Work and Pensions Committee
Oral evidence: Benefit Levels in the UK, HC 1126
Wednesday 19 July 2023
Ordered by the House of Commons to be published on 19 July 2023.
Members present: Sir Stephen Timms (Chair); Debbie Abrahams; Siobhan Baillie; Neil Coyle; Steve McCabe; Nigel Mills; Selaine Saxby; Sir Desmond Swayne.
Questions 211 - 267
Witnesses
I: Rebecca Deegan, Head of Protection and Health Policy, Association of British Insurers; Andrew Harrop, General Secretary, Fabian Society; Mike Brewer, Deputy Chief Executive, Resolution Foundation; Iain Mansfield, Director of Research, Policy Exchange.
II: Emily Farchy, Economist, OECD; Céline Jaeggy, Director of Legal and Institutional Affairs, UNEDIC; Kristoffer Lundberg, Deputy Director, Ministry of Health and Social Affairs, Government of Sweden.
Written evidence from witnesses:
Witnesses: Rebecca Deegan, Andrew Harrop, Mike Brewer and Iain Mansfield.
Q211 Chair: Welcome, everybody, to this meeting of the Work and Pensions Select Committee for our inquiry on the level of benefits. A very warm welcome to the members of our first panel this morning. Can I ask you each very briefly to tell us who you are, starting with Mike Brewer?
Mike Brewer: Good morning. Mike Brewer, chief economist and deputy chief executive of the Resolution Foundation.
Andrew Harrop: Hello. I am Andrew Harrop. I am general secretary of the Fabian Society.
Rebecca Deegan: I am Rebecca Deegan, head of health and protection at the Association of British Insurers.
Iain Mansfield: Iain Mansfield, director of research at Policy Exchange.
Q212 Chair: Thank you all very much for coming in. I will put the first question to you. Could each of you tell us what you think the role of contributory benefits should be and tell us whether you think today’s working age contributory benefits, New Style Jobseeker’s Allowance and New Style Employment Support Allowance, are set at the right level?
Mike Brewer: Thank you. I do not think our contributory benefits are doing a great job at the moment. In most other European welfare states, we would call these insurance benefits rather than contributory benefits. We would have insurance benefits on one side, which protect you against shocks, and we would have social assistance on the other side to help if you have a low income. Our contributory benefits do a very poor job at providing that insurance to the labour market for sickness shocks or shocks to your family situation in the case of maternity pay.
Andrew Harrop: I agree with Mike, but it is important to think about contributory benefits with other similar entitlements around them. We also have statutory pay schemes that perform a very similar role, and we have benefits that are non-means tested but also non-contributory, particularly Maternity Allowance, which is linked to earnings but not the national insurance system and Carer’s Allowance. I think we need to see that package of non-means tested financial support in the round.
Q213 Chair: You mentioned statutory payments. Do you mean statutory sick pay?
Andrew Harrop: Statutory sick pay, statutory maternity pay, paternity pay and shared parental leave. We may come on to that, but they play very similar roles with different people. Self-employed people need to fall back on social security because they do not have support from an employer.
As Mike says, our system is very ungenerous, with ESA and JSA paid at the same very low level that Universal Credit is paid. In most other countries, in Europe and in Canada, there are earnings-related benefits that are there to provide an insurance when people stop working that is linked to their previous income. That might be a very good idea to think about. The sudden shock of a life event means that your earnings stop and people cannot make an immediate adjustment to a very low income. They have housing costs and household bills that they need a period of time to adjust to. Also, there is a very well-established principle that the welfare state should provide insurance where the insurance market doesn’t, so people should have an opportunity to protect themselves from whatever earnings they have.
A final point on this is that Universal Credit provides very poor support in insurance for many people in work. If they lost their job tomorrow, only about half of people in work would be eligible for Universal Credit. These non-means tested benefits play a role in providing that basic floor for everyone.
Chair: Only half?
Andrew Harrop: The rest either have a working partner or have savings that take them over the eligibility for Universal Credit.
Rebecca Deegan: It is great that the Committee is considering insurance in this inquiry, given that the role of insurance is to provide financial support when people experience the shocks that Andrew mentioned. Insurance complements and often supplements state-provided financial and non-financial support. It is a contributory-based system in that individuals and employers pay a premium up front to secure a certain level of cover should they experience one of these shocks.
It is worth adding that insurers already play an important role in our system using a contributory-based model. Approximately one in three people in the UK have access to the benefits of health and income protection insurance, and that includes both policyholders and their family members. Post-pandemic we have seen the number of people with these policies rise year on year, suggesting that people are looking for insurance solutions to sit alongside what is provided by the state.
We think that there is more that insurers can do. There is a number of barriers for people taking out individual income protection and group income protection, which we hope could be looked at through this inquiry.
Q214 Chair: Does the ABI think that contributory social security benefits are important, or do you favour a more private sector insurance provided system?
Rebecca Deegan: We absolutely think that a contributory-based state system is important. Insurance is there to complement and supplement, not replace, state-provided benefits.
Iain Mansfield: First, I will go back to your question about the purpose of contributory-based benefits. Fundamentally, this is about equity and justice. It cannot be right to have a system in which someone who, for example, has worked hard for 20 years and then loses their job, through no fault of their own—perhaps through illness or perhaps because their factory closes down—receives the same level of benefits as someone who has never worked a day in their life or has worked very briefly.
The role of an effective contributory benefit system can be part of an overall benefit system that helps to make work pay so that those who have worked hard, those who have built up contributions within this, if they are, through no fault of their own—and the economy can be uncertain as was brought home to all of us under Covid recently. They can enjoy a higher level of assistance while they get their life back together, where they may seek retraining and so forth.
I echo very much what other panellists have said, including Andrew Harrop in particular, about the current system of contributory-based benefits not working well. They are a very small part of what is paid out. There are a number of issues, such as the fact that it is set at the same level as Universal Credit. If you are claiming Universal Credit and these contributory benefits, your Universal Credit is then reduced, so in practice you get no extra benefit from this in many cases, although there are some cases where you do.
We favour a stronger contribution. We can go into what we have advocated in the past, but the final thing is that this has to be looked at as part of a broader system of making work pay and where other benefits are removed in a way that works against that that does no benefit to anyone.
Q215 Nigel Mills: I am trying to follow the logic of why doing that would be consistent with making work pay. Instinctively, you would think that higher benefits makes work pay less. Are you saying that the reason why that would be the case is people would have more incentive to work because they knew there was a better safety net after it? Is that the logic in that?
Iain Mansfield: What we proposed in our report “Making Contributions Count” is that rather than in a sense people being in a relationship of dependence with the state, people, while they worked, would pay into a pot that would be funded by a deduction in employee’s national insurance contributions. That would go into a pot that would then be administered, and that pot would consist of two parts. Some of it would fund an insurance-based payout, which would apply and would fund benefits, and some of it would fund a flexible pot, which if someone did become unemployed they could draw down on. They could use it for retraining, to cushion shocks, for example, seeking mortgage adjustments or rent adjustments and so forth.
If they did not use it, at the end of their life we propose that it would be rolled into their pension pot and of course, with universal contribution now, many people have a pension pot. It would alter the fundamental relationship of dependence on this. It would mean that if someone was working, they would see that they were building this up. Of course, it would not be unlimited. They would not have an incentive to just live for years and years on it if they become unemployed. They would have incentive to get back into it before they ran down that pot and to start building up the contribution again. Obviously, once it was run down, they would fall back on the same basic level of universal support perhaps provided by Universal Credit that someone who had not worked at all had, but it would allow people to keep more of what they have earned and to use that as a cushion during hard times.
Q216 Nigel Mills: Just remind us, how much of my national insurance is being diverted into this pot in your scheme?
Iain Mansfield: It very much depends on how much you want to do it. You could certainly start in a small way with perhaps one percentage point of the take. You could go up to two percentage points. It really depends on how much you want to have in this additionality element, and there are real choices for policymakers. There isn’t a single right answer.
Chair: Nigel, I think Sir Desmond wants to raise a point.
Q217 Sir Desmond Swayne: This would be abandoning the principle that currently underpins the way that national insurance is charged. National insurance is a tax like any other.
Iain Mansfield: Absolutely.
Sir Desmond Swayne: Are you really suggesting that there would be a fund on the same basis that a private insurance fund actually funds the benefit, or would this simply be another Government guarantee?
Iain Mansfield: We are suggesting that it would be a fund. In the same way that pension auto-enrolment has shown that this is very possible, pension auto-enrolment has taken millions of people into systems where they have private pension pots.
