§ 11.33 a.m.
§ The Parliamentary Under-Secretary of State, Department of Health and Social Security (Lord Glenarthur)
My Lords, I beg to move that the draft Social Security (Contributions, Re-rating) Order 1983 be agreed to; I should also like to speak to the Social Security (Treasury Supplement to Contributions) Order 1983 and the Social Security (Contributions) Amendment (No. 6) Regulations 1983, all of which were laid before this House on 17th November.
Your Lordships will know that the first and second of these instruments result from the annual event known as the contributions re-rating exercise which my right honourable friend the Secretary of State carries out. The Social Security Act 1975 requires him to review the general level of earnings each year and your Lordships will know that he customarily combines this with a review of the state of the National Insurance Fund which the same Act empowers him to carry out.
With your Lordships' permission, I will also speak to the Social Security (Contributions) Amendment (No. 5) Regulations 1983 and the Social Security (Contributions) Amendment (No. 7) Regulations 1983 which my right honourable friend made on 14th November and 15th November respectively. These regulations, which set Class 1 earnings limits and the level of the abatements in the contribution rates for members of Her Majesty's Forces, are not part of the Motion before us, because they are subject only to the negative resolution procedure. However, the Class 1 earnings limits are inseparable from the matters under discussion and all five instruments deal with the amount of contributions to be paid next year.
In a sense the most interesting change is one that is not being proposed. For the first time in several years there is to be no change in the Class 1 contribution rate. The changes of most significance for employees and employers, the raising of the lower and upper earnings limits, are routine events as these limits are linked by law to the pension rate.
The Social Security Pensions Act 1975 provides that the lower earnings limit must be equal to, or no more than 49p below, the basic pension rate. As this will stand at £34.05 a week next year, a lower earnings limit of £34.00 is inevitable if we are to deal in round numbers. The same Act requires the upper earnings limit to be between 6½and 7½ times the basic pension rate. A figure of up to £255 a week is therefore possible. However, £255 would represent an increase of over 8½per cent. on the present limit of £235 and we are therefore proposing a figure of£250 which is about 7.3 times the pension rate and represents an increase in line with the movement of earnings. Most people, that is people with earnings between the lower and upper 399 earnings limits, will be unaffected, or virtually unaffected, by these earnings.
For employees with earnings above the present upper earnings limit of£235 a week, contributions will increase slightly: by up to £1.07 a week for contracted-out employees and up to £1.35 for others. In the case of married women, and widows paying at the reduced rate the maximum increase will be 57p per week. For the employers of people with earnings above £235 a week increases of up to £1.17 (for contracted-out employees) and £1.71 (for those not contracted-out) will apply.
The only other changes directly affecting contributions of employees and employers are those in the No. 6 and No. 7 amendment regulations. As your Lordships will know, the contribution rates for mariners and serving members of Her Majesty's Forces are set at a slightly lower level than those for other employees. This reflects factors such as their exclusion from the redundancy scheme and ineligibility for certain benefits. However, for various reasons, including the fact that the pattern of expenditure on some benefits has changed, the level of abatement now needs to be adjusted. We are therefore proposing to alter the abatements in the light of advice from the Government Actuary.
I turn now to the self-employed. We are, of course, pleased that it is possible to leave the profits-related Class 4 rate, like the Class 1 rate, at its present level. The formula for determining the Class 2 rate points to a figure of £4.80 per week. However, as your Lordships know, we have for the last two years fixed on a figure 20p below that indicated by the formula and we propose to continue this modest relief with a rate of £4.60.
The profits limits between which Class 4 contributions are payable rise automatically each year like the earnings limits for Class 1 contributions. The figures proposed for next year are £3,950 and £13,000, the latter figure being exactly 52 times the weekly upper earnings limit. The small earnings exception for Class 2 liability also rises automatically—in this case from £1,775 to £1,850 a year. The rate of the voluntary Class 3 contribution is traditionally 10p a week below the Class 2 rate. We are therefore proposing a figure of £4.50 a week from next April.
Finally, the Treasury supplement is being reduced from 13 per cent. to 11 per cent. of contributions paid. This change will help to keep in balance social security expenditure by the taxpayer and the contributor. Your Lordships will have noted in the Government Actuary's report that the reduction in the supplement will leave the estimated balance in the fund comfortably above the minimum level recommended by the Government Actuary.
My Lords, these five instruments are the result of a routine exercise to ensure that the National Insurance Fund has sufficient money in it to pay for benefits. On that basis I commend them to your Lordships. I beg to move.
§ Moved, That the draft Social Security (Contributions, Re-rating) Order 1983 laid before the House on 17th November be approved—(Lord Glenarthur.)400
§ 11.39 a.m.
§ Baroness Jeger
My Lords, the noble Lord the Minister has quite rightly said that this is a routine exercise. It is a routine exercise which some of us regret because the routine seems to be disregarding some of the fundamental thinking that is necessary about the whole social security situation in this country. The emptiness of your Lordships'Chamber indicates the reaction of many people to these rather arcane and complicated matters, although they affect almost the whole population of the country and deserve more consideration. However, this morning is not the time to go into the deeper problems and, as I see it, into the necessary revision of some of the legislation to which these orders relate.
