amount of time customers need to spend filling out forms when a job ends.

The options in the paper are designed to ensure that welfare is sustainable for the future and in doing so guarantee that those who cannot work are not forced to and the vulnerable receive all the support they need.

During his visit to Bromley by Bow, Iain Duncan Smith also spoke to local people about the importance of bringing down the budget deficit and called on them to contribute by putting forward any ideas they have to the Treasury as part of the Spending Challenge

Notes to Editors:

1. The Command Paper is available on the DWP website at: www.dwp.gov.uk/21st-century-welfare/
2. The proposals set out within the document are open for consultation until 01 October 2010
3. Iain Duncan Smith launched the proposals in a speech at the Bromley By Bow  Centre in East London.
4. Contributions can be made to the Spending Challenge by going to the HM Treasury website at http://www.hm-treasury.gov.uk/spend_index.htm

http://www.dwp.gov.uk/newsroom/press-releases/2010/july-2010/dwp100-10-3...

Iain Duncan Smith is launching a consultation today on different options for simplifying the benefits system and improving the incentives to work.

There’s no need to rehearse the arguments any more: the huge financial disincentives to work are now pretty widely known. Someone who leaves Jobseekers Allowance and does 40 hours work a week at the minimum wage can expect to be about £30 a week better off for their trouble. In other words, the gain from working is about 76p an hour. That’s not great, and its a similar story for other types of welfare claimants, as the table below shows.

Now we are getting into the detailed arguments about how to fix the system. There have been various different proposals, which all have different strengths and weaknesses.

The Centre for Social Justice produced their mega-report “Dynamic Benefits”. The Institute for Fiscal Studies came up with a comprehensive proposal for an Integrated Family Support (“The IFS”). The Taxpayers Alliance recently proposed a radical proposal for a “Negative Income Tax”. Reform proposed bringing a US-style Earned Income Tax Credit to the UK. The CPS published a proposal to simplify the system. And the think tank I work for, Policy Exchange, launched “Escaping the Poverty Trap”, which proposes a simple way to increase the incentive to work.

What are the main issues at stake here? Here are some of them:

• Should we get rid of the “hours rules” that make the system so complex?
• Should we get rid of tax credits, and their associated bureaucracy?
• How do simplification and increased work incentives happen in a context where we need to save money?
• How can you make the system simple for welfare claimants?

Behind all these questions are some big philosophical choices.

On the hours rules, there are two camps. Let’s call them “toe in the water” and “taking the plunge”. Our current system is not smooth, but rewards people a lot more if they work above two thresholds (16 hours and 30 hours). The graph shows how much this distorts the system.
Advocates of “taking the plunge” tend to worry that without the hours rules to force people to work a certain amount you will encourage lots of people to stay partly dependent on benefits, rather than move into full time work. The toe in the water camp argue that you should make it easy for people to gradually move back into work. If you have been on Incapacity Benefit for years, you are unlikely to suddenly move to a 40 hour week. Instead you might start by doing a bit of work, then a bit more. If you make it an all-or-nothing choice, many people will do nothing, and stay on incapacity benefit.

Personally I would really like to get rid of the hours rules. If we combined a smoother system with stronger conditionality (pressure to work), we could gradually press people to increase their hours. And with no hours rules, it would always pay them to do so.

The arguments around tax credits are more complicated still. What we call tax credits in Britain are actually nothing of the kind – as you can claim them if you are not working. They are really about trying to hit Labour’s child poverty target. If you compare them to the US system, they don’t taper in, and they do taper out faster, so they don’t encourage work so powerfully. The graph from Reform shows the difference.
So you could reform tax credits (that’s what the IFS proposal also does) to make the incentives to work stronger.

Alternatively you could just let people keep more of their benefits as they move into work, and get rid of tax credits altogether. People sometimes object to this idea because it would mean people staying “in the benefits system” to some extent for a long time. But tax credits are really part of the benefits system. However, one advantage (for the Treasury) is that not everyone claims tax credits (about a tenth of the money is not claimed). Others worry that trying to use the benefits system rather than tax credits will suck people deeper into welfare, rather than encouraging them to stay out.

On the other hand, if you keep Tax Credits you face huge administration costs, vast overpayments, and you make it very difficult for people to tell whether they will be better off working more. Crucially, the more you overhaul the system rather than incrementally reform it, the greater the opportunity there is to rethink the philosophical priorities that lie behind the current design.