We are proposing that these funds would not be administered by Government. They could be administered by trade unions, by the insurance industry and so forth, under certain conditions, rather as pension pots are regulated and that the Government would act as a lender of last resort, so that if we did have something such as the Covid pandemic that suddenly threw off all the predictions, it would be there.
You would not get here overnight, of course, but what we are talking about here is a fundamental system of reform and changing that situation of direct dependency relationship with the state.
Q218 Nigel Mills: Just to get the numbers clear in my head, Mr Mansfield, if I diverted roughly 1% of my salary—say, I am earning £40,000 and 1% goes into this pot, that is £400 a year, isn’t it? Therefore, after 20 years I have £8,000 in my pot. Then if I fall out of work having been earning after tax just under £3,000 a month or something, I am going to burn through this pot pretty quickly, aren’t I?
Iain Mansfield: That is why it doesn’t all go into your personal pot. Some of it goes to fund an insurance scheme. Most people will not be paying out of the insurance scheme, by its nature, and certainly will not be paying out of it every month. The calculation we made here—this was a few years ago, so it would need to be updated by inflation—had £250, say, of your £400 going towards that pot and the rest going to the insurance.
The insurance would fund a higher level of payouts over Universal Credit, and we proposed a period of six months. The other bit could be used—and I know you say it is not a huge amount. Let’s suppose you had, for example, £5,000 for training. This could fund many courses. It could fund coding courses, HGV drivers, bricklaying, electricians, plasterers, many of which have just been added to the shortage occupation list.
You have the insurance that gives you the high level of return, and then you have the pot, which in particular can be used to fund retraining. We know that for people who are unemployed or people who are stuck in casual wages, there are all these jobs are out there on the shortage occupation list, such as plasterers and bricklaying. We have 1 million vacancies in the UK. The actual cost of paying what for some people may seem a small amount but for others is an insuperable barrier—£2,000 or £3,000—is a real barrier to getting into these and to retraining.
Q219 Nigel Mills: Ms Deegan, does a third of a percent of my salary get me this insurance?
Rebecca Deegan: I do not know what insurance that would get you. However, there are other insurances in place that offer that type of protection, group income protection and individual income protection. They already interact with state benefits in a similar way.
I will add that auto-enrolment has been a great success. It has a lot more people saving, but we are obviously facing a cost of living crisis and we are looking to increase auto-enrolment levels. I guess just balancing the need to get people saving more versus having income now is quite a difficult balance.
Insurers have worked with the state, obviously, with pensions but also we have worked with the state in lots of other ways. Whether it is an opt-out method, compulsory like motor insurance, flooding, where there is a state-backed pool—whichever method the Government choose to go down in how that might work, insurance has experience in innovating and creating those types of products.
Q220 Nigel Mills: I am just trying to work out whether £150 a year would get me six months’ worth of replacement of quite a lot of £40,000 or not. That sounds quite attractive if it could.
Rebecca Deegan: Most group income protection policies cost about £150 per employee.
Nigel Mills: A group basis?
Rebecca Deegan: Yes.
Nigel Mills: Mr Harrop, I think you have done similar—
Andrew Harrop: It is very interesting hearing from a centre-right think-tank. Fabian is a centre left think-tank. We have similar proposals, but they are more statist and compulsory than what we have just been hearing. I will make the distinction that has been coming out here between payroll saving, which is a desirable thing, and insurance. The sorts of costs involved with any duration out of work needs to be supported by insurance rather than saving, for the reasons discussed.
In the option that we have developed—I can go into more detail later—we suggest that it should be for everyone and compulsory, because we are very worried about very low take-up. We know that auto-enrolment has been a success for pensions with nudge and with an employer contribution, but everyone gets a pension. When you are thinking about insuring yourself against a risk that may not happen, I think the chances of people buying it are much lower. We looked at the system in Canada where self-employed workers can opt into a very good offer from the Government, and there is a 2% take-up rate for that group of people, so that is what drives our concern.
On how it is operated, we think that there is a case for traditional Government delivery, just like with any form of social security. There is also a case for a social insurance fund operated in the public sector but on a similar basis to what Iain described. On cost, we think that to provide earnings-related insurance we have modelled that it might cost an extra 0.7% of national insurance, so that sounds like a similar ballpark to the private sector options being discussed.
Q221 Nigel Mills: Maybe rather than increasing my auto-enrolment pension contribution from 8% to 12% you are suggesting that we should—
Andrew Harrop: It is very important. It is difficult, but it might be that this is seen as a priority that other public revenue is spent on. However, if you just wanted to be a self-funding system we need to think about auto-enrolment contributions rising and better in-working age insurance.
Q222 Nigel Mills: Presumably, we design this in a way that it gives me a safety net, but it doesn’t incentivise me to stay on it for the full six months or something, so I am not going to get full salary replacement and it is not forever. That is the key to this, is it? What salary replacement are you talking? Are you capping it at a certain amount?
Andrew Harrop: The model that those costings are based on is 50% of previous earnings, with low earners also able to claim Universal Credit if that was not enough, and a capped duration, which I think is critical for your work search concerns and making work pay. For unemployment we suggest six months—as with JSA at the moment—and for sickness 12 months.
Q223 Debbie Abrahams: What is the percentage payout for insurance because of not being able to work for whatever reason?
Rebecca Deegan: The percentage of people’s salary?
Debbie Abrahams: No, how many people will receive a payout.
Rebecca Deegan: It is 98% payment.
Q224 Debbie Abrahams: Okay. I am very grateful. I want to ask a slightly different question because this is part of the overall inquiry around adequacy. We have discussed how it might be delivered and so on, but we have not looked at what is an adequate level. Could you say, compared to the current contributory JSA, USA and UC equivalents, what you think for what we have now and what we should have? I will start with Mike.
Mike Brewer: Thank you. We do not tend to think about adequacy when we think about the insurance benefits. The natural comparison is: what fraction of your earnings are insured? I think that is the right way to think about these insurance level benefits, because we have Universal Credit as the stopgap. It is Universal Credit where you should think about adequacy. For the insurance benefit, I think it is right to keep thinking about the percentages: what percentage of your earnings get replaced?
Debbie Abrahams: I am looking at what do people get now. That is the focus I would like.
Mike Brewer: If you claim JSA, you get the same as you get for Universal Credit, so £370 a month for a single person. For many people that will be a very low fraction of their previous earnings. We compare very badly to most OECD countries. The median replacement rate in this country is about 40% compared to 60% across the OECD.
Our calculations before the pandemic were that one in three single people would get less than one-fifth of their previous earnings back if they fell unemployed. These are extremely large shocks to your income if you become unemployed, where the state is just not providing any decent form of insurance at all. As Andrew was saying earlier, people have fixed costs. You cannot stop paying your housing costs or your car payments when you become unemployed, and people do not choose to become unemployed.
Q225 Debbie Abrahams: Is there a consensus on what Andrew said on the 50% figure? Is there a general consensus that, for previous earnings, we should be aiming to get towards that level?
Rebecca Deegan: Income protection is generally 50% to 70% of salary that they are paid if they make a claim.
Iain Mansfield: Broadly, it is the right ballpark. It is not an absolute figure. One thing you can also look at, especially for a state-backed thing rather than private insurance, is that you could say it was 50% up to a certain level. For example, you might say 50% up to £50,000 or £60,000 on the recognition that high earners are quite small in number and, also, very able to take out private insurance schemes.
Q226 Debbie Abrahams: Is there a consensus on how we should pay for it, that we should be looking for an increase in either an insurance-based contribution approach or national insurance?
Andrew Harrop: I don’t think there is a consensus. I think it is a political decision to be considered. In our work we have laid out options. It is worth saying that this is a very small proportion of the overall social security budget, so I do not think we should get too hung up on the source of revenue. There is a political choice. You might want to make it self-funding, but it could easily be part of the broader social security system.
I think it is important to set this alongside the state pension system, which is of course a contributory benefit that is very entrenched. When we talk about the withering of contributory benefits, that is only about working age. If you think about the support that that system has, its overall expense and that it is much more generous than these benefits, they play similar roles if you are unable to work for a period of time. We should be thinking about the benchmark being the state pension, which is now around £200 a week compared to £85 a week for Jobseeker’s Allowance.
It is interesting to look back historically at how much these benefits used to be worth compared to earnings. They have never been incredibly generous compared to earnings. They have never been incredibly generous compared to other European countries. Back in 1990, the equivalent unemployment benefit was about 18% of earnings and now it is 12% of earnings. There was never a political debate about that. That is just the sort of attritional effect of indexation policies.