But I should like to ask the noble Lord why it is necessary to increase contributions. I, too, have read the Government Actuary's report very carefully, and I see that he reports a surplus of £4,280 million this year, with an expectation next year of £4,480 million. Why are we taking more money off the working people of this country in order to swell the balance in the National Insurance Fund? I can see only one reason: that this Government prefer the regressive taxation by national insurance contributions to the progress of taxation by income tax, which shares the burden more fairly.
The result of the policy is to make heavier demands on the lower paid. I would remind your Lordships that, when we are talking about the cost of living and earnings in general, national insurance contributions are not reckoned in the retail price index. Therefore, any increase in contributions is a real loss to the people concerned. I very much hope that as soon as possible we shall take a more fundamental look at these problems.
I do not propose to take the time of your Lordships' House by going into the figures in detail, because it is the whole policy which we on this side regret, and we look forward to a change as soon as possible.
§ 11.42 a.m.
§ Lord Banks
My Lords, I should like to join in thanking the noble Lord, Lord Glenarthur, for his explanation of the purpose and content of these instruments that are before us this morning. I think the noble Lord must be glad that housing benefit is not paid out of the National Insurance Fund since, as a consequence of that, we are not discussing the confusion over the most recent cuts which the Government are proposing in that connection. Having watched the programme, "What's It Worth?" on Channel 4 this week, it seems to me that Ministers are not fully aware of the implications of what they are proposing in that field.
The noble Lord said that, generally speaking, there is no increase in national insurance contributions this year, except for the 20p increase for voluntary Class 3 flat rate contributions, and that certainly is good, particularly as, since the present Government came to office, employees' Class 1 contributions have increased from 6.5 per cent. to 9 per cent. As the noble Lord explained, the lower and upper limits have been raised to take account of inflation. I make the increase in the upper limit 6.3 per cent. The figure of £250 per week 401 for the upper limit is closer to the 7½times maximum than the figure of £235 was. The effect of the change of course will be that every employee earning over £235 per week and his or her employers will pay more. Those earning over £250 per week will pay £70.20p a year more.
One asks again why should the person earning £250 per week exactly have to pay the highest percentage of his income in increase? Would it not be fairer to eliminate the top limit and reduce the general rate of contribution? Is there any reason why, in these circumstances, pension calculations as opposed to pension contributions should not continue to be based on an upper and lower limit?
The noble Lord has explained to us that, continuing the trend which the Government have commenced, the Treasury supplement is to be reduced, the Treasury supplement having gone down from 18 per cent. to 13 per cent. and now this year to 11 per cent. of national insurance contributions before contracted-out contributions are taken into account. So more of the burden is being thrown on to contributors. Would it not be fairer for any reduction to be shared between taxpayers and contributors? Indeed, is any reduction at all justified in view of the problem of the retirement pensioners with no, or very little, earnings-related pension, and in view of the gap which will open up between these people and the younger pensioners on earnings-related pension as the earnings-related scheme matures? The oldest will be the poorest until all those born before 1933 have died—that is, the poorest in terms of their national insurance pension.
Both the Select Committee on Social Services in another place and the Social Security Advisory Committee in their second annual report have highlighted this problem and both have indicated that resources will have to be found to supplement the resources as of right of the poorest pensioners. I wonder what the response of the Government is to that. The re-emergence of a surplus in the fund, with the revised estimate for the current year set out in the Government Actuary's report, is encouraging and may possibly assist some solution to be found for the problem to which I have just referred.
But one wonders about the long-term prospects for the fund. The Select Committee in the House of Commons, to which I have referred, said in its recent report that the increase in the bill for national insurance retirement pensions might rise from 110 per cent. to 120 per cent. by the year 2031; and at a seminar organised by the Institute of Actuaries and the Faculty of Actuaries in London on 30th November, Mr. G. T. Pepper, an actuary, pointed out that the cost of national insurance pensions is expected to rise from 9½ per cent. of total wages and salaries to 19 per cent. in about 50 years—that is exactly double. At the same conference the Government Actuary estimated that ultimately contribution levels would increase by about 50 per cent. But that figure assumed a Treasury supplement of 13 per cent., whereas one of the instruments before us this morning will reduce that to 11 per cent. It also assumed unemployment at pre-recession levels, and I am not quite sure how low that is, but unfortunately it may be too optimistic an assumption as well.
402 To conclude, the two problems for the long-term are: what is to be done about those with little or no earnings-related pension, and what is to be done about the long-term costs? The first is not really a long-term problem; it is one we have with us now. I have put forward a suggested solution, and if the noble Lord the Minister is interested, he can see it in the November issue of Pensions World. Of course, it would not be appropriate for me to go into that this morning. However, I should appreciate some indication from the Government of their thinking on these two important problems which relate to the long-term future of the National Insurance Fund.
§ 11.48 a.m.
