Labour must go for contributory welfare, not more means testing

£100 million may not be an awful lot of money in the scheme of things – around 0.05% of the welfare budget – but Ed Balls’ announcement yesterday that Labour would means-test the winter fuel allowance was an important political moment.

First the good news. Putting pensioners’ benefits up for discussion is a positive step. David Cameron was wrong to promise to protect them all, regardless of circumstances, at the last election and Gordon Brown was wrong to back Cameron into a corner in the live debates. Pensioner benefits account for around 40% of all welfare spending, so protecting them has put huge pressure on the working age welfare budget to bear the burden of austerity.

The bad news is there are problems with means testing both in principle and in practice. In principle, we should aim for a welfare system that helps people in need, but also encourages honesty and rewards work and saving. This is what Maurice Glasman calls ‘incentives to virtue’. Means testing tends to do the opposite of these things and is unpopular as a result.

In practice means testing complicates the system and requires more bureaucracy to check exactly who is entitled to what. All for just £100 million. The real reason pensioner benefits are so expensive is that we are all living longer. So the question we should be asking is whether it is right that people can claim the winter fuel allowance as early as age 62, not whether means testing could save a small fraction of the overall spend.

More generally, Labour needs to get its story straight on welfare. What is the big idea? Focusing scarce resources on the most needy, as yesterday’s announcement suggests, or strengthening ‘the old principle of contribution’ as Liam Byrne promised not so long ago? Labour would do well to focus more the second of these two approaches, especially if it wishes to restore the public’s faith in working age welfare. The international evidence shows that the most generous welfare states are also those with stronger contributory elements.

This week Demos publishes proposals on how to do this. The government could create a two-tier system, with higher benefits for those with strong work records – around £95 per week job seekers allowance, compared to the £71.70 that everyone gets at the moment, regardless of their employment record. This would be paid for by cutting spending on Support for Mortgage Interest (SMI). SMI is a benefit specifically for homeowners: it covers the interest on up to £200,000 of loans or mortgages when people are out of work.

There is a principle behind this proposal: taking on a mortgage is a choice – and people should take responsibility for insuring themselves against the risks associated with that choice. To that end, people should be automatically enrolled into mortgage payment protection insurance (MPPI), providing those customers with the chance to opt out of such insurance. This would mean that anyone not insured against their mortgage interest costs would have actively made that choice. All others would be insured at a maximum cost of around £33 per month, less than the average phone bill.

Making these changes would help Labour reclaim the mantle of personal responsibility, with homeowners insuring themselves against risks incurred by their own choices. It would encourage greater social solidarity, by reassuring people that those who have contributed to the welfare system will get the most out of it. And it would not cost a penny more than the current approach.

On Thursday Ed Miliband will make the second big Labour speech of the week, focusing on welfare. Here’s hoping the contributory principle is at the heart of it.

Duncan O’Leary is Deputy Director of Demos