Welfare: just help yourself

Success in implementing the reforms requires millions of people to accept the principle of insuring themselves privately

WE NOW know where Tony Blair and Frank Field plan to start reconstructing the welfare state, but we still don't know where they will end. The easy part, in political terms, will be to attack benefit fraud which costs the taxpayer an estimated pounds 4bn a year largely because of poor record-keeping and a lack of co-ordination between the housing benefit and unemployment benefit administrators. Linking their computers to prevent people working and claiming benefits will be a good place to start.

But the practical implications of attacking benefit fraud have yet to be faced. Success will require the introduction of national identity cards to make it harder to claim multiple benefits through multiple identities and addresses. But a national identity scheme would arouse strong passions among the civil liberties lobby as well as the fraudsters.

Improving welfare delivery will also need increased state resources, especially an increase in the number of administrators monitoring claimants, tailoring benefits to need and counselling the unemployed.

Further success in implementing the spirit of the Field reforms requires millions of people to accept the principle of insuring themselves privately for things they have either left to luck, or have assumed that the state is the ultimate safety net for those who lose their homes, health or jobs as a result of illness, accident or misfortune.

In a perfect world, the state should accept that responsibility and charge people for the protection it provides: the rationale behind National Insurance. The pity is that National Insurance is now seen either as bottomless pot for free medical insurance, pensions and unemployment benefits, or as a disguised form of taxation. As such it is the worst of both worlds, and the Prime Minister could do a lot worse than redefine its role and make sure the electorate gets, and sees it gets, value for money.

If the Government rejects the role of universal insurance provider, it will have to devolve that on to the insurance industry. But the Government cannot escape overall responsibility for the framework. Most people in the UK have a mindset which regards the insurance industry as inefficient, over-manned and more interested in commissions and profits than value for money. No government can afford to launch another flawed scheme like the mis-sold personal pension programme and then deny responsibility for the mess.

Mr Field's document is still short on details, but it is possible to see where the initiatives will develop.

Accident, sickness and unemployment insurance is seen as a costly add- on which significantly increases the cost of a mortgage but offers only limited support for a relatively short period. Insurers say this is a direct result of the fact that the market is still too small for economies of scale, and in many cases insurers carry an unfair burden of risk as only vulnerable people insure voluntarily against these risks.

Amanda Davidson, of London-based independent financial adviser Holden Meehan, thinks people would be better off taking out private health insurance, which pays an income in the event of incapacity, rather than an accident, sickness and unemployment policy.

Long-term care also needs to be addressed. At the moment old people who need care have to sell their homes and run down their estates to pay for it, and their families may be pursued for cash if assets have been given away shortly before care is needed. But long-term care insurance is very expensive and many prefer to take a chance. Some authorities are more draconian than others, and there is a strong need for clarification. The partnership plan trailed by the previous government, which would take over care if individuals insure privately for the first two or three years, is worth developing.

Simon Walker, a director of Newcastle-based IFA Three Counties, is disappointed that the Government has not removed the requirement for pensioners to buy an annuity by the age of 75, when it might be better for them to retain a lump sum to pay for long-term care if the need arises, and keep the assets for their heirs if they do not.

But the most urgent issue is pension provision, including the future of the State Earnings-Related Pension Scheme, and above all whether contributions to a supplementary pension should be compulsory. The British have a deep dislike of compulsion and the Government a deep dislike of unpopularity, but there is a clear risk that 10 per cent of the workforce will be unemployed for long periods of their working lives, 20 per cent are unwilling to put money aside for an old age they may never see, and everyone runs the risk of early retirement just when they they are expecting to be able to afford to set something aside. Mandatory pension contributions from employers would go a long way to making mandatory personal contributions acceptable.