If you want people to have better to have better incentives to work, and you want to use the benefits system to deliver it, then there are two ways to go about it: you can increase the disregard (the amount you can earn without losing benefits) or you can decrease the taper rate. Or you can do both, as suggested in Dynamic Benefits.

There are pros and cons in both. In Escaping the Poverty Trap we suggested an ultra-simple reform to increase work incentives: simply increasing the disregards within the current system to around £100 a week. We suggested cuts elsewhere to pay for it. It wouldn’t solve the distortions caused by the hours rules or tax credits. But it would create a powerful incentive to do at least some work, and get rid of the huge disincentive to do anything less than 16 hours. It would be really simple to communicate to claimants: “if you work, we guarantee you’ll be at least a hundred quid better off.” That wouldn’t solve the problems with the hours rules, or tax credits, but it would be easy to do.

However, I hope the coalition are going to be more radical and go for an even bigger reform. I think if we create more powerful and clearer incentives to work, then we can ask for a quid pro quo: if we make it more worthwhile to work, them we can then more easily ensure that people do work.

Over the next couple of months these big questions are going to break out of think tank land and into the public domain. It’s going to be an interesting debate. What do you think?

http://www.taxpayersalliance.com/media/2010/07/daily-telegraph-welfare-r...

There is a huge amount to like about the principles set out in 21^st Century Welfare, the new report from the Department for Work and Pensions which sets out the options for radical welfare reform.  It is a powerful statement of intent that Iain Duncan Smith intends to overhaul a system that is failing the poorest instead of applying more counter-productive sticking plasters.

The report sets out four options to drastically simplify benefits: a "Universal Credit" that simplifies existing benefits into a single payment scheme; a "Single Working Age Benefit" recommended by the IPPR that would replace all benefits to the unemployed, disabled and others with a single scheme; a "Mirrlees model" proposed by the Institute for Fiscal Studies that would cut benefits but provide an initially zero and then low withdrawal rate; and a negative income tax model recommended by the TaxPayers' Alliance in our recent report Welfare Reform in Tough Fiscal Times.

As I wrote in an earlier post, there are a number of serious problems with the current system:

1.   It is too complicated, with more than 50 different benefits (the take-up rate for Working Tax Credit is only 57 per cent)
2.   It is poorly administered, with fraud and error costing £4.5 billion each year
3.   It’s unfair on couples because some lose up to £1,336 by living together
4.   Those who work and progress in work are financially penalised, the minimum wage of £5.80 an hour can be worth as little as 26p
5.   The number of people living in severe poverty has increased from 5 per cent to 6 per cent in the last decade

A simplified system along the lines that the DWP are considering could yield huge improvements in all those areas.  Unfortunately, there are two areas where today's report falls down.

The DWP needs to look at changing the poverty line.  As they aren't willing to do so, they are still talking about marginal withdrawal rates of around 70 per cent.  While it would be an improvement from the situation facing some families today, that isn't nearly good enough.  A minimum wage of £5.80 an hour would then still be worth as little as £1.74.  That massively undermines the incentives to work produced by the market, it is hard to think that it would be seen as acceptable at the other end of the income distribution.  Under our proposal, with a poverty line of 50 per cent, it is possible to ensure that total marginal withdrawal rates are never more than 55 per cent.

The failure to take the tough decision and bring the poverty line down to 50 per cent also means that the scheme will cost money, at least until it gets more people into work.  That creates two threats to the reform.  First that a Government facing a dire fiscal crisis will be put off and water down reforms, or insist on a higher taper rate that will further undermine incentives to work.  Second that the public, who rightly think they already pay more than enough for the welfare system, will turn against the reforms and make it easier for them to be unwound by an antagonistic Government in the future.  Policy Exchange polling found that the four areas the public were most likely to support cuts were the BBC, culture media and sport, international aid and benefit spending and tax credits.  Can a coalition Government making cuts really afford to increase spending in two of the four areas of cuts that the public think that is least necessary?

The other area that the DWP need to think about is tapering benefits over time as well as with increased income.  From page 25 in our report we set out some details of how that might be possible to improve incentives to work without unduly complicating the vastly simplified system we proposed.

So there is a lot to welcome in this report, and that was certainly the focus of our response today.  But Iain Duncan Smith does need to understand that ducking some of these tough choices now could make things more difficult down the line.  We will be making that clear in our response to the consultation.

http://conservativehome.blogs.com/centreright/2010/07/turning-aspiration...

