The concept of the welfare state has enlarged the arena of the responsibilities of the government. It is the duty of the state to cater to the problems and difficulties of its citizens. Special care has to be taken for the low income group, the disabled, the aged and the children. The onus of providing means of earning for every able bodied citizen lies on the state. In the failure of which, the state should provide allowances for those who are involuntarily unemployed. The ways and means through which the state ensures the well being of its citizens, especially those requiring special help, are enshrined under the social security schemes for every state in today’s world. This study comprises a discussion on the social security schemes in UK and how it caters to different sections of the society. It shows how extensive and comprehensive the functions of a welfare ensuring state can be. Relevant statistical data have been provided to give an idea about the extent and nature of benefits provided.
Trends in social security expenditure in UK
The social insurance system in UK is by far one of the most comprehensive social security system in the world. Almost 50% of the population is covered by some social benefit or the other. Since its inception in 1948 the social insurance scheme has seen a gradual uptake in terms of the percentage of GDP allocated for this sector. The table below shows how the expenditure on social benefits have increased over time in UK from 1948.
The focus on social spending became all the more intense during the recession in 2008-09. The core objective was to insulate the vulnerable sections of the economy from the recession. But the recent fiscal corrections pose a challenge for the economy to keep the interests of the weaker sections of the society unaffected. So the idea is to maintain a balance between fiscal consolidation and social spending (OECD, 2014). In figure1 we can observe the change in social spending in the United Kingdom since 2007, in comparison to that in the United States, France and the OECD average.
Figure 1. Change in Real Social Spending. Source: OECD 2014
It is evident from Figure 1 that the social benefits expenditure in UK has been close to the OECD average. There has been a steep rise in expenditures from 2007 to 2009 followed by a tempered growth since 2009. In fact, the expenditures showed a slight fall in 2010-11. Though social spending picked up after 2011, there is a slowing trend at present.
The trend in public expenditure is represented graphically in Figure 2.
The trends observed from figure 2 clearly indicates a rise in expenditure in Ireland in the recent years. There was a slight rise in case of Scotland as well. Public expenditure is showing a falling trend in Wales, whereas in England the expenditure has remained the same over the years.
Social Security payment system
In UK, the social security scheme is run by the Department of Work and Pensions (DWP). There are specific benefit schemes designed for various target groups like the pensioners, people who have children, for workers who cannot attend duties because of illness, etc. (Govt. of UK, 2014). The pension system is based on a flat rate. The welfare benefits may be based on contributions or means tested for low income groups. The state system of flat rates is a pay as you go whereas private schemes are funded. (Budd & Campbell, 1998). The share benefits received by different groups in the economy is shown in the pie-chart below:
Source: IFS, 2012
The pay-as-you-go system gives the employee the option for contributing in the pension plan. The incumbent can either pay it lump-sum or she may pay it from her wage as she receives it periodically. The pay as you go scheme balances revenue and expenditure in each period. The rate of contribution in a pay as you go scheme can be calculated in the following way (Willmore, 2004):
pR = swL
where: p = the average pension
R= the number of pensioners
L = the number of workers participating in the scheme
w = average covered wage (note that there is an upper and lower limit to wage for contribution to be collected)
s = the rate of contribution
We can calculate s from the replacement ratio p/w and support ratio L/R in the following way:
s = (p/w)/(L/R)
The Trend in Dependency Ratio
The dependency ratio is an important demographic indicator. It is the ratio of population below the age of 15 and above the age of 64 to the total working –age population. That means it is the ratio of dependent population to the total work force. The change in old age dependency ratio, the ratio of aged population(above 64 years of age) to the working age population, since 1971 is depicted in figure 3.
Recent demographic statistics has shown that the percentage of aged population in UK is on the increase. The percentage of population aged 65 years and above has increased by 18% from 1980s to 2008, from 8.4 million to 9.9 million.(Office for National Statistics, 2010).
The trend shows a slow increase in dependency ratio. The projections show a steep rise in dependency without any change in State Pension Age.
The age dependency in UK varied between 59.97 in 1973 to 50.97 in 2008. It stood at 51.87 in 2011. The change in the age dependency ratio for the last 51 years in given in Table 2, the corresponding graph is shown in Figure 3.
Income distribution among aged population
For Lower Layer Super Output Areas (LSOAs) the Income Deprivation Affecting Older People Index (IDAOPI) is constructed as a measure of poverty among the aged. The IDAOPI represents the percentage of aged population(60 years and above) living in Pension Credit households. (Office for National Statistics, 2010). Figure 4 shows the percentage of aged population in low income households in panels a,b and c.
Social Security Tax: Employers and Employees Contribution
As stated earlier the pension system in UK consists of both Public and Private schemes. The public system comprises a flat rate and a system based on means testing for low income segments. Apart from that there is the State Earnings related Pension Scheme.