Q227 Debbie Abrahams: Do we have a global figure of what it might be in billions if it was all state funded?
Iain Mansfield: In our report we were arguing that it should replace a penny on national insurance—not for increased payments. We estimated the cost at around £8 billion in our report, which is a significant sum. However, it is a small fraction of working-age benefits, which are currently over £100 billion. I think that is the right context to look at.
It is certainly something that should not be just taken out and added on as a bolt-on. If we are moving to a significantly more contributory-based approach, which we think we should, you need to take that seriously. The roll-out of Universal Credit took many years and actually ended up taking longer than was hoped. A serious move to this, if it wasn’t going to be just a gimmick, would take a similar level of thing to push through. We are talking about something that takes a whole Parliament to do properly because otherwise you can end up getting into trouble.
Q228 Debbie Abrahams: I want to move on to what you believe the role of employers should be in this type of new world.
Mike Brewer: Employers might have different roles for unemployment insurance and for sickness insurance. With employment insurance we should definitely think about statutory redundancy pay at the same time as we think about any form of earnings insurance. Statutory redundancy pay is an obligation on employers to pay.
It performs an incredibly similar role to an earnings replacement benefit. We do not have particularly generous statutory redundancy pay, so for many people who become unemployed it is not just relevant. It could be made more relevant. Employers could be made to pay it at a higher rate, starting sooner—kicking in after a year, say, rather than two or three? I have forgotten. We should think about redundancy pay at the same time as we think about unemployment insurance.
For sickness it is more difficult. There is definitely a strong case for having employers involved in this in some way, because employers can definitely affect the health of their employees and how quickly employees can come to work. It is very difficult to think through exactly how a system might work, but at the moment employers have no skin in the game whatsoever, do they, in the form of sickness insurance? I think that giving them some would be nice.
Q229 Debbie Abrahams: What would that be?
Mike Brewer: We haven’t done any work on what that could be, so I might leave that to my colleagues.
Andrew Harrop: In the Fabian Society’s proposals, I said earlier about statutory payment schemes as well as insurance. I think the critical role here for employers is statutory sick pay, which is currently a very low weekly level of about £109. We propose that it should be paid at about 80% of earnings, so that mirrors the furlough scheme. As Mike just said, that gives employers skin in the game. There is a huge financial interest for them to support their employees back to work, and that would be for six months of illness, which is currently the case.
We looked at the impacts on employers. An awful lot of employers, large employers and public sector employers, already pay good levels of sick pay, so the number of employers who would need to pay a lot extra would be surprisingly low. There are some employers who would need to pay a significant amount extra per sickness, but because sickness is a risk that you do not necessarily know you are going to need, it averages out as a pretty affordable policy. We are looking on average at about £250 a year per worker to go from today’s statutory sick pay levels to 80% of earnings, which is very important. That should be tied with much better obligations around occupational health, so that large employers are playing a big role in getting their workers back.
In the case of SMEs, I think you should look at free occupational health services and some public subsidy for sick pay cost, particularly in the case of long-term sickness, which can be very difficult for an SME to manage. While a big employer can redeploy staff, it is not the same for a small employer. Rebecca may want to come in. I think there is also a role for insurance in supporting employers through those greater obligations.
Rebecca Deegan: Employers have a very important role to play in the health of their workforce. One of the ways that they can support their workforce to remain fit and well is by offering them access to health and income insurance. Those insurances offer a lot of healthcare-related services that prevent people getting ill and needing to leave the workforce in the first place, but also supporting them back into work if they experience a period of absence.
A couple of weeks ago we published a brand new dataset for our members, where we looked at what happened to over 16,000 people who had accessed insurer-provided health-related services to find out the impact that it had on whether they left work or whether they stayed in work, and 86% of the people who accessed healthcare-related services through their employer were supported to either stay in work or return to work.
We looked particularly at over-50s, because that is the age at which people start to tend to need to take extended periods of leave from work due to ill health, and it still remained at eight out of 10 people were supported either to stay in work or to get back to work quickly. That remained the same whether it was cardiovascular disease, cancer treatment, musculoskeletal, mental health treatment and so on. Therefore, employers can play a proactive role in keeping their workforce fit and well and not needing to claim state benefits for a prolonged period by using insurance and the services available to them.
Debbie Abrahams: Iain, do you want to add anything?
Iain Mansfield: The Policy Exchange is a little more cautious about some of the measures imposed on employers. It does not sound like a lot to have £250 per employee, but at a time when we have not grown significantly for 15 years and we have stagnating costs and employers are facing very high costs as well, I think we should be very cautious about moving to something like that.
The other thing that I would bring out is I emphasise the point on SMEs as well, which cannot average risk, which I think was acknowledged across large numbers of employers. Redundancy payouts and sick payments do not account for the many people who are self-employed or in casualised work quite often or if your company goes bust. We have seen that in a number of places. If a company goes bust, people are just turned out. They are not getting redundancy payouts and are often not getting paid for the last week or two weeks they have worked.
I think we should be cautious of going towards the situation that we see on the continent, where you have essentially a two-tier system with fewer people with very good employment terms and conditions and then a much larger level of casualised or self-employed workforce who do not enjoy the benefits of it.
Crucially for our proposal there was a specific pot that employees got, which was then rolled into their pension if they did not use it. That answers Mr Mills’s question about whether he should contribute to this or to his pension because he would get it in the end if he did not need it. We would certainly want any employer’s additional payments to this sort of thing, or to insurance, to be tax deductible and very tax efficient. We think incentivising employers to do the right thing may be better than compulsion, given the overall state of the economy.
Q230 Debbie Abrahams: Do you agree in principle, though, that employers should have a role in this in the same way that they do in the auto-enrolments?
Iain Mansfield: Absolutely. The mark of a good employer is one who can pay a good level of sickness benefit, who helps to look after the health of its employees through various means, and that includes mental health support as well as physical health support.
What I am cautious about is that we see these cliff edges and we know that a lot of employers are doing this. Clearly employers already compete on this, and many do it if they can afford it. Given the current state of the economy, I would be nervous about doing something that might push some of those over the edge or result in slower growth, because stagnant growth is at the root of a lot of the challenges of what we can afford as a country at the moment.
Q231 Sir Desmond Swayne: If there is a case for making statutory sick pay and statutory maternity pay non-contributory, what would it be?
Mike Brewer: I will try to go first. These are both benefits that are only paid to people in work anyway. They are inevitably going to have a degree of contribution to them. You will have to have been in work for some time before you get them, and I think that should stay. What could be looked at for SSP is the fact that you get nothing if you are paid less than £120 a week, so it excludes 2 million part-time workers. That could go. That could keep it contributory but expand the entitlement.
Sir Desmond Swayne: Anyone else?
Andrew Harrop: I think there is a similar set of questions about maternity pay, so you only get a sum for six months and, as colleagues have already mentioned, there is an important set of issues around the self-employed as well.
Rebecca Deegan: If I could add to that, we also agree that the level of statutory sick pay is too low and we would like to see SSP reformed so that that it promotes effective and proactive sickness absence management to support people to get back to work quickly. For example, at the moment SSP does not support a phased return to work. People might be worried that if they go back to work and they are not well enough the first few days, if they take sick leave again, they are not paid. They end up financially worse off or, on the other hand, SSP is so low that they might end up going back to work too soon when they are not well enough to be back in work, which could have long-term consequences.
We produced a report recently with the Social Market Foundation with international examples looking at different approaches. There is one approach in Netherlands that is one of the most generous income support systems in the world. Despite it being very generous, there are cost savings for the state. It has improved return to work rates and labour market participation because it has put the onus on employers to pay a greater proportion of people’s salary for the first two years that they are out of work. It supports employers and employees with independent agencies to get those people back to work, so it is about the support around as well as the payment.
Q232 Sir Desmond Swayne: You surprise me because in your first answer, presumably not wanting to tread on Mike and Andrew’s toes, you accepted that what insurance offered was purely supplementary to the benefit system. I admit the figures are dated but in 2018, 54% of the workers who had individual protection policies provided by the private sector were eligible for Universal Credit. That clearly will have an implication for a reduction in what they get.
Surely that undermines the whole principle of rewarding people for self-reliance and making the payments and the rest. There is a tension between what you can provide in the private sector and the moral hazard of not doing so. Clearly, there should be less eligibility for those people who do not make the additional contributions—the 46%.
Rebecca Deegan: Yes. There are a couple of things on income protection and Universal Credit. You are right. On individual income protection, the income that you can get from making a claim, if you are eligible for Universal Credit, for every £1 you receive in income from an individual income protection product you lose £1 of entitlement for Universal Credit. However, for group income protection that is provided by your employer you have the taper, so the 55%. You lose 55% of that income.