Today's labour market figures show a slight rise in overall unemployment in the three months up to February 2010. Looking behind these figures, youth unemployment (amongst 18-24 year olds) has risen particularly strongly since the start of the recession, rising from 12.2% in the first quarter of 2008 to 17.7% in the latest data compared with a rise from 5.2% to 8.0% amongst all individuals. The number of people who have been unemployed for 12 months or more has risen from 400,000 at the start of the recession to reach 730,000 in the latest data.

Sensibly, there is general agreement between the three main parties on the need to tackle the large rise in youth and long-term unemployment caused by the recession, and all parties have policies to help deal with the high number of people who are out of work and receiving disability benefits. Today, the IFS publishes an analysis of the welfare and back-to-work policies proposed by the three main UK parties for welfare reform (the full report is available here).

For the under 25s who are unemployed, the Labour Party propose making work or training compulsory after 10 months, whilst the Conservatives would make it compulsory after 6 months. The Liberal Democrats would introduce voluntary work placements. Both Labour and the Conservatives are offering additional support for the long-term unemployed aged 25 or over and both have plans to make them partake in community work.

Labour has announced that it would move all recipients of incapacity benefits to employment and support allowance (ESA), which has a tougher medical test, by 2014, but the Conservative Party think they can do this by 2012. The Liberal Democrats are keen to stress that they would provide better "practical help" for people with disabilities to get to work, and that funding of disability-related equipment would be "already in place" when disabled people apply for a job, but without more detail it is impossible to assess the likely impact of this.

On top of these changes, the Conservative Party propose to replace all welfare-to-work programmes for the unemployed, lone parents and disabled people with a one mandatory Work Programme, delivered by private and voluntary sector organisations, with payment almost entirely by results. It is keen to present this as a "new welfare contract", but most of the ideas behind it merely go a little further in the direction of policy taken or planned by the current government.

The Conservative Party think the Work Programme and its plans for additional training places would cost £600 million over three years. It also claims that it would save £600 million over three years by moving IB recipients to ESA, providing a revenue neutral package. These savings seem odd given the Government has set out plans to implement the same policy. The Conservative Party has argued that these additional savings are credible because it does not believe that the Government would actually make savings from this reform, but the Government has set out a clear plan for moving recipients of incapacity benefits onto ESA, and announced how much it expects to save from this reform. Fundamentally, this is not a credible way of identifying 'savings' relative to the Government's plans, because any opposition party could identify alleged savings in this way at any time by simply asserting that the Government will not do things that it has publicly committed to.

None of the 3 main parties has proposed a substantial increase in the generosity of social security benefits (although government plans are for the pension credit guarantee and the state pension, from April 2012, to rise in line with average earnings, rather than inflation as is the case for most other benefits). On the other hand, the current state of the public finances may mean that the more likely scenario is for the next Government to implement more substantial cuts in social security spending than any of the 3 main parties have suggested in their manifestos. IFS researchers have found that on current policies the public spending plans set out by Alistair Darling in his last Budget imply departmental spending falling by 11.9 per cent by 2014-15, but social security spending growing by 4.4 per cent over the same period. Productivity improvements mean one might be able to squeeze more public services from a given level of departmental spending, whilst the same is not true for spending on cash benefits But, nonetheless, a post-election government may feel reluctant to allow public services spending to suffer this large a real squeeze while allowing benefit spending to grow that strongly.

http://www.ifs.org.uk/publications/4831

Simplifying benefits: what should we expect from the new government?

This presentation was given to the Low Incomes Tax Reform Group.

Download full version (PDF 512 KB)

http://www.ifs.org.uk/publications/5174

Citizens Advice Director of Public Policy Teresa Perchard said:

“Citizens Advice bureaux throughout England and Wales helped people to resolve over 2 million problems they had with claiming benefits and tax credits last year. Complex rules result in overly long and complex forms and systems, with applicants in need of help from the welfare system passed from pillar to post. Many more people do not even claim benefits and tax credits they are entitled to - put off by an overly complex system.

“Having long called for a simplification of the tax, tax credit and benefit systems we are pleased to see the Government today acknowledge not only that complexity is a key problem with the current system but that they are determined to deliver a simpler system. We especially welcome proposals which could allow much greater flexibility for individuals to work a small number of hours a week without losing benefits and to keep more of what they earn and save. If such changes go ahead it could transform the culture of our welfare system to one which trusts citizens and helps them do what they can rather than telling them what they cannot do.

