Brits Vow to End Welfare as They Know It

LONDON -- Annie Massie is a 24-year-old, single mother of three living in central London. She's unemployed, lives in public housing and has collected welfare benefits her entire adult life since her oldest child was born when she was just 18. But if British Prime Minister David Cameron has anything to say about it, she'll be the poster child for a sweeping welfare reform about to be enacted by his government.

"It's important for me to earn my own money," Massie explains. "Because then, even if I'm earning less, I made that money. No one can look down on me or say anything because . . . I'm not sponging off of anyone." Massie references a friend of hers who continues to collect incapacity (disability) benefits even though she arguably doesn't need them. "I look at her . . . and I think, that's what I don't want to be."

In uttering these words, Massie might as well be standing in for British Work and Pensions Secretary Iain Duncan Smith. Smith's department penned a report earlier this summer, "21st Century Welfare," which will serve as a template for comprehensive welfare reform under the United Kingdom's newly elected coalition government. The government is billing the initiative as the biggest reform of the British welfare state since World War II. In the words of Chancellor (Treasury secretary equivalent) George Osborne, they are seeking to create "a radical new welfare state where it always pays to work."

How will they do this? For starters, the government plans to consolidate the dozens of welfare payments that presently exist -- things like housing benefit, income support, and child tax credit -- into a single, universal credit. Second, there will also be an annual cap -- somewhere in the neighborhood of 26,000 pounds (roughly $41,000) -- on the amount of benefits any one family can collect. Finally, the government also plans to cut back on assorted "middle class" benefits that go to all British citizens regardless of income, like the child benefit for parents and the winter fuel allowance for the elderly. (Although how much the government will actually follow through on its plan to cut popular, universal benefits remains to be seen.)

The over-arching idea guiding the reform is to make the benefits system simpler to administer, less prone to fraud and -- crucially -- incentive-compatible with work. According to Smith, five million people are on out-of-work benefits, with 1.4 million on benefits for nine or 10 of the last 10 years. With more than 50 distinct types of benefits, multiple withdrawal rates are so complicated that taking a job at the lower end of the pay scale often involves real risk of being plunged into poverty. Moreover, many poor people also benefit from a quite generous social (public) housing benefit which effectively discourages people from taking jobs lest they lose this vital perk. Because of these perverse incentives, it's not really worth going from the dole into work if the job pays £15,000 ($24,000) or less. Which is why -- as Iain Duncan Smith put it so delicately -- many people on benefits regard those who take up job offers as "bloody morons."

A quick look at Annie Massie's back-of-the-envelope calculations confirms this predicament. Massie currently pays £5.20 a week (roughly $8.25) in rent for her flat to the local housing authority. If she gets a job, that figure will go up to something like £90. (When she first uttered this figure, I thought she'd said "19" because I couldn't believe the gap was really that large.) As Massie points out, "With the kind of job I can get, that's going to be about half my wages." And that's not factoring in what she'll need to pay in child care and council tax (local property tax from which she is currently exempted.)

There's no question that this reform is motivated partly by simple economics. The British government is broke.The welfare bill is the largest area of government spending -- clocking in at £218 billion in 2010 (if departmental spending is included on top of transfers) or 15.8 percent of GDP. The current plan is to shave 15 billion pounds off the benefits budget by 2015.

But the motivation behind the reform is also philosophical. Osborne has promised to go after those who regard welfare benefits as "a lifestyle choice." Prime Minister David Cameron -- for his part -- couches the reform as emblematic of a new understanding of fairness. "Fairness means giving people what they deserve, and what people deserve depends on how they behave," he said. As Deputy Prime Minister Nick Clegg phrased it, the reform is premised on the idea that welfare should "not be there to compensate the poor for their predicament," but to "act as an engine of mobility."

If all this sounds familiar to an American ear, that's because -- rhetorically, at least -- this reform has a lot in common with Bill Clinton's famous campaign pledge to "End welfare as we know it" during his 1992 presidential bid. Several years later, that slogan led to the largest reform to the American welfare system since the 1930s, The Personal Responsibility and Work Opportunity Reconciliation Act . The American reform sought to impose credible and enforceable work requirements into the welfare program for the first time, as well as to establish time limits on lifetime receipt of benefits. The bill's name reflects the fact that -- much like the U.K. reform that's on the table -- it was as much about reducing the welfare rolls as it was, as one analyst put it, about "reducing the deep-seated social and personal dysfunction associated with long-term dependency."