We think it would be good if there was parity between those separate income protection products, so that people who have put money away, whether their employer has on their behalf or they have themselves, receive the same benefit of doing so and are encouraged to do so. Therefore, they are much more likely to have a level of income that looks closer to their initial salary so that they are able to manage their finances better.
The other thing on income protection is that people pay up front for how much cover they want to have, and a lot of income protection products last until someone retires with a level of certainty about how much income they will get. If they are getting state benefits, currently Universal Credit entitlements change if your life circumstances change—for example if your partner starts earning money or your dependants leave home—whereas income protection provides you with a consistent level of income for the duration of the time that you are out of work.
It also, really importantly, includes all of the healthcare services that I mentioned before to support people back into work in a way that the state system currently doesn’t. There is much more to it than just that initial pound for pound consideration.
Sir Desmond Swayne: Does anyone else have anything?
Iain Mansfield: Yes. We absolutely endorse the same taper rate applying to private insurance operations. Broadly, this is about how you make individuals take more responsibility and how you reward and recognise individuals for doing so. It would not necessarily cost the state that much or anything in the long term. In the short term of course there would be, but in the long term if it incentivised more people to take up private insurance schemes, they would have less reliance on Universal Credit.
In a way, it feels like in the current system—with some exceptions of course, such as pensions, which I have noted—there is a strong focus on giving everyone the same and making people run down their private savings and other forms of insurance before using it. You can see how in the short term that has benefits because you are minimising the cost to the state, and obviously we support keeping the benefit system as low as is reasonably possible while also being fair. However, in the long term you create a problem. Again, I go back to this relationship of dependence where you might as well just rely on the state rather than earning and getting yourself out of low income situations.
To pick up on a particular example, which I think relates to a lot of this, another example that affects people on lower incomes is around Carer’s Allowance. This is not a contributory benefit, but you get around £3,000 a year. However, if you earn more than around £120 net a week the entire amount is taken away. Therefore, someone has to jump from around £6,500 to nearly £10,000 in one go or else lose it. We would much prefer throughout all of these things—and it applies to every area that we are talking about—situations where people earn more so they get to keep a decent amount of that income. I draw exactly the same distinction between insurance, which after all is paid through your earnings earlier on, and normal earnings that are coming in daily.
Chair: Thank you very much. I should mention that our report published today does commend to the Department income protection insurance as something we would like to see more of. That brings us to Steve McCabe.
Q233 Steve McCabe: Good morning. I want to go back to the question of statutory sick pay and statutory maternity pay. I guess we saw during the pandemic how difficult it was for certain groups—self-employed people—when it came to sick pay. I think the Resolution Foundation points out that there are about 2 million people that lose out because of low wages. They have this funny disparity between Maternity Allowance and statutory sick pay, where you get much less money for what is essentially the same event. Do you think it is time to bring self-employed people and others who are losing out properly into the benefit system? If it is, what do you think is the best way to achieve that?
Mike Brewer: Historically, our approach to the self-employed is that they pay less national insurance and they get less insurance from the state, and the pandemic showed that was not tenable where we have a shock of the size of the Covid pandemic. We were not prepared to let them go without the income and so we invented a self-employed support scheme. That was not a good idea. They were not getting any SSP, so they weren’t able to self-isolate in some cases, and we tried to patch that up too.
I think it showed that our current approach is sustainable. However, it is really hard to insure the self-employed, particularly for unemployment but also for sickness. I do not think I have the answer, but I think it means that we just need to abandon the idea that self-employed should pay less national insurance in return for less support. I do not think that is a credible long-term solution. We may need to do more work on how exactly we provide insurance for them.
Q234 Steve McCabe: If we move from 9% to 12% and equalised it so they all paid 12%, you are saying they still would not qualify for the same level of benefit?
Mike Brewer: I think we should definitely have a form of sickness insurance for self-employment. The case is stronger for sickness and maternity than it is for unemployment. Yes, if we cannot get an unemployment insurance, maybe they should pay less than 12%, but for the moment they pay significantly less. The self-employed still get a good deal. Even when we value the insurance benefits they get, they are still paying too little national insurance.
Q235 Steve McCabe: I accept that unemployment is slightly more complicated. I am particularly interested in statutory sick pay and statutory maternity pay. I am not saying the others do not matter, but these seem to highlight some of the inequality.
Andrew Harrop: I argue for unemployment as well, but you would obviously need to have a process to ensure it was genuine unemployment. You could certainly have self-employed national insurance contributions counting towards Jobseeker’s Allowance, which they do not at the moment.
To your core question, statutory sick pay needs reform for employees, and the key issue we saw in the pandemic is not getting it until the fourth day of sickness, which is just a public health disaster because it means that people go to work when they are ill because they do not have money to stay at home. That should happen for everyone, but then there are some critical areas where self-employed workers do not get support that employees take for granted.
They can claim Employment and Support Allowance instead of statutory sick pay. Very few do or even know that it is an option, partly because we see that benefit as a long-term disability benefit rather than as a short-term sickness benefit. It is complicated. People do not know about it. You have to wait for a week before you can get it, and it is paid at that very low level we have been talking about. It is £85 rather than the very low £109 of statutory sick pay. Therefore, I would ideally like to see a system where people at all levels—
Steve McCabe: It would not make a massive difference.
Andrew Harrop: I would like statutory sick pay to be significantly higher than it is. Why is it lower than statutory maternity pay or the state pension we have been talking about before? Employment and Support Allowance in the first six months to mirror that because it plays a similar role in the early stages of a claim as statutory sick pay.
On maternity and paternity, there are also some real entitlement gaps for self-employed people. There is no paternity leave cover. We spoke to people in our work—a new father who could not take time off at all or lost all their earnings to do so for the first two weeks. There are some things around maternity allowance that make it less good than statutory maternity pay. It is not earnings-related in the first six weeks. Statutory maternity pay is our only surviving earnings-related benefit. For six weeks, you get 90% of your prior earnings, but you do not have that with maternity allowance.
Also, you cannot get maternity allowance if you adopt, and you cannot share it with your partner. A self-employed father cannot take shared parental leave and take some of the partner’s maternity allowance. Those are tweaks. They are all quite affordable, but the fundamental question is the level. Obviously, to raise the level of payment has much larger public finance implications.
Q236 Steve McCabe: Would you accept that self-employed should pay the same national insurance as conventionally employed people?
Andrew Harrop: I think there is a good case for that, but it is not necessarily about these entitlements. I think it is much more linked to the good deals self-employed workers now get on the state pension. They used to get a much worse state pension than employees and that has been significantly improved in the last decade but there has not been any trade-off in what they contribute. These sorts of entitlements are very cheap compared to the pension deal they now get.
Rebecca Deegan: If I could add to that, because self-employed people do not have access to these types of benefits, they are much more likely to be entitled to Universal Credit. Therefore, the discrepancies in the way that Universal Credit entitlements are worked out will impact self-employed people. Two-thirds of people who take out individual income protection policies, so will be impacted by these discrepancies, earn between £10,000 and £40,000 a year. They are not high earners. They are low earners who are financially vulnerable.
There was one point that I forgot to mention when I spoke about Universal Credit before that I think is relevant here, particularly given their income. There is a disregard for mortgage payments with Universal Credit but there is not that same disregard for rental payments. It would be great to see that disparity looked at for this cohort.
Iain Mansfield: I think that we should be cautious on significantly raising taxes on self-employed people in the cost of living crisis. Of course, there are some self-employed people who are very well off. A lot of self-employed people are not, as I know people will realise, but it does feel a little bit as if we are talking about an evening-out exercise. There are historical reasons and maybe it is an odd thing that you would not create it exactly in the same way right now, but at the moment, when self-employed people have been struggling, when everyone has been struggling, a significant raise in what is effectively their tax rate for some benefits they may get in five, 10 or 15 years’ time—is that really the right thing to do? I am not saying that there are not some things that could be looked at.
Q237 Steve McCabe: What would you do instead?
Iain Mansfield: I am not convinced that the bargain that self-employed people get is necessarily worth it. We have had other speakers here giving evidence that they get a good deal, and if they do get a good deal overall and if they can take out some insurance, I am okay with that. I think that self-employment has downsides.
Q238 Steve McCabe: That wasn’t really the experience of the pandemic though, was it? The experience of that was that significant groups of self-employed people toiled to get support.
