The welfare state should be overhauled and replaced with a social insurance system delivered through individual accounts which modernise the contributory principle and restore confidence in the system, according to former pensions minister Malcolm Wicks.
In a paper published today and based on speech he gave at the Institute for Public Policy Research in April, Wicks argues for a “renaissance and modernisation” of the contributory principle “based on a proper balance between rights and duties”. He says reform is vital to rebuild confidence in the welfare system.
Under his proposals, people would be given individual accounts to which they can contribute to beyond national insurance payments and boost state pension benefits or, under certain conditions, borrow from against future contributions.
The “life-cycle accounts” would also cover unemployment benefits, long-term care costs, child endowments and childcare, he says.
Wicks writes: “There should be flexibility, including the ability to access money at certain, albeit limited, points in one’s life cycle, ahead of retirement. The ability to ‘borrow’ certain amounts against future contributions should also be a feature. I do not underestimate the need to build up funds for a decent pension, but the ability to draw on social insurance for specific purposes pre-retirement is attractive.
“The scheme should enable individuals to make payments into their own account. This would be a welcome feature, not least at a time when many commercial schemes resemble a confusing savings swindle.”
Wicks says the low administrative costs of national insurance means the system could provide a state pension which is a “far better deal” than private sector pensions which are usually defined contribution schemes “with low annuity rates”.
He adds that addressing the funding of long-term care, currently something at risk of being sidelined by the Government is one of the most important areas the scheme should cover.
He says: “The Dilnot Commission made important recommendations in this area, essentially proposing a sharing of costs between the individual and the state. Is there scope for a new insurance contract that would help meet these costs?”
The accounts should also reintroduce child trust funds along with endowments for every child, funded by the sale of the state’s stakes in nationalised banks. “There would be strict rules about the use of such an endowment. These might include the funding of post-16 or later further education or a deposit for home ownership,” he says.