Both employers and employees are required to contribute to the National Insurance Contributions in order to receive pension as well as incapacity benefit and jobseeker’s allowance. Earnings exceeding Primary Threshold become payable for contributions. The PT was £76 a week in 2000-01. The Lower Earnings Limit was £67 in the same period. This implies that once earnings exceed £67 a week rights to benefits are earned. The Upper Earnings Limit was £535 in 2000-01. Anyone having income above PT have to pay 10% of their earnings between PT and the UEL. Employers are required to contribute 12.2 percent of income above the secondary threshold set at £84 in 2000-01. There is no upper earnings limit for employers’ contribution. (Emmerson & Johnson, 2001).
Social Security Benefit
The summary measure of benefit entitlements (GRR) from 1985-2005:
Chart: Author’s calculation
The AW based GRR summary measure of Benefit Entitlements, 2001-2011:
Chart: Author’s Calculation
The Gross Replacement Ratio represents the pension benefit as a percentage of the gross income received earlier. Previously GRR was calculated based on Average Production Worker (APW) wages. Now it is calculated on Average Worker (W) basis.
Trends in Retirement Age
The retirement age denotes the age at which a person can draw the full benefits of his pension. The retirement age in UK had been fairly constant around 65 years till 2010. But recently there is a trend in upward revision of this age to 67 and 68 years.The retirement age criteria is going to be more flexible in the coming years.(OECD, 2011)Figure 4 and Figure 5 represents the historical trend in the retirement age for men and women respectively, in six countries including UK.
Figure 6 Source: OECD,2011
Unemployment benefits program in the UK include:
- Income Based Job Seeker’s Allowance
- Contribution Based Job Seeker’s Allowance
- Job Grant
- In Work Credit
- Return to Work Credit
- Income based Jobseeker’s allowance: To receive this benefit the incumbent’s age must be 18 years or more but not above the pensionable age. The person must not be working for more than 16 hours in a week but is able to join work immediately. He or she must be actively looking for a job, taking at least two steps in a week for job seeking. The person must be willing to accept a job that requires at least 40 hours of work per week. Those who do not qualify for the contribution based job seeker’s allowance, and income is sufficiently low. Only one partner in a couple can receive this benefit.
- Contribution Based jobseeker’s allowance: For this scheme the criteria for receiving the benefit is same as the income cased jobseeker’s allowance. There is an additional requirement, the claimant must have made contributions to NIC for at least two years prior to the receipt of the allowance. This allowance is paid for a maximum period of 182 days.
- Job Grant: Job grant is provided when an individual stops receiving a benefit after getting into a job of at least 16hours a week or his or her partner gets a job for 25 hours a week. It is a once for all payment of £100 for singles or couples and £250 for those with children. The claimants of this grant must also ensure that the job lasts for at least five weeks, and they must have received a qualifying benefit for at least 26 weeks immediately before joining the present job.
- In Work Credit: This benefit entails a tax-free payment of £40 a week to lone parents, bringing up at least one child who is below 16 years of age, who have started work. Other eligibility criterion for the grant is same as job grant.
- Return to Work Credit: This is also a tax-free payment of £40 a week for those who have joined work after illness or with a disability. The job must be for at least 16 hours a week and must be expected to last for at least 5 weeks. The remuneration for the job must be at least the National Minimum Wage but not more than £1250 a month. The claimant must have received a qualifying benefit for at least 13 weeks prior to the receipt of this credit.(IFS,2012).
Health Care Coverage
Statistical information indicates that health spending has fallen in UK in 2010-11. Figure 6 shows the change in health expenditure in UK in comparison to other OECD countries.
The Figure below shows the change in per-capita health expenditure in Uk along with some other countries.
It is evident from the graph that health expenditure is on the rise in UK. But it is still below the OECD average, and much below the average expenditures in Canada and Switzerland. It clearly indicates that there is much to be done in this area.
Current Reforms in Social Security Benefits
Recently, the government of UK has planned a reduction in social expenditure to the tune of £18billion. The reduction will come by way of pay freezes and cuts.(IFS, 2012) The Box 1 below gives a summary of changes in Social security Benefits since 1948.
Recent changes include the introduction of 1) Universal Credit, 2) Personal Independence Payment, 3) The single tier pension, 4) Localizing support for council tax. (IFS, 2012).
A Brief Assessment of the System
The social security system in UK is targeted towards the low income population and towards the elderly and disabled. It is one of the longest and most successfully running system. The country shows commendable performance in most of the indexes of social well being in terms ofincome, job earnings, housing , health status, education etc. In fact, it ranks above the OECD average in many of the dimensions of social well being like environment and education.( OECD, 2013)
The reforms taken up recently are more comprehensive than reforms taken earlier. The introduction of Universal Credit will make the benefits system simpler as it is now a combination of six earlier benefit schemes. The single tier pension scheme is also another move towards simplification. But it should also be noted that the reduction in funds for social security by as much as £18billion is by far the largest cut in social benefits expenditure since the Second World War.(IFS,2012). So there are apprehensions among the beneficiaries. This may fall heavily upon the low income group. A careful balance is called for to take care of the interests of the various sections of the society.
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