Iain Mansfield: The pandemic was an exceptional circumstance. It was a once in half a century event and we responded to the pandemic with various measures, including for the self-employed and to furlough, which would not and should not be part of our core system of ongoing benefits and support for the population. It would be a mistake to take arrangements that were in place in the pandemic, however necessary they were—and I am supportive of most of those—and use those as a model or blueprint for the steady state of affairs or to say that because the steady state does not work in a global pandemic, just as it would not have worked—
Q239 Steve McCabe: I think that it was the Prime Minister who said that that was the lesson that he had drawn from it.
Iain Mansfield: I am not obliged to agree with the Prime Minister.
Q240 Steve McCabe: One last thing. That covers self-employment. What about maternity pay? Do you have a view on that?
Iain Mansfield: I think that there are things to be looked at on statutory maternity pay, disability allowance, paternity pay, but I go back to the point that at a time when we have stagnant growth and over 100% of debt to GDP ratio, we should be looking at making sure that any of these changes are fiscally neutral, not looking at an increase in benefits.
Q241 Neil Coyle: Can I ask a quick follow-up to Steve’s question to Andrew about the earnings link to what you were saying about statutory sick pay? Would Fabian advocate a model akin to that in Ireland and elsewhere of that only being for people who have been in employment for a set period beforehand? What is the Fabian thinking? Is there a threshold?
Andrew Harrop: On statutory sick pay for employees, we think that it should be a day one entitlement, as it is at the moment, paid at 80% of earnings ideally. I have talked about lower levels, such as matching state pension or maternity allowance because of the impact that it would have. Remember, this is the regulatory impact on employers, which on average is pretty affordable for them. It is not a public spending choice, whereas the benefits we have been talking about for the self-employed is a public spending commitment.
Q242 Neil Coyle: I think we are coming on to that with the second panel, Chair. During the pandemic the Government introduced income-related support for lots of working people, direct employees and the self-employed through the Coronavirus Job Retention Scheme and the Self-Employment Income Support Scheme. Focusing first on worked well, what positives do you think there are to learn from those two schemes?
Iain Mansfield: I come back to the point that we should not use national emergencies as a model for normal stuff. There were things in the second world war that were absolutely necessary in the second world war, such as rationing, which we should not be looking to apply in the normal steady state. There were things such as furlough, which were absolutely right during the pandemic because the Government were taking extraordinary action. It was shutting down businesses, telling people that they could not go to work, telling businesses that they could not operate and make a profit. Furlough was absolutely necessary. If we look at the spending there, it handed over 10% to our debt as a fraction of pre-pandemic spending, it is having long-term impacts that we are still paying for—
Neil Coyle: Focusing on the positives first.
Iain Mansfield: Sorry. Focusing on the positives, apologies. I think they were good, but I do not think we should draw lessons from them. I really do not. They were exceptional costs for exceptional times.
Rebecca Deegan: I think that one of the benefits was demonstrating the important role that employers can play in workplace health. There was greater flexibility in how people access work and how they return to work if they had experienced a period of illness. Those are helpful ways to approach wellness. I mentioned before that reform to SSP should support people back into the workplace and absolutely those flexibilities do that.
Andrew Harrop: It demonstrated the inadequacy of the system as it is. In the reforms, we temporarily created a much more generous system that met the public’s sense of what they would expect if their earnings stopped. There was proof of concept of earnings-related payments through the furlough and the self-employment scheme, which we have suggested should become permanent.
Another positive was huge success in data integration and IT. Partly Universal Credit worked, but also the fast timescale. HMRC was able to work with employers on the furlough scheme, and to develop the self-employment scheme using its data and IT systems.
I disagree with Iain about permanent lessons. I think that there is a case for having some of these policies ready to go for future emergency. Most other rich countries have permanent furlough-style schemes that are cheap most of the time because very few businesses fail, but they are there ready to go in the eventuality of a severe recession.
Mike Brewer: The positives were that Universal Credit was a great success. The Chancellor was able to change the generosity of it extremely quickly and it did not crash, even when the volumes went through the roof, and the fact that the Treasury was able to devise a furlough scheme so quickly. I think the furlough scheme shows that our current system is inadequate, but if you do not want to do anything about it, I am reassured that the Treasury can get one running in a matter of weeks.
Q243 Neil Coyle: You have already touched on this, but on the flipside how well did it expose the inadequacies of the current system? Iain, you may have a different view. To say Universal Credit works well, Andrew, as well as saying that half of those who applied got nothing and the self-employment scheme only helped 2.9 million people at its peak—I am open to correction if that is not the right figure—but could it have done more? What weaknesses did it expose in the general social security system?
Mike Brewer: I think that we still failed on self-isolation and sick pay support. We never managed to come up with a good way to support people to self-isolate—the self-employed and low-paid employees—with the self-isolation grants being inadequately funded and poorly taken up. We did not get self-employment support right in general. Many people have pointed to the self-employed people who did not qualify, but there was also a problem the other way around. We gave out huge amounts of money to self-employed people in the first year who were not affected by the pandemic. There was a massive amount of dead-weight, which was not there for the furlough, because for the furlough scheme you did stop work. I think that those were the downsides.
Andrew Harrop: I spoke earlier about the waiting days, which demonstrates that you have to have a sick pay and sickness insurance system with a public health design to it.
The other point, as Mike has just spoken about, is the entitlement gaps. I think that there is a lesson to be learned there about the future design of insurance benefits, rather than just those extraordinary circumstances. Look at national insurance entitlements to make sure that they are broad—that they encompass everyone who in a common-sense understanding has a relationship with work. At the moment, you have to jump through hoops and have two prior years of national insurance contributions, which would result in exactly what happened with the self-employed workers. It would happen routinely. If we had a better insurance-based system, you would have people falling through the cracks where, with any common sense, you could say that if they have a recent connection with work, they should receive an insurance payment if they stop working.
Rebecca Deegan: I do not have anything to add to this question.
Iain Mansfield: I think that it exposed the shallowness of the national consensus around temporary uplifts. The number of temporary things that were always flagged as temporary—particularly the £20 a week uplift to Universal Credit and the provision of free school meals and holidays—were introduced precisely because positions were more difficult. However, once the pandemic was finished and they were being removed, a large section of the country and commentariat rallied for them to become permanent, actively campaigned against it and caused significant political difficulty for removing these temporary things.
I think that the real lesson of that, politically, is to not bother giving temporary uplifts if that will be the response. If we want to be able to flex and give temporary uplifts to things such as Universal Credit or other benefits in times of national hardship, there has to be a bit more good faith on all parts that if these will go up in times of hardships, they then revert back when that is previously signalled.
Q244 Neil Coyle: Are you suggesting that MPs should not have argued for their constituents to be better off?
Iain Mansfield: I was suggesting more about the wider civil society on this than MPs in particular. I think that if something is introduced as a temporary measure in a national disaster, and people support it as a temporary measure, trying to bake that in and using it as a ratchet—you have to think about the long-term effect and how likely people will be brought in there. I like the idea that in times of national disaster we might be able to temporary flex things up and bring them down again, but it cannot work one-sided, using them to cement them as permanent.
Q245 Neil Coyle: There would not have been the debate and the difficulties for the Government had the system been more generous from the start. I think that is a fair counter-argument.
The other point I want to come on, because it is something that the Committee has looked at before, is bogus self-employment. Is there anything to learn that the pandemic helped to expose around those who do not have a choice about being in self-employment? They are given one option. Are there any comments there, or on in-work poverty and the fact that more than half of those who receive indirect employment support at the end of the Covid-19 payments were on £50,000 a year? That would leave them vulnerable to housing costs in my constituency and elsewhere around the country. It is a question about the generosity of the general system and how that was exposed in these payments.
Iain Mansfield: The overall system could have been far more generous if we had been growing at the pre-recession rates over the last 15 years. I know that sounds trivial, but the fundamental point on all of this is that we are not growing and we put that down to the fact that we have high tax, high regulation and high debt. Sorting that out is the only sustainable route to more generous welfare systems as well as sorting the cost of living crisis.
Andrew Harrop: I disagree with that. We have a much better pension system than we did 15 years ago, and I do not see why we should not be able to create a working-age social security system that is more generous to people on low incomes for Universal Credit and provides good insurance-type support for everyone.
On your specific point on employment status, I do not have an answer to the question but point out that there is a massive take-up issue for people who are entitled to things such as statutory maternity pay and statutory sick pay, even although they are workers who are not getting it because there is so much misunderstanding and opaque practice in this area.
Chair: Thank you all very much. That concludes our questions to you. Thank you for a very interesting session. You have provided lots to think about. If you would like to step down from the desk, we now move to a virtual panel. I am hoping that we will shortly see some faces appearing on the screen in front of us. Thank you all very much indeed.
