The Promise Behind National Insurance – What’s happening to it, why does it matter for women, and how might it change?

People often see national insurance contributions as ‘just another tax’. But, as the WBG points out, national insurance is an important element within the overall social security system. The money from National Insurance contributions goes into a fund, which can only be used to pay national insurance benefits (with a small proportion going towards the NHS).

National insurance is social

National insurance isn’t the same as private insurance. So it can avoid two problems.

One, private insurance usually excludes some groups from cover if they are seen as too ‘high risk’ – for example, people who have a pre-existing, or chronic, long-term condition.

Two, even for those who are included, premiums can be increased for those at greater risk of claiming, which can make it unaffordable for many.

Instead, national insurance rules are set by policy-makers for society as a whole. The national insurance system is based on ideas of contribution and reciprocity. National insurance benefits are also an important part of a social contract. That’s why this kind of system is often called ‘social insurance’ in other countries.

Unlike private insurance, national insurance pools risks across a wider population. Cover for a range of potentially predictable risks is a fundamental purpose of social security systems.

National insurance benefits also redistribute resources across the individual and family lifecycle to periods when support is needed most, offering both individual security and social solidarity.

National insurance aims to give individuals income security during periods when their paid employment is interrupted (such as unemployment) or ended (by retirement). So it can be seen as a reward for working – a ‘workers’ benefit system’.

National insurance benefits can also act as an economic stabiliser during recessions. Benefits are more likely to be spent not saved, putting money into the economy.

National insurance benefits are individually based

The national insurance system gives individuals access to benefits, such as the State Pension, and two working age contributory benefits (now also called ‘New Style’) –  Jobseeker’s Allowance or Employment and Support Allowance.

These are vital because they are not means-tested. They provide an individual, independent source of income . This means that if you are in a couple, what you get does not depend on your partner’s income, or savings, or needs. And national insurance benefits are paid to you. These aspects are particularly important for women in couples, especially when resources are not shared, and when there is domestic abuse.

National insurance coverage has been expanded 

Workers and self-employed people pay national insurance contributions but may also get ‘credits’ for activities – such as parenting, caring or education/training – which can also count towards benefit entitlement.

Although the original scheme excluded some groups, over time the range of activities that attract contribution credits has expanded, and more low-paid workers have also been brought into the national insurance system without having to pay contributions on a slice of their earnings.

But national insurance benefits have been eroded

But, over time, policy decisions by governments have eroded working age national insurance benefits, with tighter eligibility rules, lower amounts and shorter durations. This has coincided with a massive expansion of means-testing.

This has meant that many more couples have been brought into Universal Credit, which means-tests them jointly but usually only pays into one bank account. In contrast, national insurance benefits are individually based.

The latest cut?

Last year the Department for Work and Pensions’ Green Paper proposed a single Unemployment Insurance to replace two current national insurance benefits – Jobseeker’s Allowance and Employment and Support Allowance. It would be paid at the higher rate of the two benefits, but because it would focus on short-term job loss it would be time-limited (lasting for up to only 6 or 12 months).

But the proposed Unemployment Insurance would mean the abolition of Employment and Support Allowance, a national insurance benefit for two groups of people: those who have limited capability for work; and those who have limited capability for work and work-related activity. For the latter group, Employment and Support Allowance can be paid for as long as eligibility conditions are met.

So, in the proposed system, after Unemployment Insurance stopped, there would be no right to an individual benefit – which, as the WBG argues, is so important for women. (For women in couples, means-tested Universal Credit does not guarantee individual access to payment; and those with a partner with income or savings could be excluded from Universal Credit.)

So if this proposal is adopted, someone assessed as having limited capability for work and work-related activity and just getting contributory/New Style Employment and Support Allowance, without any means-tested top-up, could lose over £145 per week (i.e. £7,586 over the course of a year).

If someone is not entitled to Universal Credit, they may get no benefit at all.

And even if you get Universal Credit, your National Insurance contribution credits will only help you meet the contribution conditions for the state pension – whereas credits for Employment and Support Allowance help towards entitlement to most national insurance benefits.

Depending on its final policy design, Unemployment Insurance could be another erosion of national insurance rights for many people, ending more than a century of provision for long-term ‘incapacity’ for work.

The decline of national insurance benefits is not inevitable.

It is a policy choice.

And we can, as a society, take a different path.

Instead of decline, here are two suggestions.

First, retain and reform 

We should retain Employment and Support Allowance as an individual non-means-tested national insurance benefit for people who are assessed as being unable to work due to long-term work-limiting impairments or health conditions. It would be paid for as long as someone met the eligibility conditions. The parameters and assessment of this benefit should be co-designed with disabled people.

Second, make national insurance more flexible

As some think tanks have argued, we could make national insurance and the contributory principle more flexible to reflect today’s society and labour market, future-proofing the system for the next generation.

More flexibility could be introduced in several ways, such as:

• Making national insurance contributions more inclusive, such as by expanding credits and allowing contributions and credits to be counted over a more flexible period, as well as perhaps relating contributions to the person rather than the job (so that someone with several jobs can ‘add up’ contributions from each);
• Relaxing current contribution conditions for benefits, perhaps by extending entitlements that are based on low earnings, as with Maternity Allowance now;
• Giving a lower benefit payment (rather than awarding no benefit at all) in cases in which someone has a gap in their contribution record (as used to be the case, such as with part-payment for unemployment benefit);
• Re-creating part-payment for people with some limited capability for work, returning to the original design of Employment and Support Allowance, and earlier calls for a ‘partial capacity’

If we take a more flexible approach to national insurance, this could include expanding the range of contingencies  which qualify for benefit when employment is interrupted. A more inclusive approach to ‘contribution’ could be developed, such replacing based on current as well as past contribution. Of course there is a balance to be struck between including a wider group of people and rewarding contribution. But making national insurance more flexible could be one way in which more people could feel they have a stake in the system and can see what they are entitled to and why.

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This article is the first of two exploring national insurance and how it could be reformed for today’s labour market and society.

Dr Marilyn Howard is a writer and researcher on social security and a policy advisor to the WBG. She is also a member of the Scottish Commission on Social Security. Here she is writing in a personal capacity.

This blogpost draws on work that the author has undertaken with Fran Bennett and is indebted to her knowledge and expertise.

The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy position of the Women’s Budget Group.