Magazine

Is the benefit system too baffling to be solved?

  • 17 October 2012
  • From the section Magazine
Welfare composite

Simplifying welfare is a top government priority. But why are benefits so baffling?

Benefits are fiendishly complicated. If Franz Kafka were to write a novel today, he might plunge protagonist Josef K into the baffling UK welfare system, rather than the claustrophobic legal process of The Trial.

People increasingly expect technology to make complex systems work intuitively. But the opacity of the UK benefits system has not been resolved by high-powered websites, smartphones or clever apps.

Welfare Reform Minister Lord Freud has said that reform is necessary to sweep away a "tangled mess of add-ons and premiums" to make the system "simple and understandable".

It's so bamboozling that many benefits go unclaimed, according to DWP figures released for 2009-10.

There is a paradox for policymakers. Make benefits simple via a few clear cut-offs and the effect is unfair - many will miss out either because they earn just too much or because their complicated circumstances are not recognised. If, on the other hand, there is generous universal provision of things like child benefit, the rich receive hand-outs they don't need. The challenge is to design something that is simple, fair and well directed.

The current system relies on labyrinthine rules to impose means testing and prevent abuse.

Eligibility is the first hoop to jump through. And it is regularly being tweaked by politicians.

Once eligible, the claimant has to find out the amount they'll get - each benefit comes in different rates according to range of criteria.

Then if the claimant's circumstances shift - they take a job for example - the amount they are entitled to changes. Claimants are allowed to earn a small amount on top of their benefits without incurring a penalty.

Earning more than this small top-up will cause claimants to forfeit a proportion of their benefit. This "withdrawal rate" or "taper" differs between benefits.

So far, so simple.

There is the complicating factor that some benefits are awarded to people according to their income after "means testing". Others are only available to people who have paid a sufficient amount of national insurance contributions.

The complexity makes benefit recipients cautious, says Mike Dixon assistant chief executive of the Citizens Advice Bureau. "It's really hard to understand at the moment. People moving into work have to move from one benefit to another, which makes them nervous."

Iain Duncan Smith was influenced by his time on Glasgow's Easterhouse estate

Tax credits are supposed to help make work pay. But analysis by the Institute for Fiscal Studies (IFS) shows that those who are most dependent on benefits - the poorest families - face a steep withdrawal of benefit when they move into work. It found 1.5 million people on an effective tax rate of 70% to 100% when they began working.

The question is why it needs to be so complicated?

None of this was part of the plan 70 years ago when William Beveridge wrote the blueprint for the modern welfare state. The language in 1942 was grand and poetic.

"Want is one only of five giants on the road of reconstruction… the others are disease, ignorance, squalor and idleness," he wrote in Social Insurance and Allied Services.

The post-war Labour government agreed to his proposals. In came unemployment benefit for a period of six months, unlimited sick pay, and five shillings a week for each child after the first.

It was a different age. Society as a whole was poorer. It was also less complicated. There was full employment, nuclear families were the norm and there was little awareness of the rights of women or the disabled.

As society has become more complex, successive governments have added bits, tweaked and tweaked again, says Mr Dixon. "A good way to think about the welfare system is as a big ramshackle Victorian house. It's had lots of owners doing extensions but it's quite hard to move around."

Beveridge's system was founded on people paying contributions. But over the past three decades there has been a dramatic increase in means testing as governments have sought to save money and focus resources on the poorest.

The effect is a rash of rules and conditions to prevent people claiming who earn too much. Critics argue it has created perverse incentives for people to stay on benefits rather than take jobs.

"Part of the complexity is down to the variety in people's lives," says Tim Nichols, parliamentary officer at the Child Poverty Action Group. "Another aspect is the lessening of universalism - the more means testing, the more complex it becomes." Governments have practised "incremental penny pinching", adding conditions and sanctions, he says.

By the end of the 1970s, the benefits system had become more complex

Next year, the government will launch the biggest reform of benefits since the modern welfare state came in after World War II. A central plank is the universal credit, which will merge six benefits - housing benefit, jobseeker's allowance, income support, child tax credit, working tax credit and employment support allowance - into one monthly payment.

But trying to simplify something so complex is a headache in itself, and the question is whether Work and Pensions Secretary Iain Duncan Smith's audacious reforms will make the system any simpler.

A pessimist might echo the words of Kafka, who once said: "Every revolution evaporates and leaves behind only the slime of a new bureaucracy."

"The current system is more complicated than it needs to be and the government has decided to simplify it by integrating most means-tested benefits for working-age people," says James Browne of the Institute for Fiscal Studies. "However, the rules for calculating universal credit will still be complicated."

It means trade-offs. The IFS calculates that 2.5 million families will gain, 1.4 million will lose out and 2.5 million will see no change. Mr Duncan Smith's gainers are people for whom going into work is least economically attractive.

The number of people paying an effective tax rate of 70% to 100% as they move into work will be reduced from 1.5 million to 400,000, the IFS says. But some people who currently pay a lower rate will find themselves paying more.

James Purnell, who was work and pensions secretary in the last Labour government, believes universal credit will make it simpler for the Department for Work and Pensions to administer and cut down on error. But it won't solve the problem of incentivising work, he says. Means testing requires arbitrary cut-off points.

And universal credit is not the end of the story - disability benefits, for example, will be outside its remit. Baroness Tanni Grey-Thompson, the champion Paralympian, agrees with the need for greater simplicity. But the government's plans for "tough cuts" to disability living allowance will make life hard for disabled people, she says, and some parents even fear they will have to put their disabled children into residential care.

According to the IFS, the fact council tax benefit will be paid separately "risks introducing the sort of complexity and lack of transparency that the government says it wants to reduce".

The system as a whole will have more up-to-date information, supporters argue, such as details of the tax and national insurance deducted from people's wages.

It all depends on a powerful new IT scheme. And that is the other big unknown. Government IT schemes do not have the best of records.

Without the computers, how will mere mortals be able to get their heads round the benefits system?