Contribution vs. redistribution: why contributory welfare won’t happen

Contributory welfare has become the latest fad in Westminster village. Labour politicians are in favour of it, Conservative politicians are in favour of it, think tanks are in favour of it, and they all use largely the same rhetoric: rewarding contribution, restoring confidence in the welfare system, ensuring greater fairness, ending the ‘something for nothing’ culture, establishing a ‘something culture’.

Sounds good. But it won’t happen, and here’s why.

The difference between a contributory and a means-tested welfare system is not just an administrative one. The two reflect completely different conceptions of fairness, and different understandings of what a welfare system should be there for.

A contributory system is based on an understanding of ‘fairness’ in the sense of ‘proportionality’, or reciprocity: the more you have paid into the common pool, the more you should be entitled to take out of it. Quid pro quo, something for something. In a means-tested system, meanwhile, fairness is understood as supporting the needy, with support being proportional to need. The more you need, the more you get, and if you don’t need support, you won’t get any.

The two principles can easily be in conflict with one another. Suppose you are in charge of the welfare budget, and you have to allocate a fixed amount of money between two people:

– X has worked full-time for many years before losing their job, on a salary in, say, the second quartile of the distribution. They have managed to put some modest savings aside, and their partner is in minor employment (meaning that the household’s current market income is insufficient but not zero). They have no children.

– Y is a workless single parent. They have worked in the past, but their employment history has been short and patchy, and so is their contributory record. They have no savings or family support.

Who should get more? If you are ‘contributionist’, you will allocate most resources to X. You may favour some non-contributory support instrument to help Y, but probably with much more stringent conditions attached, and certainly at a lower level. They have barely contributed anything, so why on earth should they now be entitled to generous support? Yet if your main criterion is need, you will favour Y. X has their savings, and their partners’ income, to bridge the gap. Why on earth would you waste scarce welfare resources on somebody who clearly does not need them? Moreover, Y has a child, while X has not, a reason for prioritising them.

Due to their emphasis on proportionality, contributory systems are not, in themselves, redistributive. They are only redistributive to the extent to which they deviate from the contributory principle, which no system adheres to in an entirely pure form. But a welfare state that honours contribution cannot, at the same time, be strongly redistributive, and a welfare state that is strongly redistributive cannot, at the same time, honour contribution. In this sense, those who have recently discovered their love for the contributory principle are not telling the full story. They are right to point out that the British welfare state offers those who have worked and contributed for a long time a rough deal. But they fail to mention that this is precisely what redistribution is all about. If the welfare state has little left for those who have a paid a lot into the system, it is because all the money has already been spent on non-contributory transfers.

So unless our new contribution enthusiasts are also planning to substantially expand the welfare state – and I take it that that is not their intention – then they can only restore the contributory principle by reducing the extent of redistribution. Since nobody appears to be prepared to do that either, ‘something for something’ is hollow rhetoric. There will be no return to contributory welfare.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

4 thoughts on “Contribution vs. redistribution: why contributory welfare won’t happen”

  1. Posted 25/06/2013 at 10:43 | Permalink

    Surely we have a contributory system – what are NI and taxes for?
    In most cases if you are unable to ‘contribute’ it is not your fault – ie if no jobs, your are sick/disabled etc.
    This scheme, suggested by right-wing think tanks, Tories and Labour ‘Tory-lite’ seems to be another way to enhance the neo-lib agenda of shifting cash to the richest section in society?

  2. Posted 25/06/2013 at 14:40 | Permalink

    To be clear on our ‘welfare state’ principles over people’s whole lifetimes, we need to distinguish between different state benefits. It is true that there may be some people — the severely disabled, for instance — who may need help (would anyone mind if I call it ‘charity’?) on a permanent basis. But some others may only really need help, from time to time, on a temporary basis. Unemployment benefit, which was always essentially contributory, falls into this category. We don’t expect most people to be permanently unemployed. In normal circumstances they can be expected to look after themselves. Some benefits, such as Winter Fuel Payments have nothing to do with contributions (and nothing much to do with ‘need either). They were just an attempted bribe which is now proving difficult to withdraw. In the same way, so-called ‘free’ health benefits or ‘free’ schooling have nothing to do with contributions. They are intended to be available to all who need them — on the whole, mainly the old or the young respectively. State pensions, on the other hand, also intended for the old, clearly started out as contributory: they were not originally intended to be redistributive. If the politicians now want to make changes, I dare say the transition will prove difficult. One of the difficulties is that if people have in fact contributed through various kinds of taxation over their working lives, in the expectation of being entitled to certain state benefits in their old age, it could be regarded as ‘unfair’ to change the rules when those people have retired from work.

  3. Posted 26/06/2013 at 15:11 | Permalink

    Can anyone explain the purpose of a contributory only system? I can understand the purpose of a redistributive system (even though I heartily disagree with it), it’s obvious and goes with the term. But why have a state-operated contributory system? If individuals are sufficiently able to contribute a sufficient amount for their welfare, why not do it privately and eliminate the deadweight costs and inefficiencies of a state monopoly? It might perhaps be that people won’t save ‘enough’ (who is to say what constitutes this?) in the absence of compulsion? So then, why does the state attack saving via constant inflationism and ‘demand stimulation’?

  4. Posted 27/06/2013 at 12:30 | Permalink

    it’s mostly for moralistic reasons. Historical proponents of contributory state welfare (especially Bismarck, and Beveridge as well as far as I know) believed that private insurance was immoral. Nobody should commercially benefit from the risks of life. Even they did not claim that private solutions would not work, only that they were morally inferior to state action.

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