The National Insurance Fund
The National Insurance Fund (pdf) intended to give claimants a sense of dignity and self-respect, in that National Insurance Contributions paid into the National Insurance Fund (Fund) would cover the cost of any benefits received. The National Insurance Contributions (NICs) made into the Fund were not to be means-tested. The intention was to give people an incentive to take extra steps, such as saving, thus providing themselves with more than the minimum benefit entitlement advocated in the Beveridge Social Insurance and Allied Services report (pdf).
The Beveridge Report of 1942 proposed that in return for a flat rate contribution by an employee and his employer – all contributors to Beveridge’s Social Insurance and Allied Services should be able to claim specified benefits. The system proposed was based on a real insurance contract of pooled insured risks, in which the premium payments reflected the value of potential benefits. However, many of the recommendations made in the Beveridge Report were not implemented by the Attlee Government of 1948. Following its introduction, the numbers of claims on the National Insurance Fund were greater than the NICs received and Treasury grants were needed to top up the Fund.
[Note: There was no real actuarial link between contributions (NICs) to the Fund, for the different insured risks, and the benefits paid put. In principle, the Fund operated on a pay-as-you-go basis, the NICs received in each year being used to pay pensions and other state social services in the same year.]
In the late 1950s, Beveridge met an old friend for lunch and expressed distress that ‘his original ideas had been mutilated, reversed and taken completely out of his hands although given his name; that he had come to loathe both the caption “Welfare State” and the title “Beveridge Plan” which had become like advertising slogans, which taken together had led many people hopelessly to misunderstand what he had truly worked for’. [10 things you may not know about the Beveridge report]
Millions of pensioners, workers and their employers have no idea that National Insurance Contributions are not being used to pay higher pensions and benefits, instead they are being used to balance the government’s books (pdf). The National Insurance Fund now has a surplus, which successive governments have borrowed in order to spend on other items of public expenditure. Employers and employees still – largely – believe that NICs co-fund a state social services revenue programme designed to serve its contributors.
Flat rate NICs were replaced in the 1960s by earnings-linked contributions. Unlike in some overseas jurisdictions, such as Germany and France, benefits in the UK continued to be paid at a flat rate. Those who paid in more because of higher earnings were not given higher benefits or pensions as a result. Instead, the Fund’s accumulated surplus of over £50 billion in recent years has been invested in Government gilt-edged stock, which the government repays from future taxation and raids on the Fund surpluses.
Politicians now dismiss the Fund, by claiming it to be a ‘notional fund’ used simply as an accounting tool. From the Treasury’s point of view NICs are a convenient form of taxation, as increases incur less protest than those of income tax. The Fund – with certain ever decreasing fiscal limitations – is now simply another fiscal input revenue contributing to total public expenditure. The lack of any hard boundary between the Fund and general government finances, has allowed further money to be divert from the Fund by successive governments for the National Health Service (NHS) and ‘environmental taxes’.
Since the introduction of the NHS in 1948, it has been possible for it to have specific sums allocated out of the Fund, current legislation now enables the government to bypass the Fund and divert a proportion of NICs directly to the NHS. Just over £20 billion a year in NIC payments is currently diverted in this way. If NICs are increased to pay more to hospitals, the residue of expenditure that it needs to fund hospitals from general taxation is reduced, so that the Government thereby obtains the funds that it needs to release for the other planned expenditure.
In a similar way, the Fund is deliberately and substantially reduced by environmental taxes; including the landfill tax, the climate change levy and the aggregates levy. Taxes levied to burnish the Government’s green credentials, made coincident with a reduction in employer’s NICs, has enabled the Government to claim that the resulting revenue is cash neutral on employers. This political manoeuvre is estimated have lost the Fund around £13 billion due, in part, to the Government’s reduction of NICs paid into the Fund and an over- compensation in reduced employer NICs.
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