Is it time to scrap the National Insurance fund? Despite its name, it is not a fund and it is not insurance, though a fiction is carefully woven around it to make it appear as if it is both.
Its very name is misleading. The word “fund” makes people think of a pot of money saved up for the future. And the contribution rules, which link paying enough NICs to getting a full state pension, confuse the public into thinking that, somehow, the money in the fund is theirs – saved up to pay for their state pension. But the fund does not exist except outside a set of accounts.
Myth 1: The fund is used to pay benefits. No it is not. The money used to pay benefits comes from the consolidated fund: the money the Government owns, if you like. That is where the fund sits. The fund does not even get all the NICs paid. A big chunk goes straight to the NHS. In 2017/18 that will be £24bn; about 19 per cent of receipts. The balance – a shade under £100bn – goes into the fund, which also gets a notional sum of £2.6bn interest added on as interest from the Treasury on its balance.
The main benefit set against the fund is the state pension, which takes 92.4 per cent of the money paid out. Another 4.4 per cent goes to pay contributory Employment and Support Allowance (what used to be called invalidity benefit) for those too ill to work.
The contributory version only lasts 12 months. Another 0.5 per cent pays for bereavement benefits, 0.4 per cent for maternity allowance (for those who cannot get statutory maternity pay) and 0.3 per cent goes on contributory Jobseeker’s Allowance (paid only for the first six months out of work). Another 0.3 per cent covers redundancy money which employers fail to pay. Each of those is less than the cost of administration, which is put at 0.8 per cent – £841m in 2017/18.
The money that comes in from NICs and goes out to pay those benefits should roughly match. If it does not, then the Treasury steps in and uses ordinary taxation to top it up. In 2015/16 it handed over £9.6bn – about 11 per cent of the year’s receipts from NICs. That was in addition to a £4.6bn top-up the year before.
In 2016/17 and up to 2021/22, Government Actuary Martin Clarke says the fund will be more than enough to meet its commitments. That is largely because extra income was generated from 2016 by the big rise in NICs for six million people who were previously contracted out of part of the state pension. That rebate was 1.4 per cent of a band of earnings for employees and 3.4 per cent for employers.
Those rebates ended from April 2016 when the new state pension began, and meant an extra fiver a week or so for someone on average pay who had been contracted out into a good work pension scheme (teachers, nurses, police officers and the million or so private sector workers who still pay into a good pension at work).
That fiver will keep the National Insurance fund big enough to meet its obligations up to and including 2021/22. Or so says the Government Actuary. But he has been wrong before. The errors in the past – or more fairly, the mismatch between forecast and reality – were due largely to earnings growth being lower than expected.
In January 2016 he predicted a surplus for 2016/17 of £1.6bn. A year later that had turned into a £2bn deficit. That reversal was largely caused by “lower assumed earnings increases”. That is continuing. In 2016 he assumed that pay would rise 3.2 per cent in 2017/18. This January he had brought that down to 2.4 per cent and, on the latest labour market data, pay including bonuses is now down to 2.1 per cent a year. So the £300m deficit projected for 2017/18 may well get much bigger.
It does not matter. The Treasury is there with its big pot of tax – close on £567bn in 2016/17 – to top up the National Insurance fund as and when required.
Myth 2: I’ve paid for my state pension: No you have not. People believe that, because they have paid their NICs, they have somehow paid for their state pension. That confusion is caused because each year of contributions counts as a “ticket” towards your pension. You need 35 years of tickets to get a full pension and at least 10 years to get any pension at all at the reduced rate of 10/35ths. Fewer than 10 years and you get nothing.
But that system is no more than an assessment of entitlement. Even when 35 years have been paid, most people work another 10 years and still pay NICs right up to state pension age.
The fund deceives people into thinking there are certain benefits that are good – because they have somehow been paid for by the recipients – and other benefits which are bad – because they are a burden on taxpayers. It is all nonsense. Today’s taxpayer pays today’s benefits, whether they go to single mums or state pensioners.
The answer is to scrap NICs, raise income tax rates on earnings to 32 per cent, 42 per cent and 47 per cent, impose an employment tax of 13.8 per cent which all employers would pay on the earnings of their staff, and save the £841m a year spent on administration.
All we need is a clear-minded, courageous Government with a large majority. Oh…
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney