‘The Future of the Welfare State; should we be forced to save more?’
Robert Skidelsky
Hansard | Monday, September 29, 1997

It's commonly assumed that the Welfare State stands in need of drastic reform. Our chairman, Frank Field, has been made reformer in chief: it is said he has been told to 'think the unthinkable'. Right now, we are waiting for his thoughts with bated breath.
But why this feeling that something needs to be done about the Welfare State, done urgently, done radically? I suggest there are four main reasons.
The first, off the top of the head, is that we cannot afford it. In any simple sense, that's not true. Of course we could afford to spend a bit more of the national income on health, education, pensions, social security and so on. The question is whether, as a community, we want to.
Here we come to the second reason. Some bits of what we call the Welfare State are much more popular than others. The popular bits are health, education, and pensions - the entitlements of most concern to most people. Much less popular are the minority entitlements which make up about half of Frank's budget - money paid out for the relief of poverty.
This brings us to the third reason. There is a growing feeling that the majority entitlements are being squeezed by the minority entitlements. As a matter of fact this is true. The fastest growing parts of the Welfare State have been payments to the very poor. Single mother and invalidity benefits are the main example, but there are many others. This is not because these benefits are becoming more generous, but because the number of people claiming them have been growing at a fantastic rate. On the other side, spending on the NHS, education and state pensions has been kept under very tight control.
The fourth reason is a more general disquiet about the effect of the Welfare State on people's characters. . This is a disquiet I share with Frank Field. He points out, rightly, that 'welfare provisions affect people's behaviour and thereby their character' and argues that our reforms must aim to restore the link between income and work and 'cut off the supply routes to dependency'.
I come to this debate from a modified classical liberal standpoint. I want a smaller state, smaller in the sense that people are left free to spend a larger proportion of their earnings as they choose and the government a smaller percentage of those earnings as it chooses. This doesn't mean going back to the Victorian age. It does mean lowering the share of national income spent by government on our behalf. And that means re-balancing our notions of individual and collective responsibility. What worries me is way we have divided the human attributes between the individual and the state. The state takes care of altruism and long-run thinking while it graciously leaves us free to spend 'our own money' on our own selfish pleasures. This is the epitome of mindless consumerism, it skews everything the wrong way, and demeans us as human beings. Any serious reform of the Welfare State has to aim to break down this sharp distinction between compulsory altruism and voluntary hedonism, to recapture altruism from the central state, and return it to the individual, the family, and the local community.
How do we set about applying these principles? Let me exclude two topics, because they are not really central to tonight's discussion. It may surprise some of you to learn that I am not a critic of the National Health Service. In fact I regard it as the Welfare State's finest achievement. I think that's common ground between us. I’m a much more severe critic of our educational system, but that's another debate for another time.
I want to spend a little longer on pensions. There are basically three issues in pensions reform: whether to go on with the existing PAYG system or switch to a saving system; whether, if you opt for the saving system, to make savings voluntary or compulsory; and if compulsory whether or not to give savers a choice of pension providers.
The first battle is over. Virtually everyone who has studied the matter accepts the need to move from a PAYG system to a saving or funded system -one in which people literally save a bit every week or month for their retirement or old age as opposed to transferring money to an existing OAP. The great economic advantage of this approach is that it builds compound interest into the entitlement. You invest in the economy and you get the benefit when you retire.
Morally, it is a return to the older ideal of not wanting to be a burden on your family and the next generation. I agree there was something grand in the wartime ideal of inter-generational solidarity from which the PAYG system sprang. But except as a family obligation that has now largely vanished, and the myth that it still continues is too high a price to pay for the economic costs of the present system.
Should we make the saving voluntary or compulsory? I find this very difficult. Ideally everyone should save voluntarily for old age, with the state paying the premiums for those with no earnings. However, there may be quite a lot of earners who will not have saved anything and will have to be bailed out by the state later. I am not willing to take that gamble -certainly not now - and no government has anywhere in the world. All the pension saving schemes are compulsory, with employees being forced to save from about 5 to 15 per cent of their earnings. Because I believe in individual responsibility I would set the compulsory savings at the minimum, leaving people to save voluntarily for larger pensions.
Should they have a choice of pension funds? In Singapore they don't. in Chile they do. The Chileans get a better return than the Singapore savers who have to invest through a government mutual fund.
There are huge transitional problems in moving from a PAYG to a funded pensions system, but I believe this is the way we are going, and it's the only sensible way to cope with the so-called 'demographic time bomb' - the ageing of the population.
The heart of our problem tonight is: how do we reform the social security system proper - that part of Frank's budget, amounting to some £60bn, or nearly 10% of the national income, which is spent solely on the relief of poverty? There are two components here: the so-called in work benefits like family credit which are subsidies to low wages and the out of work benefits to the unemployed. Housing benefit is paid to both groups.
Let me strike an optimistic note. Part of the problem will solve itself automatically. I think - I hope - we are coming out of the period of really heavy unemployment. It's down to 6.5%, the lowest since 1979, and still falling. I think the labour reforms of the 1980s will keep it at about 5% on average, provided the government does not make gross mistakes in macroeconomic policy.
We still need special schemes to get people, especially young people back into jobs. A poor job is better than no job. That is why I welcome the Welfare to Work programme. and would only urge that it be handled imaginatively, like Roosevelt's Civilian Conservation Corps in the 1930s.
My second ground for optimism has to do with wages. Over the last 20 years the wages of unskilled workers have gone down relative to those of skilled workers, reversing the trend in the 1950s and 1960s. What has happened, quite simply, is that the demand for unskilled or low skilled labour has fallen faster than the supply. But this cannot last, for two reasons. First, as the job market gets tighter again, the demand for low skilled labour will grow. Secondly, as educational standards improve, the supply will fall, thus forcing up the wages of the least skilled. So growing wage dispersion should at some point start to reverse itself.
However, neither of these things will lead to an automatic reduction in the growth of the social security budget. The Welfare State is like a cat chasing its tail. The improvement in general conditions does not reduce the demand for welfare, it seems to increase it. A wealthy society, it is argued, can afford to be more generous to its poor, even if those poor are a lot better off than they once were.
Thus even if wages at the bottom start going up again, that will be simply be used as a reason to shift the poverty line upwards, leaving the low paid just as dependent on benefits as before. There is a laudable aim behind in work benefits, which is that the income needed for a decent life should be guaranteed irrespective of one's earning power. This has been the main argument for redistributive taxation. It applies whether a person is earning a little or not at all. Carried to its logical conclusion it points to a universal basic income, payable of right, with work as a kind of optional extra.
However, there is a much older Labour tradition, which is that work should earn a decent wage - a living wage as it was once called - and that self-respect demanded that one resorted to the benefit system only when all opportunities for work were cut off. I know the economists will be against me, but I still think that that is the healthier instinct. It's what gave rise to the trade union movement and it's what lies behind the call for a minimum wage today.
How do we way this issue up? On the one hand, Gordon Brown aims to establish an Earned Income Tax Credit which suggests a minimum income approach. On the other hand, he has appointed a Low Pay Commission to recommend a minimum wage. I think Labour really needs to make up its mind about which of these it wants. But the basic aim of any scheme should be to cut the permanent link between people in work and Frank Field's department. It's degrading and should not be necessary.
This still leave us with the problem of those too discouraged to look for work, too unsocial to get work, too fickle or apparently unhealthy to hold down jobs. The Victorians called them the residue and tried to keep them out of sight. We call them the 'socially excluded' and want to give them a leg up.
Economists address their problem by trying to eliminate the 'poverty trap' - the situation of being able to get more or as much from benefit as by working. They devise all kinds of fancy tapers to reduce the high marginal tax rates attached to extra effort, or effort of any kind. Of course, I am not against technical reforms of this kind, and I believe they can do some good. But we must recognise that exclusion is a social and not just economic problem. Inclusion requires not just technical fixes, which may be too costly or ineffective on their own, but all kinds of schemes of community self-help.
Yesterday the newspapers gave some publicity to what is called the Wisconsin model, which requires that single mothers be made to work for their benefits after six months. I have to say that I am instinctively against schemes of this kind. Certainly try to get people from welfare into work. But I would aim such schemes at young men, not young mothers. This isn't because I want to keep young mothers out of the labour market if they want to work. But we need to recognise that the explosion in the numbers of never married mothers has a lotto do with the lack of reliable male breadwinners. So I would try to use my welfare to work schemes to rebuild the traditional one earner family which is still preferred choice for most mothers with young children.
You will see that I have been preaching almost the pure milk of our chairman's gospel. I'm not sure how far it is the pure milk of Will Hutton's. I read a review of his last book which said that 'Hutton is continually struggling to control his dirigiste instincts'. Will is basically an old-fashioned socialist in the head, but his heart is too soft for him to be a consistent one. So I fear he will take over some of my soggy middle ground, and end up agreeing with me, which would be a shame.
I hope I have sketched out the direction in which I want to go: more self-reliance, less reliance on the state. Now we can all relax and enjoy Will's ironies, paradoxes and passion.