21st Century Welfare

We are grateful to Rightsnet for permission to reprint the following summary of the Department for Work and Pensions’ consultation paper:

Options for reform outlined in the consultation paper – designed to simplify the system, for example by reducing the number of benefits and tax credits; and to improve work incentives, for example by removing the current ‘very high’ marginal deduction rates that apply to people’s benefits when their incomes rise – include:

1. a Universal Credit:

A new approach to supporting working-age households, the Universal Credit would bring together existing income-related out-of-work benefits and tax credits into a simpler, integrated system to support people in and out of work and 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; and
  • supplement monthly household earnings through credit payments reflecting circumstances, including children, housing and disability.

In addition, to improve incentives to work (especially for low earners), people entering paid work would see no reduction in their Universal Credit until they earned over a certain level and, in order to improve the incentive to earn more, the system might involve applying a single taper to reduce the Universal Credit where earnings (net of tax and national insurance) exceed the level of the earnings disregard in place of the current different withdrawal rates across out-of-work benefits, tax credits, housing benefit and council tax benefit. This taper could apply to all earnings, regardless of the number of hours worked.

2. a Single Unified Taper:

Whilst a ‘set of benefits’ – including the major out-of-work benefits and tax credits – would be retained to reflect the fact that different families need support for different reasons, the introduction of a Single Unified Taper would mean that once eligibility has been assessed, the system could work without earnings disregards and withdraw benefit entitlement in such a way that a person’s Marginal Deduction Rate would be constant, until benefit receipt is exhausted.

This would be achieved, as an individual’s income increased, by withdrawal through a taper that would be applied to their overall benefit eligibility, rather than the individual benefits as is currently the case.

3. a Single Working Age Benefit –

Proposed by the Institute for Public Policy Research (IPPR), the Single Working Age Benefit model is based on a single flat rate benefit that would give all working age claimants the same level of replacement income, regardless of whether they were jobseekers, lone parents, sick or disabled.

Other key features of the model would be:

  • no contributory entitlement;
  • a universal non-means-tested entitlement for the first 12 weeks out of work;
  • all benefit beyond 12 weeks to be means-tested; and
  • the option of individualised entitlement for couples.

Whilst the IPPR envisages that the Single Working Age Benefit would replace existing out-of-work benefits, there would continue to be separate provision for extra costs, and tax credits would remain as now.

4. the ‘Mirrlees’ model

Proposed by the Institute for Fiscal Studies, this model would replace child tax credit, working tax credit, income support, JSA, housing benefit, council tax benefit and child benefit with an integrated ‘family allowance’ paid directly into bank accounts and withdrawn using the ‘withholding system’ for income tax.

Whilst the allowance would be far less generous than current income support levels (£50 for a single person), earnings up to £90 would have no impact, and earnings above this would be subject to a 30 per cent withdrawal rate (with an additional 15 per cent on the housing element). Tax allowances would be adjusted so that tax and NI would be payable once the earnings disregard had been exhausted.

5. a single benefit/negative income tax –

Recommended by the TaxPayers’ Alliance, this reform would bring together a large number of existing benefits but, unlike other approaches that introduce a single benefit, it would involve the introduction of a negative income tax. This would replace current income-replacement benefits and tax credits, although a number of the current benefits aimed at supporting those with a limited ability to work or who need extra support would be retained.

Under the model, a household’s eligibility for the negative income tax would be based on their characteristics, and set equal to a given proportion of (equivalised) median income. As household income increased from individuals moving into work or progressing in work, the level of the negative income tax would be reduced in such a way that the Marginal Deduction Rate (inclusive of income tax, NI contributions and the withdrawal of the negative income tax) was constant until all support was exhausted. This implies that the system would not have a system of earnings disregards.

Alongside the potential for structural change, the consultation paper also sets out proposals for other areas of reform that include:

  • the scope, with the move toward a single payment, for conditionality to be determined not by the benefit received but by the reason for receiving benefit, thereby creating a ‘single progression to higher levels of conditionality’;
  • moving to a less centralised, more devolved welfare system – as is the case in a number of countries, including Switzerland, the Netherlands and the United States – which might stimulate innovation and ensure that systems are more aligned to local circumstances, for example by giving more discretion to advisers at the local level; and
  • consideration of the need to achieve a balance between contributory benefits and targeting support on those with the lowest incomes.

In addition, the DWP outlines the ‘significant implications’ that its ideas for structural reform could have for the way that support is delivered and for how individuals interact with the system, for example:

  • the scope for claimants to be able to make a single application for all major entitlements, ending the excessive form-filling of the current system;
  • the impact on the current organisation of work between the DWP, the Revenue and local authorities;
  • the possibility of introducing a system that uses real-time data – that would involve employers reporting their employees’ earnings to the Revenue at the time the earnings are paid rather than only at the end of the financial year – which could present opportunities to use real-time earnings data in the calculation of entitlement, and remove the need for claimants to notify changes of income; and
  • the impact of significantly reduced complexity on the level of error and overpayments, with fewer mistakes being made by staff and claimants whilst navigating the system, and of having one main gateway for claimants to access the system that should make it impossible for people to represent themselves differently to different parts of an organisation.