Inclusion or Insurance? National Insurance and the future of the contributory principle

John Hills

Published May 2003

This paper examines the decline of National Insurance in Britain, as witnessed by its declining share of all social security spending and the steady dilution of the ¿contributory principle¿ on which it was originally based. It argues that this decline is not an accident: under governments of the Left, arguments in favour of inclusion have been predominant, non-contributory benefits expanded and contribution conditions softened; under those of the Right, the emphasis has been on focussing limited resources on the poorest through means-testing. Given where we are now, the strong arguments in principle for social insurance look much weaker. However, there are also reasons why the system has not been swept away, notably the way in which the bulk of the system is concerned with state pension rights which have already accrued. The paper explores current plans for the future development of state pensions, arguing that their combined effect is to restore something like a flat rate state pension, but with significant complexity. This could be developed into a more transparent system guaranteeing a total state pension at a fixed percentage of average earnings for those meeting a participation test, rather than being based on contribution records. This leaves a choice for the remaining sixth of National Insurance benefits: to separate out state pensions and absorb the other insurance benefits within the rest of working age social security, or to maintain the scope of National Insurance, but also based on participation, not past contributions.