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Protection insurance - the answer to reducing welfare costs is not making further cuts

Realistic reductions in the cost of welfare will not come from further cuts, but from lessening the reliance on the state.

Later this month workers all over the UK will start to receive annual tax statements from the Government, showing that the biggest chunk of their tax contribution goes towards paying for the cost of welfare, costs that will face demands for cuts, whatever the election result.

However, this expenditure on welfare is predominantly made up of public sector pensions and support for the sick and disabled (according to the Institute for Fiscal Studies, benefits for the sick and disabled make up 5% of total Government expenditure and, according to the Treasury, 20% of welfare spending). Therefore the government is left with a dilemma: how can they make meaningful welfare cuts without hitting pensions and the most vulnerable in society?

We all tend to agree that the state should look after those unable to look after themselves. But whilst politicians of all hues consider how to further curb welfare spending without neglecting society’s most vulnerable, perhaps they should be asking whether cuts are a realistic, or even the most effective, means to that end.

Realistic reductions in the cost of welfare will not come from further cuts, but from lessening the reliance on the state.

What if as a society we could ease welfare costs whilst also ensuring individuals who are unexpectedly forced to leave work have more financial support than they currently do under the state? That would be the best of both worlds, although it does require some honesty first.

The fact is that welfare only protects the sick and disabled from absolute poverty. For most, it does not provide real financial security. Politicians should be clearer about how much the state will support you and your family. They should encourage you to think what you would do at times of hardship – however unlikely it may seem – what you would actually get from the state, whether that is sufficient to pay your mortgage and household bills and whether you could support your family as you would hope to.

Latest research for the ABI by the Centre for Economic and Social Exclusion (CESI) shows that 10.8 million households – more than 60% of working families – would need more than the state currently provides if critical illness or disability struck down the main breadwinner. If these households had better safety nets, through private insurance, rather than relying on inadequate state support, they could ensure that money was not a primary concern at a time when sickness or disability has forced them to unexpectedly leave work.

Currently the state saves £120m a year from the 11% of working families who have taken out private insurance as a safety net, or whose employer provides it for them. If the 60% of households who would not get adequate support from the state all had the same, the Treasury would save a total of over £660m, and those households would be better protected against the unexpected loss of income.

We recognise that there is a cost to taking out insurance and for many it is not one they are likely to prioritise, but it seems perverse that so many of us insure our phones and our pets but not our monthly income. We know people think the worst is unlikely to happen to them and that too many overestimate state support, but although only 1% of working people will experience serious illness or injury there is no way of knowing if it will happen to us.

It is time that we had an honest debate about what we would all actually be entitled to from the State. Only then can we talk about realistically reducing welfare spending whilst protecting those that really need it.

Helen White is Head of Protection, Association of British Insurers (ABI).

Last updated 29/06/2016