Dynamic Benefits

16 September 2009

Full Report

Executive Summary

Dynamic Benefits examines how our broken benefits system has trapped millions in a life of worklessness and dependency.

Successive governments have attempted to address many of the problems of the welfare system, but their inability to look at its structures has meant they have failed to achieve their objectives. A system that penalises work, and focuses on how much income people have, without differentiating between earnings from work and income from benefits, simply reinforces dependency and poverty. This report condemns a current system which disincentivises work through the rapid withdrawal of benefits, and penalises the lowest earners trying to earn more. It also imposes penalties on behaviour such as marriage and cohabitation. In addition to this, the system is shown to remain very complex – making it not only expensive to administer but increasing dependency.

Dynamic Benefits argues work must be supported as the principal route out of poverty. We propose replacing the current confusing array of benefits with a ‘Universal Credit’ – a simpler, more cost-effective system that provides greater rewards for work. The Universal Credit is a single payment with two components: (1) Universal Work Credit, for those out of work or on very low wages. This will combine JSA, IS, IB/ESA; and (2) Universal Life Credit, to cover additional living expenses for all those on low incomes.  We recommend in order to make the first steps into work more rewarding, the government should increase the ‘earnings disregards’ – the earnings level at which benefits begin to be withdrawn – as this would encourage out of work claimants to take their first steps into work.  Passported benefits should continue to be available to those earning above the current hours thresholds. Higher earners who choose to receive them will be expected to pay a notional value imputed to them. This means low earners will not face the cliff-edge withdrawal of these benefits. Instead, their value will peter out, like other benefits.  Those who are employed will find the value of the benefit gradually withdrawn through the ‘pay as you earn’ mechanism, with Universal Credit payment being withdrawn in a similar way to Income Tax and National Insurance. This ensures continuity of income as a person moves into work. The report also highlights the need to reduce penalties for couples, those with mortgages, and low-earning savers.