The welfare state after Covid: learning from our Bismarckian moment

A version of this article was first published by the Financial Times.

The significance of choices made in the midst of a crisis often get overlooked. During the first lockdown the UK government scrambled to invent a generous system of wage insurance for employees and income-protection for the self-employed. It could have sent all households an emergency flat rate benefit payment or targeted those in most need. Instead, the bulk of the new support offered was linked to past earnings. During this century’s darkest hour Britain turned to Bismarck, not Beveridge, for inspiration.

This represents a major rupture with the UK’s post-war policy settlement. Protecting existing jobs and wages — and the economic continuity and social cohesion this secured — trumped all other considerations like cost and selectivity that, in less extreme circumstances, would have prevailed.

Choices made during the trauma of a pandemic are not necessarily a good guide to the future. Only the naïve would expect the success of furlough to presage a pivot towards continental social thinking among Britain’s governing class. Equally, though, only uninquiring minds would be closed to the possibility that the crisis response has something to teach us about 21st century social protection.

The UK’s modern welfare model may have been founded on Beveridge’s commitment to flat rate contributions in return for guaranteed flat-rate benefits but it has been shaped ever since by the rise of means-testing. Whether motivated by a desire for spending restraint on the right, or redistribution on the left, the result has been that the distinction between contributory ‘insurance-based’ and ‘means-tested’ benefits has collapsed.

Pushing back against the spread of means-testing have been sporadic attempts to introduce earnings-related social insurance. Indeed, calls for the rejuvenation of the ‘contributory principle’ are almost as old as the principle itself. Harold Macmillan’s Conservative government first dabbled with the idea of an earnings-related state pension before Labour’s Harold Wilson introduced a more full-blooded version alongside wage-linked top-ups to unemployment, sickness and widow’s benefits. All eventually fell by the wayside, helping forge today’s received wisdom that such initiatives are futile.

Yet, if we use a broader lens, history also furnishes us with examples of successful attempts to improve our welfare state that have enjoyed broad-based political support. The introduction of statutory maternity pay in 1975 — set at 90 per cent of earnings, followed by a longer stretch of a lower flat rate payment — is now part of the furniture of our society. No mainstream politician would dare suggest this approach to earnings-protection represents an aberrant departure from the parsimonious British tradition.

The pension system, too, is an example of welfare innovation that will stand the test of time. Patient and consensual reform over the last 15 years has resulted in a settlement which is structurally sound, even if still under-generous. A low but steadily rising universal flat-rate pension twinned with a mandated workplace system — backed by contributions from employers, government and workers — provides a solid platform on which to build.

The wider point is effective welfare states need to improvise over time. This often means knitting together a blend of approaches to meet the needs of a wide-spectrum of society while securing popular legitimacy. This will disappoint those favouring totalising arguments about the future of welfare — whether based on the contributory principle, a universal basic income or stringent targeting — but better reflects the competing objectives that contemporary social security systems must reconcile.

A willingness to build and improvise is, unfortunately, very much the exception not the rule. The prevailing mindset — which views welfare challenges as solvable only via cuts and eligibility-restrictions — has resulted in ever more risk being shifted onto those least able to bear it.

Sickness pay has been reduced to an ugly runt of a benefit that forces the ill to work while acting as an arbitrary tax on employers. Unemployment benefit is set to fall to the level it was at 30 years ago. The social care system privatises, rather than pools, the risk of a family being hit by catastrophic care costs. Support for the self-employed is threadbare. The cumulative effect is a rising tide of social insecurity.

The pandemic will leave us poorer as a nation and make most things harder in the world of public policy. But the social flux generated may also open up space for political leaders willing to do the hard work of mobilising support for new approaches to social protection.

2020 has served as a brutal reminder of something both the ultra-conservative Bismarck and radical- liberal Beveridge understood: societies need effective ways of sharing the burden if they are to be resilient in the face of shocks. It’s a lesson we should put to use when improving our welfare state for the world beyond Covid.

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