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National Insurance Contributions Bill

My Lords, I am sure that I speak for the whole House in thanking my noble friend the Minister for such a clear explanation of the Bill. It is narrowly drawn, but it has wide-ranging implications, or so I shall seek to suggest. I shall not go into the flattening of S2P—I understand the logic of that and think it is sensible. Instead I shall raise two issues. The first is some issues concerning the alignment of NICs and tax bands. The second, which will not surprise my noble friend, is the issue of buy-back. NICs and tax thresholds have always been curiously connected. It was not until 1975 that we constructed LELs and UELs, as we currently understand them, as a self-enclosed system with a crude ratio in which LELs were about a quarter of average earnings and UELs at about one and a half of average earnings. In 1985, the then Government removed UEL for employers but not—although it is often suggested by those to the left of me, and perhaps even by those to the right of me—for employees as well. A few years back, the Government also separated the LEL from the tax threshold. I cannot find out when, but it may have been when we introduced tax credits to replace family credit. I am not sure about that. We now have a primary tax threshold that is £10 or so higher than LEL, which itself is now quite arbitrarily attached to the level of the basic state pension, which is a benefit. Finally, in a move which separates the national insurance upper limits from benefits, we are reconnecting UEL to the upper tax threshold. So we now have alignment of the tax and benefit system at the top but some rather curious connections at the bottom, where LEL runs. It is those connections that I want to explore now, particularly as they very much interact with those who are also experiencing the loss of the 10p tax band. It is even more complicated than that. At the bottom, we have a tax credit threshold at 16 hours’ work, which gives you tax credits. It is different from the LEL because you can run several small jobs together to qualify, but if you do get tax credits, that passports you through to national insurance, notwithstanding your being below the LEL on all other grounds. LEL is still for some arbitrary reason attached to the basic state pension and gives entitlement to contributory benefits. The question I want to ask my noble friend—as I gave the department notice of it yesterday, I am confident he will have an answer to it—is whether this LEL will rise with earnings from 2012 as will pensions, rather than with RPI as at present. At the bottom is the primary threshold, PT, at which point you pay tax. If the LEL rises with earnings, because it is attached to the basic state pension which will rise with earnings, the gap between it and the primary tax threshold, which I presume will be largely RPI’d, will narrow over time: LEL will rise faster than the primary threshold. Equally, if average earnings rise faster than the minimum wage, an increasing number of people will fall below the LEL, though working 16 hours a week at minimum wage, and lose entitlement to contributory benefits. In discussion on the Bill in the Commons, everybody fretted about what was happening at the top; nobody looked at what was happening at the bottom. I am sure that my noble friend can allay my fears. However, if LEL rises with basic state pensions and its earnings links, what are the implications for those, especially women whose earnings are rising less fast, who are on the minimum wage or who work part time? Will they become progressively disfranchised from contributory benefits? If the primary threshold remains RPI’d, does it mean that LEL and primary threshold will, as with the UEL, again become realigned over time, reconnecting the lower earnings limit with the tax threshold, both at bottom and at top? It is clear that the higher that the LEL rises, the more people, such as partnered women in part-time jobs and disabled people in part-time work, are potentially excluded from contributory benefits. The simple answer would be to break the link with the basic state pension level and allow LEL to remain below that at which the BSP rises, because people would otherwise drop out of the contributory system. My noble friend may be able to give me other reassurances about the distributional effects. Real issues surrounding who will be eligible for a contributory system will arise if we do not think ahead about what is going to happen to LEL if it continues to be connected to a BSP that will be earnings-linked rather than RPI-linked. My second point is that those who are currently disconnected from contributory benefits, especially for BSP, have an incomplete national insurance record. I rather doubt that my noble friend can give me the reassuring reply that I would like also on this. Those who are savvy or well-heeled, or who have parents or husbands with the same fortunate attributes, can buy back their missing national insurance contributions as they go along, back to a further six years. But poorer women may well have missing years long before their previous six years. They may have had children before 1978; they may have dovetailed together several part-time jobs—if they are not eligible for tax credit, they do not get into the NI system; they may be service wives accompanying husbands abroad; or they may have extended caring responsibilities for older people. As a result, they would have a shortfall on their record which they could not cover under existing rules, meaning that only a quarter of women, compared with 90 per cent of men, currently retire with a full BSP. The Government’s figures are higher only because widows inherit a full BSP from a