Abolishing employees’ National Insurance would be both more achievable and more popular. But there is a wrinkle. Many people still believe that their contributions go into a designated pot which then provides for certain benefits and the NHS.
Although there are administrative transfers between notionally separate funds, in practice receipts from NI go into the Treasury’s coffers just like any other tax. Similarly, the spending on state benefit programmes, including the NHS and state pensions, is set by the chancellor regardless of the amount of NI receipts.
Nevertheless, there is a difference between employee NI contributions and income tax because NI contributions are used as the basis for assessing individuals’ entitlement to the full state pension and certain other benefits. You need a record of 35 years of contributions in order to get a full state pension. Some people who have had a mixed employment history have voluntarily made extra contributions in order to boost their pension entitlement.
Reducing the rate of NI contributions has not caused problems for this system; pension entitlements have still been governed by the number of contribution years.
But if NI were to be abolished, what would be the basis for pension entitlement? Would everyone automatically be entitled to the full state pension? Or would entitlement be rejigged to an income tax basis? Whatever, it would be messy and all those who had “paid in” for their pensions would be annoyed that others who had not contributed were entitled to the same benefits.
The pickle this puts us in goes right to the heart of the issue about the role of the state in providing social security. The original National Insurance Act of 1911, updated in 1948, envisaged the state as providing exactly that – insurance. At its root was the contributory principle.
But, by and by, society has become more of the view that the state should provide for the indigent or unfortunate, however much they have or have not “paid in”. Now we have a raft of state benefits based on perceived need or entitlement that have no link whatsoever to insurance or “contributions”.
We have landed up with a Byzantine system of benefits that is extremely costly to administer and almost impossible to understand.
This expense and complexity has led some conservative thinkers to support the replacement of all state benefits by a single “universal basic income”, under which everyone is given a certain monthly income regardless of perceived need such as unemployment, age or disability.
Suffice it to say that such a system would be extremely expensive if it were to provide a liveable income. Accordingly, I doubt that it would ever be introduced. More likely is a much cheaper version consisting of some small “universal” entitlement, living alongside the remnants of the old insurance/contributory system and the current “perceived needs” system. This would be a dog’s breakfast.
Better not to go there. But abolishing employee NI contributions is an advisable and attainable goal.
Roger Bootle is senior independent adviser to Capital Economics. [email protected]