§ Lord Kilmarnock
My Lords, we on this Bench should also like to thank the noble Lord for introducing and explaining these amendment regulations. The most significant of the regulations is the one reducing the Treasury supplement contribution from 13 per cent. to 11 per cent., to which my noble friend Lord Banks has already referred. I should like to add my voice to his on this point.
The main cause of the rise in social security expenditure has been the rise in the long-term unemployed who are dependent on supplementary benefit. This has also led to a rise in the proportion of benefit expenditure that has be be met from taxation. Now the Government propose yet again—having reduced the Treasury supplement from 18 per cent. to 13 per cent.—to reduce it from 13 per cent. to 11 per cent., which means that any shortfall must be loaded further on to contributors, who are made to pay more for non-contributory benefits.
My concern is as follows. Is it equitable to pass the buck for unemployment arising as a result of Government policy on to contributors at work, mainly on average earnings, rather than on to general taxation, which includes all earners. Does it not discourage low earners from seeking employment? Will the Government look again at the balance of social security finance and keep the Teasury supplement steady in the future?
The second thing I want to refer tois the work of the Social Security Advisory Committee on regulations, dealt with in Chapter 3, paragraph 4, of their recent report. They refer to the procedure which allows Ministers to make regulations urgently, without prior submission to the committee.I see that this procedure has in fact been invoked in one of the orders before your Lordships this afternoon, the one relating to mariners. Was this really necessary? I am only asking for information in view of the assurance that the SSAC received from the Secretary of State that urgency powers will be used only in exceptional circumstances.
Another instance of this, as the noble Lord will recall, was the recent Supplementary Benefits Single Payments Amendment Regulations which were pushed through both Houses of Parliament before the SSAC had been able to comment and enter into their normal consultative process with interested bodies and parties. I should like to have a reassurance from the noble Lord that in future the urgency procedure will be invoked only when it is strictly necessary.
403 I want to turn briefly to the Statutory Sick Pay Up-rating Order. When this was introduced employers were worried at the risk of abuse.
§ Lord Lucas of Chilworth
My Lords, I understand that my noble friend has not yet spoken to that point. Perhaps the noble Lord, Lord Kilmarnock, would like to make his remarks after my noble friend has spoken.
§ Lord Kilmarnock
I beg the noble Lord's pardon. I thought he had spoken to all the orders at once. Perhaps I could revert to the point when he has introduced that order.
§ Lord Glenarthur
My Lords, the noble Baroness, Lady Jeger, and the noble Lords, Lord Banks and Lord Kilmarnock, have raised a fair number of points. I may not be able to cover all of them. Certainly the noble Lord, Lord Banks, raised a great number of points which I should like to study, and perhaps I may write to him about them. The noble Baroness, Lady Jeger, asked, effectively: why raise the contributions at all when the fund is in surplus? As I hope I made clearwhen I spoke, the Class 1 contribution rate is not in fact being raised, nor is the Class 4 self-employed rate. We are raising the upper earnings and profit making limits and the Class 2 rate because they are expressed in cash terms and need to be raised each year because the Act requires them to be looked at in this way.
The noble Baroness also asked about the reduction in the Treasury supplement. In managing the national insurance fund we try to achieve a broad balance between expenditure and income, taking one year with another. How the income should be split between contributions and general taxation is a question to be looked at in the wider context of the burden of taxation generally. In view of the other increasing costs of social security being met by the taxpayer, we felt it right to make a reduction.
The noble Baroness and the noble Lord, Lord Banks, asked why the supplement was being reduced by the figure of 2 per cent. The appropriate level of the supplement is a wider question to be looked at, as I think I indicated, in the context of fiscal policy generally. In this context we felt that the maximum adjustment allowed without primary legislation would be desirable in this particular case.
The noble Lord, Lord Banks, asked why we do not abolish the upper earnings limit altogether. The upper earnings limit provides a ceiling, not only for contributions but also for earnings-related pensions and the guaranteed minimum pensions provided by contracted out occupational pension schemes. This link is an essential feature of the contributory principle—and I hope that the noble Lord would agree with that—and there could be no question of removing the ceiling for benefits. It would be prohibitively expensive to do so. To remove the limit for contributions only would mean breaking the present link between contributions and benefits, and would be a major departure from the pension arrangements agreed in 1975.
The noble Lord, Lord Banks, suggested that the load on contributors should be relieved. Social security benefits are funded by both contributors and the 404 taxpayer. In recent years the taxpayers' share has increased from 47 per cent. in 1979–80 to 50 per cent. in the current year. The effect of this order is to reduce the demand on the taxpayer by 1 per cent., stopping the drift towards higher pressure on the taxpayer. The noble Lord. Lord Kilmarnock, asked whether it was really necessary to invoke the urgency powers referred to by the SSAC so far as mariners are concerned. It was impossible for formal SSAC consultation to take place. They were consulted informally, and they are content with the regulations.
I am conscious of the fact that there were a great many technical questions asked, particularly by the noble Lord, Lord Banks. I think I would not follow him down the road of discussing something which we are not here to discuss—housing benefits—but I should be delighted to respond. perhaps in writing, to the more detailed questions he put to me.
§ On Question, Motion agreed to.