contributory husband. Therefore, the relevant statistics are about not when they retire but what they currently enjoy on average during their retirement. The situation of those pensioners will improve from 2010, and dramatically so from 2020, thanks to the Government’s Pensions Bills, but in the mean time there will be a sandwich generation which as it retires is dependent on the support of partners or the state to fund their retirement even though they would like to help themselves by co-purchasing missing years back beyond the six-year rule. We are talking about women who, as we have argued previously in this House, keep several generations afloat: their own older children, their grandchildren, their partner or husband and often elderly parents as well. By supporting others they will often have lost the chance to support themselves, at least with a pension of their own. We debated this matter very fully last summer. I am considering tabling similar amendments to this Bill to allow buy-back beyond six years by amending the 1992 social security Act. I hope that if I do so the House will be minded to support me as fully and extensively as it did last summer when the Government faced their biggest defeat since 1997. I am sure the House would forgive me if the amendment introduced delays to the passing of the Bill. If I propose such a measure, I hope that my noble friend will not tell me on behalf of Her Majesty’s Treasury that it cannot be afforded. The cost of such an amendment, with sensible hurdles in place, would run on average at about £25 million a year, declining sharply after 2030. The current Exchequer contribution to class 3 buy-back contributions is of the order of £450 million for the last year for which I have figures. Each and every year it fluctuates by more than the cost of this would-be amendment. That fluctuation in contribution, and its scale, seems to bother nobody one bit. We cannot suddenly start to worry about the cost only when it comes to helping poorer women help themselves. As those missing years are bought by all and sundry, including by Ministers and ex-Ministers, I hope we will not be told that it is poorly targeted. We do not know. I have asked and been told that the Government do not collect information about who currently receives this benefit by way of class 3 contributions. I suspect that it is poorly targeted. If we do not ask the questions, we cannot be seriously worried about the issue. Therefore, suddenly to put it on the back of some poorer women is inappropriate. The third argument that has been run is that of risk: if poorer women knew that at the end of their working lives they could buy back missing years they would not do it during the course of their working lives. This is to presume a rationality which is sadly missing from the lives of women who possibly in many cases do not even understand the reduced married women’s stamp. In any case, we are dealing with a transitional generation, those who from about 2105 to 2020 will certainly enjoy the benefits of the Pensions Act and the reduced number of contributions they will need to make—only 30 years. Therefore, those women who are now 50 to 60 cannot revisit their past behaviour and change it in perverse ways that my noble friend or HM Treasury might think unacceptable. That behaviour is already there; we need to be able to help them to help themselves. Finally, relevant to affordability—I have a couple of remarks on this—is the state of the National Insurance Fund, which can only be used for contributory benefits, apart from the NHS supplementation. Obviously that fund does not sit there as a piggy bank; it allows for reduction of the borrowing requirement which in turn is a form of not-so-hidden subsidy to other services. The guidelines from GAD are for a 16.7 per cent balance, which I calculate as about £12 billion on current levels of contributory benefit expenditure. The balances are growing fast; the figure now—for the current year, I think—is forecast at £42 billion, as opposed to £12 billion. That is equivalent to 65 per cent of benefit expenditure, rather than 16.7 per cent. The balances are also growing each and every year—by £5 billion, then £6 billion and £7 billion—because more people are earning and paying higher contributions, while fewer people are drawing out. I repeat; there is a £5 billion addition, rising to £6 billion and £7 billion, yet we cannot have £20 million from a fund devoted to contributory benefits. Of course, given the demographics and the earnings link to BSP, these surpluses will begin to flatten from 2012 on, but while employment remains high—and with the raising of the state pension age, which also puts into the Exchequer a contribution equivalent to about £5 billion a year, but is excluded from nearly all discussion—that flattening will take some time to occur. I suspect we will be well into the 2020s, depending on unemployment figures, before we even begin to come back near GAD’s recommended figures. By that time, the cost of these buy-back proposals will have dwindled to the stuff of margins of error. I am confident that if the National Insurance Fund were in deficit and required a taxpayers’ contribution, we would be told quite sharply that there was no money available for increases in certain benefits. If my noble friend will forgive me, I will tease him that such arguments, interestingly, only ever seem to run in one direction. I am entirely content with the clauses in this Bill as it stands, but it is about reading the silences—the things not said. I am hoping that the House will continue to investigate and explore my particular concern about the connections between the tax threshold at the lower earnings level and buy-back on the other in further stages of this Bill.