Witnesses: Emily Farchy, Céline Jaeggy and Kristoffer Lundberg.
Q246 Chair: I bid a very warm welcome to the three guests joining us from outside the UK. Thank you very much for giving us your time this morning. I will ask each of you to briefly tell us who you are, starting with Céline Jaeggy.
Céline Jaeggy: Good morning. I am Céline Jaeggy. I am the head of the Institutional and Legal Affairs Department at UNEDIC. I do not know if you know what UNEDIC is. It is a non-profit organisation founded in 1958 by the Social Partners in France to manage the unemployment insurance.
Kristoffer Lundberg: Distinguished Members of Parliament, ladies and gentlemen, my name is Kristoffer Lundberg. I am Deputy Director at the Swedish Ministry of Health and Social Affairs and I am based in Stockholm.
Emily Farchy: Hello. My name is Emily Farchy. I am based in Paris at the OECD, and I am an economist working on working-age benefits more generally—unemployment insurance, social protection and employment assistance.
Q247 Chair: Thank you all very much indeed for joining us. Céline and Kristoffer first of all, can I ask you to briefly outline for us how unemployment support works in each of your countries? Starting with Céline, how are unemployed people supported in France?
Céline Jaeggy: General principles of unemployment support in France are based on mandatory contribution-based insurance, so employees who are bound under an employment contract are affiliated with the unemployment insurance scheme and contribute. It is a national redistributive system, and it is managed by employer and union representatives. This management is framed by law. The system is regulated by negotiated agreement of the Social Partners. These agreements occur every two or three years, depending on the financial situation of the unemployment benefit system, the job market and the unemployment level. Those are the general principles.
Kristoffer Lundberg: Thank you very much. Briefly, I would like to say a bit about three pillars and a couple of prerequisites of the Swedish model and how Sweden, as a small open economy, aims to try to achieve the objectives of creating higher prosperity and equity for our citizens. Basically, our point of departure is to have sound public finances, high levels of trust and high levels of employment. Also, we have strong and equal social partners. These are the prerequisites for us in how we work. Then we have our first pillar, which is a labour market that facilitates and adjusts to change. This is done by having a co-ordinated wage formation and also active labour market policies in combination with an effective unemployment insurance.
If I may talk to you about the unemployment insurance scheme, it is slightly different from the other transfer systems that we have in place because it is organised by individual insurance funds. For those of you who are familiar with the literature, it is the Ghent system. Basically, the Government and the social insurance covers everything except for the unemployment insurance schemes. These are mostly funded by Government, but they also levy some sort of payments from the members.
Insurance consists of two parts. It has a basic general insurance and also a voluntary loss of income insurance that complements the first part. The two parts apply to employees and the self-employed and the basic insurance is normally paid for jobseekers from the age of 20. These are basically the systems that we have in place.
I have been listening in to the discussions that you had, and I think that we have a bit of what you have been talking about here in this group. The maximum that you can get from the income-related benefit, because it is capped, is 80% of your previous salary, up to a ceiling of almost £2,000 per month. Bear in mind that we tax our insurances and transfers. We apply Swedish income tax on these things, so in effect, the net is lower but our tax rate is slightly higher than in the UK, so that also has an effect. The basic level is roughly around 11,000 Swedish Krona per month, and that is almost £850 a month. Also, this is taxed.
Q248 Chair: Thank you very much. Emily, to what extent is the way that things are done in the UK here an outlier compared with other systems in Europe, such as the two we have just heard about?
Emily Farchy: Talking beyond Europe, many OECD countries have some combination of what we tend to term unemployment assistance, which is not income-linked and is more along the lines of Universal Credit, providing a safety net for people who fall out of work. In many countries, that goes on indefinitely. It is not limited to the duration of the unemployment spell, but it is set at quite a low level. The goal is to protect against falling into poverty if possible.
Alongside that, they have another scheme that is a more income-linked unemployment insurance. The eligibility tends to be dependent on how long you have been in employment. In many cases, you have to have been there for six months, or it is variable. It is also limited in the duration, so you have between one and two years over which you can receive these benefits before it comes to an end and then you would fall back on that lower-level unemployment assistance. In a sense, they have quite different goals. Many countries have them both in parallel.
The UK is an outlier to the extent that it does not really have unemployment insurance, which is why I think that was highlighted during the pandemic and why furlough had to play such a large role, because there was no income-linked protection. However, there is a number of other Commonwealth countries, such as New Zealand and Australia, who do not have an insurance-linked component. The UK has strong unemployment assistance—maybe not in the level but it is very good in the targeting. There are a lot of reasons why many countries look towards Universal Credit as a good example of what it does, perhaps again extracting from the level. What it does miss, as a lot of countries have, is this insurance income-linked component.
Chair: Thank you. That is very helpful.
Q249 Steve McCabe: Good morning. You may have heard when we were speaking to the previous panel that I asked about self-employed people and people with irregular employment in particular. Can you tell me how that works in France and Sweden in supporting people who are self-employed or who have a succession of short-term or irregular work contracts?
Céline Jaeggy: Our Government has implemented support for the self-employed, but I will speak about the support that UNEDIC implemented for self-employed workers. We put a non-insurance-based compensation scheme in 2019 to cover certain self-employed workers. This scheme is subject to conditions such as resources, turnover, length of time in business. If a self-employed worker fulfils these conditions, they receive a lump sum benefit of €800 per month for up to six months. This allowance is not really successful for now because in 2022 only 500 self-employed workers asked for it. Probably the conditions are too strict.
We have another aid for starting or buying a business self-employed. This aid helps jobseekers to transition to a self-employed position. This aid is based on the unemployment benefit. It consists of receiving 60% of remaining rights to benefits for a person two times. The first takes place when the company is set up and corresponds to 30% of the revenue rights. The second takes place six months later and corresponds to 30% of your remaining rights. It allows them to defray some up-front costs for new self-employed workers. Those are the two ends that are financed by the unemployment benefits.
Q250 Steve McCabe: Thank you. Kristoffer, can I ask what is in Sweden for self-employed people?
Kristoffer Lundberg: Of course. In Sweden, our general systems are universal in the sense that they apply to everyone who is either a resident here or who pays taxes. That also, of course, applies to self-employed persons. Hence, self-employed are covered by sickness, maternity, paternity, pensions, public pensions and so on, by declaring their income. The self-employed, of course, can be covered as members of an unemployment insurance fund to get income-related benefits. However, some special rules apply to people who are self-employed and that is because they need to prove that they are no longer active in their company or that they have any significant influence over their own company. They have to do some extra work to show that they are truly unemployed. In general, however, all our welfare settings are built up to cover the entire population. I think that is a strength because it enables people to freely programme employment, self-employment and so on and also over various sectors of the economy, which is, of course, important for us.
Q251 Steve McCabe: Emily, are there any examples in other OECD countries of special measures to support people who are self-employed?
Emily Farchy: It is a question that a lot of countries are struggling with at the moment. I suppose you have covered this already in your inquiry, but the main problems of insurance tend to be adverse selection. If you make it mandatory, as in France, it is not a problem; everybody is automatically subscribed. If it is voluntary, as in Sweden, there is potential for adverse selection in the sense that only those who are the most likely to need it will subscribe and then you potentially have a financing issue. Another problem is moral hazard in the sense that maybe a person does not search for a job hard enough and a person’s action and effort is dependent on that. That is where the work incentive question comes in.
Those two issues tend to be stronger among the self-employed so there is more scope. It is more often voluntary. In all countries that have experimented with it, it has tended to be voluntary and the self-employed have more scope to alter their effort, or it is less clearcut when a self-employed person is fired and also there is perhaps more scope over the timing of their income to manipulate those things. It is much more of a difficulty when you are talking about insuring the self-employed. There is no obvious answer and I think you may have covered this already.
Something that a few countries are looking at and that is potentially interesting is only insuring risks that are sector-wide. It is less for the idiosyncratic risks but more when there is a general shock to that sector there would be more insurance. That is less vulnerable to the issues of gaming and moral hazard. A few countries have been piloting or considering various things but no best practice has been established yet. It is an open question.
Q252 Steve McCabe: Céline, I notice that there is a special insurance scheme in France for people who work in the artistic professions—actors, musicians and so on. Is that because they are a special case and is it because they have such irregular employment?