By most accounts, the American reform was largely successful in reducing welfare rolls, boosting income and reducing poverty. And those results held up even during the current recession. The question is whether -- even acknowledging important differences across the two political systems -- the British welfare reform will yield equally positive results.

Patrick Nolan, chief economist at the London-based think tank, Reform, is dubious. For starters, just having a "bonfire of the benefits" -- as he colorfully puts it -- is neither necessary nor sufficient. While he's sympathetic to the idea of simplifying welfare policy -- (by way of example, he notes that the official guides for helping someone navigate the system total more than 8,000 pages) -- he doesn't think that taking a "big bang" approach to welfare reform will work. "The problem is that welfare systems are designed to deal with people who have complicated lives . . . parents who are separated . . kids moving between houses . . . people in and out of work. That's why the system is complicated."

Nolan has just co-authored a report at Reform titled "The Money Go-Round: Cutting the Cost of Welfare." One of the central premises of this document is that, for an administration that is otherwise so committed to decentralization, the government's welfare reform is remarkably state-centered and bureaucratic. "The idea is that we'll have one benefit but it will vary according to household characteristics and all this will be calculated by a computer in Whitehall. But one of the things that's often missed about the American reforms is how diverse they were among the different American states."

Nolan and his colleagues would thus like to see less emphasis on incentives and more of a focus on delivery. They'd be willing to accept retaining some of the complexity of the current design in exchange for putting local government -- which has much better working knowledge of the local labor markets, family structure, etc.-- in charge of implementation.

Tess Lanning, a researcher at the Institute for Public Policy Research (IPPR) in London, agrees. She's more focused on the work end of welfare reform, and has just completed a study looking at precisely the sorts of welfare-to-work programs that will take on a key role in the new reform. For Lanning and her colleagues, the problem with the new reform is that it assumes that work will be a "silver bullet" for the poor. But in the present economy, it's not at all clear that there will be jobs out there to absorb these new waves of workers.

As Nick Pearce, Lanning's boss and the new director of IPPR, recently told The Guardian: "There are currently nearly 800,000 people who have been out of work for a year or more, but fewer than 500,000 vacancies. Even the Office of Budget Responsibility predicts that 2 million people will still be unemployed (on the International Labour Organization definition) at the next election in 2015, and there will be at least as many again on incapacity benefit."

And even if there were jobs, Lanning argues, they'd need to be the right kind of jobs. Lanning cites research at IPPR showing that there are far more people in the United Kingdom living in working poverty than there are unemployed. So it's quite possible to imagine a scenario whereby poor people move back to work, but remain trapped in working poverty. And that's because a lot of the jobs that will be available to people coming off the dole for the first time are part-time, low-wage jobs.

Iain Duncan Smith recognizes this reality and has thus devised a "tapered" benefits system whereby welfare recipients are not penalized for going back to work at, say, four to five hours a week, by immediately cutting off their benefits. Rather, benefits are abated gradually as individuals move up the work and income ladder. The problem with such an approach is that labor markets don't usually work that way. As the Reform report shows, the evidence that so-called "mini-jobs" act as stepping stones to longer hours' work is inconclusive. Moreover, according to Nolan, if you begin to taper benefits at, say, 16 hours, all you do is discourage poor people from working anything more than that amount and/or discourage second earners from seeking employment.

Like Nolan, Lanning would like to see a much more decentralized approach to welfare reform, one that removes responsibility for supporting job seekers from a small number of large welfare-to-work providers and pushes it into local communities that can partner with local industries to improve skills valued by employers in specific sectors. The idea is that rather than helping welfare-to-work participants learn to write their CV, local authorities would use their local knowledge and contacts to create training routes into specific professions.

Which brings us back to Annie Massie. Despite the problems inherent in welfare reform outlined by Nolan and Lanning, Massie remains steadfast in her determination to work. "It's quite scary," she acknowledges. "But I can't sit around doing nothing. I can't go crazy and there's a chance that might happen if I stay at home." With the help of her boyfriend, who has a computer in his flat, she's put together two different CVs and has begun applying for jobs. "I just want to be able to make it myself. I need my independence."

David Cameron couldn't have said it better himself. He just better hope that there are more Annie Massies out there.

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