REFORM

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Welfare Reform for the 21st Century

Understandingthe problemThe ABI asked the Centre for Economic andSocial Inclusion (CESI) to conduct research andanalysis to identify what impact loss ofemployment income has on households’income, taking into account entitlement to Stateincome support through welfare and tax credits.(Through the rest of the paper we will use‘welfare’ to refer to all forms of State incomesupport.) The ABI asked CESI to focus theirwork on loss of employment income due toserious illness or injury impacting ability to work,and to identify types and numbers ofhouseholds that would experience a significantdrop in income, and those that would not. Wethen asked them to compare the impact onhousehold income with - and without - IP.The objectives of this work were to:Identify the types and numbers of householdsthat would (and would not) have asignificantly better income safety net with IP;Identify the nature and scale of the issues;Build the evidence base around the fitbetween IP, State welfare and householdrisks;Provide a basis for more informed debate onthe role of private and State insurance inmeeting households’ income safety netneeds; andScope out key areas for future policydevelopment.CESI assessed the direction of travel forwelfare, including reforms already introducedunder Universal Credit. Changes made to put atime limit entitlement to contributoryEmployment Support Allowance (ESA) areparticularly important when considering thepotential role of private insurance. For manyhouseholds with moderate incomes, particularlythose with two or more employed earners, ESAwill no longer provide a long-term safety netagainst ill health or disability.BY ‘INCOMEREPLACEMENT RATE’WE MEANHOUSEHOLD INCOMEAFTER ANINDIVIDUAL HASSTOPPED WORK,INCLUDING ANYINCOME FROM STATESUPPORT, AS APROPORTION OFHOUSEHOLD INCOMEWHEN THATINDIVIDUAL WASWORKING.CESI used the Family Resource Survey andother sources of data to divide the employedpopulation into 200 household types, andwelfare entitlement calculator software to modelincome replacement rates from welfare and taxcredits in the event of losing employmentincome due to ill health or disability.By ‘income replacement rate’ we meanhousehold income after an individual hasstopped work, including any income from Statesupport, as a proportion of household incomewhen that individual was working.CESI focused on long term absence from work,so modelled incomes after the expiry ofStatutory Sick Pay (SSP) and ContributoryEmployment Support Allowance (ESA). TheCESI research showed that for those who fallout of work due to ill health or disability, whereprevious earnings were low and otherhousehold income is nil or low, the State systemwill generally provide a decent incomereplacement rate. The State provides little or nosupport – and a low income replacement rate- for those with moderate or higher earnings,and other household income.However, the picture is far more complicated formiddle income households. Entitlement to Statesupport is based not only on income, but alsoon whether the household has children,savings, a second income, and whether thehome is owned or rented. Two households witha similar level of income can therefore receivevery different levels of State support based onthese factors.CESI found that there are 10.8 million middleincome households in the UK that would beentitled to relatively little or no State supportif the principal earner had to stop work, andwould see their income drop substantially ifthey rely on State support alone as theirincome safety net.7Follow us on Twitter @BritishInsurers

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