“However, it is vital that in the mission to simplify the government also designs and delivers a system which ensures people are not living in poverty, that individual needs are recognised and citizens who need financial support from the state at any time in their lives are treated with respect and dignity and are appropriately supported. A welfare system that does not turn the tide on poverty is embedding inequality in our society. Balancing these requirements with greater simplicity, and tight public spending requirements will be the key challenges for the Government.

“We welcome the open nature of the Government's consultation on these reforms - it is important that great care is taken in bringing in such fundamental changes and that they are not rushed. There are many examples over the years where benefit and tax credit changes, that have been intended for good, have left people in hardship through poor implementation. We will be feeding the evidence from our experience of advising people about benefit entitlements and helping them to navigate the system into this consultation.”

http://www.citizensadvice.org.uk/press_20100730

 

Reforming the UK Family Tax and Benefits System reveals that the average middle-income family today pays £6,016 in tax and National Insurance contributions, but gets back £5,383 as social security and family payments. This unnecessary churning has undermined family independence and self-reliance and turned four-fifths of the nation’s families (around 5.5 million households) into welfare claimants.

Here are some of the recommendations from this report:

• Tax allowances for dependent children and for non-working spouses should be restored. This would allow working parents to keep more of what they earn, rather than going to the state for top-ups, and it would reduce wasteful churning and ‘middle class welfare’.
• Tax credits should be retained, but cut back so they are only claimed by low income working families
• The tax credits system should also be overhauled. There should be a single family tax credit, normally payable annually in arrears so as to eliminate the overpayments problem and reduce fraud.

Download Publication PDF

http://www.policyexchange.org.uk/research_areas/social_policy.cgi?topic_...

Response to the DWP consultation document, 21st Century Welfare

by Dr David Green, Civitas

http://www.civitas.org.uk/pdf/Civitas_ResponseToConsultationCm7913.pdf

The Department for Work and Pensions (DWP) is consulting on 21st Century Welfare, a reform of the benefits system to end worklessness and dependency. The plans propose to help people move into work by letting them keep more of their earnings, creating a more affordable welfare system.  The core aim is to ‘make work pay’.

DWP highlights that under the current system work incentives for some groups are poor and the benefits system is too complex. The key principles for reform are:

• Ensure people see clear rewards from taking all types of work outweigh the risk
• Incentivise households to move into work and increase the amount of work they do
• Increase fairness between groups of benefit recipients and between recipients and the taxpayer
• Support those in need; reduce numbers of workless households and children in poverty
• Promote responsibility and positive behaviour, reward saving, strengthen the family and reinforce conditionality
• Automate processes and maximise self service to reduce scope for fraud, error and overpayments
• Ensure the benefits and Tax Credits system is affordable in the short and long term

The Voluntary and Community Sector (VCS) provides support to vulnerable groups, some of whom may find it hard to get into employment due to ill health, physical or mental disabilities. RAISE has identified the following scenarios and would appreciate feedback on how the proposals might affect these groups:

• A reduction in the number of means tests would reduce the complexity of the system, but may adversely affect vulnerable groups.

• If the economy doesn’t pick up in the short term, there will not be jobs available for people to move into, so welfare claimants will increase as unemployment rises. Will the vulnerable receive an adequate share of the money or will resources be spread too thinly?

• A ‘one size fits all’ approach may adversely affect vulnerable groups. Some people are legitimately unable to work 16 hours a week, these individuals should not be penalised.

• Steps should be taken to remove the stigma attached to claiming benefits, which can be of detriment to claimant’s health and confidence. Does this Welfare Reform help or hinder the need to remove this stigma?

• An individual may seek work for a prolonged period.  If unsuccessful, under the new system they may be perceived as insufficiently active in seeking work and have benefits tapered. The system must be careful not to penalise those who want to work.

• DWP highlights the need to work in partnership with HM Revenue and Customs and Local Authorities, but do not mention the VCS who need to be recognised as an important and equal partner.

http://www.raisepolicy.org.uk/21stcenturywelfare.shtml

Response to the Department for Work and Pensions on 21st Century Welfare

The Joseph Rowntree Foundation's response to the Department for Work and Pensions consultation on 21st Century Welfare.

http://www.jrf.org.uk/publications/response-dwp-21st-century-welfare