Politicians of all stripes want to be seen as tough on welfare, usually through increased conditionality for those on benefits. In other words, requiring people to do things in return for benefits and withdrawing support if they do not. In many cases these steps have been sensible. They have increased people’s chances of finding work, but have left things lop-sided by beefing up obligations while not strengthening people’s security against economic risks, such as losing a job. They’ve aimed to make the welfare system more demanding for those people who don’t work but have done little to make it more protective for those who do.

In the boom years, this problem was hidden from the mainstream. Then the recession hit and many who had been in work for a long period lost their jobs. Not only did they face a rapid and drastic drop in their incomes, but they also found themselves entitled to just £67.50 a week in benefits from a welfare state they had been paying into for a long time. The fact that people who had not worked for some time were entitled to the same level of support only exacerbated the sense of frustration.

For much of the 20th century the situation was different. Unemployment benefit was set at a reasonable level for people who had lost their jobs after having contributed to the system. Over the last three decades this system has broken down. The contributory principle has eroded and has mostly been replaced by means testing. At the same time, the real value of the jobseeker’s allowance (JSA) has declined relative to average earnings.

One way to enhance economic security for those in work would be to increase significantly the value of the benefits they receive if they’re made redundant. However, this would either be prohibitively expensive or require resources to be switched away from the poorest households.

Instead, therefore, the government should establish what IPPR has called National Salary Insurance (NSI). NSI would provide higher levels of financial support to people losing their jobs, but require it to be repaid when they return to employment. It would offer greater security when it’s really needed without imposing significant additional costs on the state.

Under the IPPR plan, NSI would offer the recently unemployed up to 70 per cent of their previous earnings in non-means tested support for up to six months, capped at a maximum of £200 a week. This would incorporate their existing entitlement to JSA, trebling the amount they can receive. This extra sum – up to £132.50 a week – would then be repaid once people were earning and could afford to do so, charged at a zero real rate of interest. There would be a cap on the amount that could be borrowed at any one time, equivalent to the maximum support for the full six months, or £3,445. Based on recent unemployment data, we estimate that the scheme could be available to between 700,000 and a million people a year.

Around 60 per cent of those who claim JSA leave the benefit within three months, rising to 80 per cent within six months. Given their recent work record, it is highly likely that these rates are even higher for those claiming contributory JSA (though there is no publicly available data to say for sure). This gives a high level of reassurance that people receiving NSI would be back in employment quickly and repaying the extra money they’d received at their moment of crisis. Someone who had borrowed the maximum amount possible – £3,445 – and repaid £20 per week would clear their debt in a little over three years. At £30 a week, repayment of the full amount would take just over two years.

The policy is designed so that the government recovers the total cash cost of higher benefit payments, which we estimate could be between £1.8bn and £2.6bn. The net expenditure risks to the Exchequer would lie in the costs of subsidising the loan and the potential for non-repayment. Based on the estimates associated with the student loans system, this could amount to somewhere between £180m and £520m a year.

However, there are good reasons for thinking that the net costs would be lower. The maximum amount loaned to an individual would be three or four times less than is the case for student loans. Repayments would start as soon as people were back in work for a month and earning above the primary threshold for NICs (£139 per week). The likelihood of people entering (or re-entering) work quickly would be higher, given the conditionality of benefits.

Beyond these costs, the impact of NSI would be a major reduction in the risk of families falling into poverty. This would help prevent the crisis of unemployment becoming a wider catastrophe, for them and the state, through losing a home, suffering relationship breakdown or building up unaffordable personal debt. NSI would mean the welfare state could offer real income security in a risky world, while reinforcing the principle that people are rewarded for their contribution to the system.  

The possibility of NSI regrafts economic security for the majority of working people into the heart of the welfare state. Alongside continuing efforts to ensure those on benefits fulfil their obligations to look for work, this reform could help to show that the welfare system not only demands more but also protects better.

Graeme Cooke is a visiting fellow at the IPPR. His full report is available at: http://tinyurl.com/69yeu3s

Tags: Benefit, Issue 41, National Insurance, Wages, Work