Social Security special

More spending = more generosity of basic income support

Here’s a conundrum that is at the heart of the UK’s social security system: why is it often called mean or threadbare, when the percentage of national income we devote to it has risen fairly significantly since its post-war creation? We’ve more than doubled the 1.7 per cent of GDP spent on working age welfare in 1948-49 to around 4.5 per cent during the 2020s.
 
The chart below provides the answer: that increased spend does not reflect the generosity of basic income support within our system. One of the long-term decisions we have made (particularly since the 1970s) is that such income support should be very mean indeed: unemployment benefit in April (when energy bills soar) will be £77.29, the lowest in real terms since the early 90s and half the level relative to earnings it was in the 70s. To provide some grim context, the destitution income level is £70 a week.

This approach of not prioritising direct income support isn’t just about the low level of the basic entitlement – it is reinforced by the move (under governments of both parties) away from any idea of providing higher income replacement benefits for those who have paid into the system over time: contributory benefits now make up just 8 per cent of working age benefit spend.

Instead we spend on housing and kids

Low income support hasn’t been an accident. Thatcher wanted to see spending at a time of high unemployment controlled, and even governments happy to increase spending elsewhere have wanted to ensure those out of work have a strong incentive to find a new job swiftly.
 
But partly in response to these very low levels of basic support, our system has evolved to prioritise support for major costs faced by some poorer households, in particular on children, housing and disabilities. The growth of these extra cost benefits explains our rising overall welfare bill.
 
The introduction of new benefits for children (think Child Benefit in the 1970s or Child Tax Credits more recently) has seen the child-related benefits available to a single parent rise from being two-thirds less than an adult’s unemployment benefit in 1977-78, to being 12 per cent higher today, as this chart shows.

Meanwhile benefit spending on housing has risen from 0.2 per cent of GDP in 1980- 81 to over 1.0 per cent in the 2010s. It’s this major system design choice to spend on extra-cost benefits rather than income support that marks us out, not that we spend far less: despite spending less than almost anywhere else on unemployment benefits (0.1 per cent of GDP) the UK actually spends more on working age welfare than the OECD average, including the likes of Sweden and Germany. In fact, the UK spends 1.3 per cent of GDP on housing benefits-in-kind, the highest rate in the OECD, and 2.1 per cent of GDP on family cash benefits, the second-highest rate in OECD.

Our social security choices reflect societal change, not just politics and economics

Often we see the social security system as responding to political preferences or to economic developments (higher housing spend was driven by housing costs surging for everyone in the late 80s/early 90s, and for poorer households more recently). But these are often closely entwined with wider societal shifts that get ignored. Here’s an example. Social security exists in part to reduce inequality in market outcomes, which we tend to narrowly think of in terms of the big differences in how much people get paid for an hours work. But as this chart shows that kind of inequality peaked in the 90s and fell over recent decades (thanks to the minimum wage).

But as the chart also shows, that hasn’t lowered inequality between households in terms of what they earn. Inequality in overall earnings at the family level (ie all earners weekly pay combined) between the top and the bottom has actually continued to rise, more than doubling over the past half century. Why? Because of changes in who works (more second earners in couples and more workless singles), how long they work for (poorer households have moved towards part-time work) and family structures. Remember, female participation surges drove record employment pre-pandemic but in 2019 three-in-ten working-age single men without children were not in employment. The policy response to this complicated mix of economic and social trends has been the need to direct more benefit spending towards working households to prevent income inequality rising any further – which has largely been done through those extra cost benefits.

The result 1: the poor left behind

Now we come to the results of the UK’s unusual approach of going big on extra cost benefits in large part because of very inadequate income support. This is a system that favours lower income families (including those working) over single adults without extra costs (causing problems especially when they are out of work). It prioritises work incentives, and taken to extremes it risks destitution.
 
Crucially, it cannot cope when a government seeks to cut back those extra-cost benefits at the same time as making the low-income support that makes them essential even more inadequate, as has been the case over the past decade. The poorest households have seen their income rise just 7 per cent since 2003-04, half the rate of the middle. Working age poverty has remained stubbornly high thanks to decades of erosion of core-benefit levels. And more recently child poverty has risen, driven almost entirely by larger families affected by cuts like the benefit cap and two child limit, as this chart shows (for more on poverty in 21^st Century Britain read this week’s JRF report).

The result 2: weak, and very variable, insurance

This choice of approach to social security also drives the extent to which we provide income insurance to workers losing their job, for example because of economic change. Flat rate and very low income support means generally low levels of insurance compared to similar countries, while higher extra-cost benefits mean that insurance is also highly variable, as our final chart illustrates.

A single average wage worker with no children losing their job faces one of the worst income replacement rates in the OECD (retaining just 40 per cent of their previous earnings vs an average of 59). This is the statistic often bandied around by those pointing to how mean the UK system is. But for a single person with two children on two-thirds of the average wage, higher child related benefits mean a much higher replacement rate of 67 per cent (but still below the OECD average of 77 per cent).

Where next?

You never start with a blank sheet of paper in life, and that is doubly true in the complex world of social security. There are reasons we have the welfare system we do, with its strengths and major weaknesses. Understanding that is crucial to considering how fit for purpose our status quo is for the economic and social context the 2020s will bring. 
 
Weak insurance is of course the flip side of strong work incentives, and some would argue that the UK’s flexible labour market means few need face long periods unemployed on such low-income levels. These are valid considerations, but can be pushed too far. We want those losing jobs to find a good match for their talents, not be so impoverished they take the first job offered. With the decade ahead looking set to involve more economic change than the recent past, the spotlight is on the insurance we provide workers to navigate it.
 
And if tackling the UK’s legacy of high inequality and poverty is remotely part of new economic strategy for 2020s, then we must accept that permanently cutting basic income support is untenable and increasing leaves many at risk of destitution.
 
The pandemic policy response recognised both of these challenges for our working age welfare system: the £20 uplift to Universal Credit and furlough scheme were our emergency answers. The question for the 2020s is whether we have permanent answers or not.