Céline Jaeggy: Yes. That sort of insurance was decided about 30 years ago to support artists and technicians who work without long-term employment contracts because of festivals and irregular performances and so only work for a few months or weeks, go to employment insurance and then work again. It is a very specific insurance where you have to work a minimum of 500 hours a year. If people work that minimum, they will be covered when they are unemployed. However, to finance that specific insurance, the employers pay specific contributions to UNEDIC. The contribution is higher than for other employers.
Steve McCabe: I see. Thank you very much.
Q253 Selaine Saxby: Céline, could you describe your organisation’s role in the development of unemployment insurance policies in France? How would you characterise its quasi-independence?
Céline Jaeggy: My organisation is independent of the Government because, first, we have a very independent budget based on contributions. When we do not have enough money to make payments for the unemployed, we create debt. We do not rely on the Government at all for financing. The Social Partners who manage UNEDIC decide the unemployment insurance rules, but it is true that UNEDIC is less and less independent from the Government.
During the summer of 2018, a law changed the role of the Government in the field of unemployment insurance. The law created two new obligations. A negotiation framework was given to the Social Partners by the Prime Minister. The Social Partners have to negotiate within that framework, which can give negotiation deadlines and objectives of the evolution of the unemployment insurance regulations. The second obligation implemented by the new law is that the insurance agreement requires the approval of the Prime Minister. Those are the new obligations.
From the beginning of unemployment insurance in France in 1958, the state has been entitled to decide unemployment insurance regulations if the Social Partners are unable to reach an agreement. Two things happened in February 2019. Negotiations broke off without the agreement of the Social Partners because they did not reach an agreement within the negotiation framework given by the Prime Minister. Then, in 2019, the Government decided the rules by what we call a default decree. The default period will finish at the end of this year, 2023. The Social Partners are waiting for a new framing document that should be sent by the Government by the end of this month, so probably we will receive it next week. We hope that the Social Partners will reach an agreement within that framework but during the default period, the Government made two important reforms to the unemployment insurance.
Q254 Selaine Saxby: Kristoffer, how are unemployment insurance policies developed in Sweden?
Kristoffer Lundberg: Unemployment insurance has a very long history in our country, going back to each of the guilds having their own unemployment schemes a long time ago. A lot of the social insurances in Sweden were created, say, 100 years ago by various entities and most of them have been taken over by the Government over the years, especially during the 1950s and 1960s.
However, the unemployment schemes are still in the hands of various parts of the economy. There are unemployment insurance schemes for academics, for electricians, and so on, but they are very much financed by the Government. The lion’s share of the financing for unemployment schemes comes from public sources but there is still this connection to the labour market and the situation of each sector. They work as independent organisations, but of course there is a strong link to the public employment service because that is where you register and do all the labour market activities if required and this is, of course, very much connected to the actual insurance.
We also have the basic unemployment insurance level that I spoke about, which is provided and fully funded by the Government. However, that is done through one of the broader unemployment schemes that virtually cover everyone who does not belong to any other scheme.
It is a bit of a complicated set-up but, as in most countries, that is due to our history. Our parties in Parliament have had discussions about whether or not we should take the final step and unify all the schemes and bring them fully on board as part of social insurance. That is, of course, a political issue and there are pros and cons to whatever you choose. That is pretty much it. I hope I have answered your question.
Chair: Thank you very much indeed. We are a little bit up against the clock in our meeting today so we will need to move on fairly quickly if we can.
Q255 Nigel Mills: I want to ask Céline and Kristoffer how unemployment benefits in your countries are linked to prior earnings. I think the situation is that the more you earn the more benefit you get if you fall out of work. Is that right?
Kristoffer Lundberg: Yes, that is correct. There is a ceiling for the income-related parts that I mentioned of, roughly, I believe, £2,000 a month. Below that ceiling, you would get 80% of your salary. Bear in mind, though, that some high-income earners are also getting other kinds of insurance. Most often, people do that through their unions, for example, or maybe privately, so there is more coverage available if people choose to pay for it. In general, however, for average-income earners the benefit is initially 80% of the prior earnings. Bear in mind, though, that we do tax our benefits.
Q256 Nigel Mills: Is your system an opt-in system? It is not compulsory in Sweden, is it?
Kristoffer Lundberg: It is universal in the sense that you belong to something, and if you do not have any voluntary income-related insurance, you belong to the minimum. In that sense, it is universal.
Q257 Nigel Mills: Everybody has £2,000 a month?
Kristoffer Lundberg: No. They get the basic level, which is roughly half, or £850.
Q258 Nigel Mills: Céline, can you describe what I would get in France if I fell out of work?
Céline Jaeggy: In France, the method of calculating the unemployment benefit is based on a registration objective. The replacement rate is proportionally higher when you have lost a lower-paid job. The benefit is between 57% and 75% of the daily reference salary, so depending on the level of the former salary. However, there is a ceiling, which is the highest the benefit amount can reach—it is probably an exception—of €7,000 per month. It is very rare, however, to have such a benefit level because it applies to only 0.1% of beneficiaries.
Another point of the redistribution objective is that the unemployment benefit can be reduced by up to 30% after six months if the daily benefit amount is more than €85, which would mean that the former salary was about €4,000. The average benefit amount in France is €1,000.
Emily Farchy: Perhaps if I could come in—I know you are pressed for time—you start to understand that these systems are incredibly complicated across countries. At the OECD we tend to look at the net replacement rate. That is after tax, when you take into account the tax on the benefit, but also the benefits that you would have had out of work that you would lose by moving into work, so we have this figure across countries, this net replacement rate.
In many countries, it hovers around 60% but as you have heard from Céline and Kristoffer, it varies on a number of tangents—for instance if you had a voluntary top-up. Even if the absolute amount tends to be higher for higher-wage earners, the percentage in a number of countries might be smaller. For example in Italy, they provide a 75% replacement rate up to a certain threshold and beyond that threshold, there is a 25% replacement rate for earnings beyond that threshold.
There are ways of playing with the rates and they depend on how much you want it to be a redistributive programme as well as an insurance arrangement. A higher floor and a lower ceiling tend to target resources more to those who were earning lower wages in the past whereas a larger gap between the ceiling and the floor has—there are a lot of parameters that countries play with to alter not only the rate but who gets what rate and to what extent the arrangement is redistributive as well and insurance.
Q259 Nigel Mills: Thank you. Céline, am I right that in France the employer takes this on—that the employer is responsible for paying if an employee leaves employment—or is it insured, or do you have a combination?
Céline Jaeggy: I am sorry. I did not hear your question very well.
Nigel Mills: I was asking who is responsible for this in France. I am sure I remember from somewhere that the employer can, in effect, insure their own staff or they pay an external insurance provider to do it. Is that right? Is it in some cases an ongoing obligation of the employer?
Céline Jaeggy: No. The system is national. Perhaps what you are thinking of is health insurance, complementary health insurance should be offered by the employer. Unemployment insurance is the same national system for everyone.
Q260 Nigel Mills: Finally, Céline and Kristoffer, are the levels of benefits in your countries something that people value, support and find reassuring or does nobody understand the system until they need it? Is it a positive selling point for working in Sweden or France?
Céline Jaeggy: I am sorry. I have difficulty in hearing you.
Nigel Mills: How well known, how popular, are the levels of unemployment benefits? Are people aware that unemployment benefits exist? Are they happy with the amount of money they get, or does nobody understand the system until they happen to fall out of work and find out the hard way?
Céline Jaeggy: The method of calculation is very complicated so a lot of people cannot really know what they will receive if they become unemployed. However, we do a survey every year on the perception of unemployment insurance and the 2022 survey showed that 40% of the population thinks that benefit levels are too high in France and 48% think that the duration of the entitlement is too long. That was before the last reform, which reduced the duration of entitlement. However, that is the general population. Of course, when people become unemployed and face their levels, they think it is not so high.
Kristoffer Lundberg: I think there is quite broad support for our welfare state and social insurances—the things that we have in place. Generally, we have discussions on the margins, a bit of fine-tuning here and there and so on, where the politicians debate, but no one is really against the system as such. I think the rates are designed to make work pay, so the connection to declaring your own income for employees and the self-employed is there and you also get some sort of value for your taxes and contributions. In that sense, people feel that the benefits are fairly good. The point here is not only to give security but also to support changes in people’s lives, either sickness or unemployment or the necessity to go from one job to another. That is also there. I think it works.
Q261 Debbie Abrahams: Good morning, everyone. This question needs to be quite quick. It follows from Nigel Mills’s question. What do you believe is the relationship between earnings-related benefit payments and work-related outcomes? Perhaps we could start with Emily and then go to Kristoffer and Céline.
