Thank you all for coming today.
An issue that has concerned me for some time, is that there is effectively no social security system for the middle classes. They have access to other parts of the welfare state, particularly health and education, but when it comes to unemployment, there is no safety net worth speaking of.
If you lose your job and can’t find another one, and if you were on a reasonably good wage, the benefits you receive from the government are going to be much less than your outgoings. The upshot is likely to be that you are likely to be unable to pay your debts and you may well be unable to pay your rent or mortgage if you can’t find a new job straight away.
Why should be worry about this? After all, you could argue that this is just the price of a successful economy: You receive high wages and you take the risks that go with that. After all, you could save for a rainy day, or take out insurance.
Let me give you 4 reasons why we should be concerned:
One, a society that feels insecure about its financial future is a risk averse, discontented society. A sense of insecurity undermines quality of life.
And we are a very insecure society. Even before the credit crunch and all that has come with it, British workers felt very insecure compared to their European neighbours. Around 25% of people felt it was probable that they would lose their job in the next year – a similar figure to the US. However, the figure for Norway was 3%.
Two, the market is not providing workable solutions for most people, so it isn’t fair to expect people to take out insurance on the current model. I will say more about this shortly.
Three, people with little confidence in their future employment are less likely to be trained, or work at becoming productive employees, and it can even dissuade the sick or unemployed from energetically seeking work, if they doubt the durability of the work they find, and fear losing benefits.
Four, while it is important that we maintain a flexible workforce; forcing people to take the first job that comes along to avoid financial collapse might not help the UK’s overall performance.
The important thing to realize is that there is nothing to stop a flexible job market also being one that provides security to its workers – in fact, the phrase "flexicurity" is meant to capture this ideal combination.
Those of you with an interest in welfare systems will know, I’m sure, that in the Scandanavian countries, combining generous unemployment insurance with a very active labour market policy has resulted in even higher employment rates than in Britain, and less long term unemployment.
Now we are not suggesting that we adopt a Scandanavian style system here – we don’t have the same level of toleration for taxation, for a start.
But we are suggesting that we look at a system that delivers real financial security – just in a way that sits well with our culture and our economy.
Hence the catchy “anglo-flexicurity” of the title.
Before I come on to look at what we are proposing, I want to say a little about why we are not saying that we should leave it to the market, as it currently stands.
The first thing to say is that we have a lot of debt to insure against. As a nation, we have over £1trillion in mortgage debt, and £200billion in personal loans and credit cards. For the average household, debt is 140% of household income.
And generally we do not have anywhere near enough savings or insurance to provide us with a safety net.
According to a recent report the average household has a protection gap of £52,000. This means the typical family will have only 61% of the protection they would need should they lose their income.
Insurance for the family pet is more popular than taking out cover against a permanent loss of income through illness or unemployment.
And this risk is not evenly distributed. 40% of mortgage borrowers have no cover at all and of those that do only 16% are covered for both unemployment and health risks.
The question then becomes why aren't people taking these policies out?
There are four main candidates for blame.
One, lack of consumer financial education and literacy – a problem well discussed.
For the purposes of our discussion, it is probably worth noting that a recent survey found that about 40% of the public feel that they could manage for 12 months after an unexpected drop in income yet only half of these respondents actually had any provision.
Two, the associated problems of product and market complexity. To adequately insure yourself you need a combination of products insuring different debts against different risks, all of which will have complex terms and exclusions.
Three, lack of a trigger for decision-making and purchase. Most insurance is sold when you buy something else, like a house or a car.
And four, perceived lack of value.
Adding these together, it seems to me to be pretty clear that this is a case of market failure.
So given this, what can be done? We ruled out a number of options. We don’t think it is an option for the state to step back in and replace the state safety net that was gradually withdrawn - the cost would be exorbitant.
We ruled out using tax relief or other financial incentives to increase take-up – there is just no evidence that this would work.
Financial education would make a difference, but not enough and not in time.
Simpler, more standardised products might help a little, but probably not enough. That would still rely on the product being sold, rather than brought. So they may be a necessary condition of getting the market working, but they are unlikely to be sufficient on their own.We argue that it is only by using the workplace as a conduit for provision that we will really make a dent in the level of under-insurance.
There is no real incentive for employers to offer this – after all, not many of us take a job if we expect to lose it again. So this is the place for government to step in – to facilitate adequate insurance for the majority of workers for whom traditional benefits do not form an adequate safety net.
What might this look like?
We envisage a privately provided product provided to employees via their employer.
Employees would automatically be enrolled in the scheme after they had been employed for a certain amount of time, say 12 months.
The contributions would be deducted from their wages at source, and the provision would take the form of a level of income replacement – say for argument’s sake 60%.
The cost of the insurance would be kept low, partly because of the extensive pooling of risk that this model would represent, but also because the benefits would be time limited – probably to 6 months.
Since the vast majority of employees who lose their jobs are back in work within six months, a scheme like this would provide an effective safety net to those who are not wealthy enough to have sufficient savings to cushion them against redundancy, nor poor enough for state benefits to provide a real safety net.
Incidentally, this would also look attractive to the Exchequer since government would not be required to pay benefits to those in receipt of the insurance while they were unemployed.
This approach builds on a model established by an advisory committee to government in the area of personal pensions called the Turner Commission.
It proposed something similar for private pensions which is currently being adopted by government.
In conclusion, in our view, such a scheme would be a win-win option for the state and the individual. The individual would gain a degree of financial comfort which is currently lacking. The government would get to retain a flexible jobs market but with a more secure and confident workforce.