Emily Farchy: We have spoken a lot about equity—well, we have not but I heard your earlier session. People have different ideas of what equity is and it is inherently ideological to some extent anyway. Is it fair if you get more out if you put more in? Is it fair if we protect the poor? There is also a question of efficiency; as well as helping individuals cushion income loss, which is itself efficient because they are not pushed into poverty and potentially make them sell off assets, which might be income-generating, and so forth.
There is also a question of economy-wide efficiency and you can think of unemployment insurance as facilitating that because you help people by giving them some time, some breathing space, to find a good job and a job that is matched to their skills and experience. That not only maximises the output from the job that they obtain but also facilitates reallocation and an economy that can restructure in response to structural changes.
Q262 Debbie Abrahams: Can I intervene there? Are you saying that this is based on the evidence across all the OECD countries, or are you focusing on a particular country or group of countries where that is the case? Is this something we can point to in our report, that earnings-related social security will improve, for example, both the employment rate and productivity and can be seen as positive in employment outcomes?
Emily Farchy: It is difficult to give you a straightforward answer and I know we are pushed for time. It is extremely dependent on the parameters of the system and how you design it, but there are ways to maximise that and there is certainly evidence across different countries of a stronger job match and a better job match. Maybe I can provide you with something after this talk that focuses a bit more on that but that is certainly an empirical reality, dependent on the parameters.
Debbie Abrahams: Lovely. That is very helpful, thank you.
Kristoffer Lundberg: That is entirely the point and why we have the systems that we have because as a small country, we cannot be wasteful with the human capital available. To achieve a high standard of living, we need to have productivity, good matching on the labour market and all these things because we do not think we have the resources to be wasteful. In that sense, it also makes sense for us to optimise. If you lack social insurance for a broader part of the population, those people will need to save more and there might be over-saving and that could be hurtful for households if they need to put aside lots of money just in case. For us, it is always important to optimise these things, given what we have available.
Q263 Debbie Abrahams: Kristoffer, I will ask you the same question I put to Emily Farchy. Can you point to specific evidence that shows the relationship between improvements in the labour market and other economic and employment outcomes, or is this just your belief, that you and your country believe that this is the way that you should treat your citizens?
Kristoffer Lundberg: I hope it is both. To be completely honest, I would need to check what research we have on that. We write extensively on the subject, but it is, of course, an integrated part of our belief system. For us, we have come a long way from being one of the poorest countries in Europe to now being one of the richest so that, at least to some extent, is part of that story. Of course there are other factors, as well, but if I may, I could look into this in a proper way and let’s see if I can find something.
Debbie Abrahams: That would be good of you. Thank you. Finally, to Céline.
Céline Jaeggy: In France, unemployment insurance is seen as a support for transformation in the labour market. It would contribute to the labour market’s dynamism and the interests of employees and employers by protecting working people in all aspects of a career, relating originally to unemployment but also to retraining or creating a business, as I mentioned before. At the same time, unemployment insurance should remain attentive to the needs of employers, as furlough in a situation of crisis. In France, unemployment insurance has the role of an economic and social shock absorber. When unemployment increases, fewer contributions are collected and expenditure on benefits increases so our financial balance becomes negative, but the opposite is true when growth is strong. In France, the insurance is seen as a countercyclical absorber.
Debbie Abrahams: Thank you.
Q264 Neil Coyle: My question is for Emily Farchy. Can you tell us how the OECD is working with Ireland and Greece on their proposals for a new income-related unemployment benefit?
Emily Farchy: Greece is doing a very big overhaul of their system. At the moment, Greece has a flat rate, a little bit similar to what the UK has although much less sophisticated, but it is dependent on contributions. In a sense, Greece has contributions linked to earnings but a payout that is independent of earnings. Greece wants to introduce an income-related component but also wants to make it that you get out a bit more of what you put in, so link the amount not just to your prior wages but also to the duration of your prior employment.
We are working with Greece to help to design the optimal parameters. It is extremely complex and heavily dependent on the local labour market situation and the type of employment in the country. We are working with Greece to design the system and how it should work and to micro-simulate. We use the micro-data to try to anticipate what would be the impact, both financial/fiscal and on the distribution of the benefit, to try to anticipate ex ante what various designs would imply.
Also, as part of that, we are bringing together international best practice. We arranged an international workshop on making work pay. We had policymakers from across the OECD come and explain, very much as we are doing today, with presentations and more interaction with stakeholders across the Greek system to try to understand what they could take from other countries and how they would need to adapt it to the Greek context, so to support them in designing an appropriate system.
In Ireland, it is much less involved. We are just consulting with Ireland. Ireland is in the early stages of thinking about an income-linked component, and we are advising and are in conversation with them about what the various parameters could look like and what the implication would be.
That is our bread and butter, in a sense, working with countries to support them in making these reforms and building on the experience of other countries that have tackled similar questions.
Q265 Siobhan Baillie: I have two questions. The first is on how long unemployment income support is provided. There is quite a range of approaches across the OECD. Has any particular scheme or approach been found advantageous?
Kristoffer Lundberg: In Sweden, we have compensation periods and the normal one is 300 days. It is possible to get compensation for five days a week. If you have children under 18, the period is automatically extended by 150 days. This is the maximum. If you require more, there will be increasing demands on you to participate in various activities. Eventually there is a requirement that you participate in something that we call the job and development guarantee programme, which is a specified programme for people who have been long-term unemployed.
Thus there is an increasing amount of activity associated with being on unemployment. It begins when you register with the employment services. You start planning what is going to happen to you more or less immediately. However, this only happens if you are expected to have difficulty finding a job. Most people are between jobs or are managing a lot of things on their own or with help from other partners, so their requirements are quite easy because they are very short-term.
Q266 Siobhan Baillie: I am going to bring in Emily and then ask Céline a different question. Do you think any particular countries’ approaches to the length of time for payment are working well?
Emily Farchy: In most countries, the length of time is dependent on how long you have contributed to the system. If you have contributed for six months, you might have just three months’ entitlement; if you have contributed for two years, you might have one year of entitlement potential. You might use all of it, you might not. Countries differ a lot on the rate of accumulation, so how fast your contribution translates into the potential benefit duration.
What is interesting and tends to be what countries have been doing recently—the USA, Canada and, very recently, France so perhaps Céline can tell you more about it—is linking the duration of benefits that you can potentially claim to the wider macro-economy. Thus in times of a boom, the duration you could claim for would be shorter on the assumption that it is easier to find a job if you are searching for one. In a slump, you would be able to claim benefits for longer because the cost to the economy of remaining in unemployment is also less during a slump. That is one of the trends in the duration at the moment.
Q267 Siobhan Baillie: I think they are recent changes in France.
Emily Farchy: Very recent, yes.
Siobhan Baillie: Do you want to say a little bit about that? I am also interested to know your views on how significant the use of sanctions and conditionality is to these schemes and whether you think it is important to have those aspects of support schemes.
Emily Farchy: Sanctions are tricky in minimum income schemes such as Universal Credit. Some countries, for example Germany, are looking again at how they do that, whether they will do that and to what extent, because again you are assuming that people are very close to the poverty line and then you are taking away even more. That is really very tough.
When it comes to unemployment insurance paid at a higher rate, again it is all about balancing work incentives and support. Many countries use sanctions in those situations. If an individual is not searching for a job, if an individual is not attending obligatory training, it needs to be clearly conveyed that individuals understand their obligations, but in the majority of countries, there is some form of mutual obligation, things you have to do to claim additional support.
Céline Jaeggy: Do you want to know about the reform of the duration?
Siobhan Baillie: Very briefly, and then the sanctions would be helpful.
Céline Jaeggy: In France, the duration of compensation is related to the duration of contribution but since February of this year, the duration of compensation that we calculated before is reduced by 25%. If the unemployment rate becomes higher than 9%, we put an additional period of compensation corresponding to the 25% not granted at the beginning. The objective of this reform is to resolve hiring difficulties and to reach full employment but obviously we do not have any idea yet of the effects of this reform because it is very new.
As for our sanctions, as Emily explained, there are conditions attached to continuing to receive benefits—job search, accepting reasonable job offers, and attending monthly updating. If the jobseeker does not respect these conditions, there are consequences, which could be removal from the list of jobseekers and a full or partial withdrawal of benefits. Partial withdrawal means that the duration of the benefit is reduced. In cases of undeserved payment, we have repayment requirements for jobseekers.
Chair: Thank you all very much. That concludes our questions. You have mentioned one or two things that you might be able to send us. Please do, if there is something that you think would help us. We would be very grateful. Thank you all very much for joining us this morning and for the very helpful information you have given us.