The welfare state started with great intentions but over time has become both expensive and ineffective. We need a transformation of the welfare state in order that people can be encouraged to work, save and build up their own assets; in short, to break the model of dependency which now characterises the present system. To do this, we propose a radical yet practical alternative: the Lifetime Account (LA).
Every individual in Britain would be given a Lifetime Account to fund their pension, health and welfare needs. In short, a Lifetime Account would be free from government interference, safe from government raids and would combine a private pension fund and health and welfare insurance with the ability to make tax efficient savings.
For those in work, a proportion of their National Insurance contributions would go directly into their Lifetime Account. This would start at 2% of salary and build up over time as the system matured. In addition, every individual would receive an annual allocation of 'National Shares' - long-term bonds with a fixed date of maturity. Prior to the shares reaching full maturity, they will be able to trade a proportion for cash or other stocks and shares held in their LA. However, better value would be obtained by holding onto the shares. National Shares would be valued annually, based on GDP, thus relating the assets held by individuals to the overall economic performance of the country.
Upon reaching the age of 18, each individual would receive an additional one-off amount of National Shares – a ‘coming of age bonus’. This would assist young people going on to higher education, give them a sound basis to start building their pension fund or to put down a deposit on their first property.
In this way, a large proportion of current government commitments in health and welfare would be replaced by personal Lifetime Accounts giving individuals ownership and control of their own health and welfare needs.
Advantages of Lifetime Accounts
The advantages of Lifetime Accounts would be numerous. They would be owned by the individual and secure from government depredation. LAs would combine universal coverage with individual incentive, and their tax-efficient status would stimulate savings and investment.
Private sector financial institutions would manage LAs, properly regulated to ensure complete coverage and fair treatment for all. LAs would be simple and transparent, with online access and brief, easy to understand guidelines. This measure would enable everyone to have a financial interest in the future of the country, allow them to build up long term assets and provide for their future pension needs.
There would be other advantages too. Welfare bureaucracy would be dramatically reduced and the pension time-bomb could be defused. Individuals would have a healthy incentive to save as they would be able to watch the value of their fund increase. They would have a tax-free option to invest and know that their personal trust was indeed their property. We would also introduce financial training in the classroom (see Schools) to better equip the next generation to avoid the pitfalls which have trapped previous generations (see proposals on debt).
Employers would thus be able to augment staff pensions without having to set up complex pension funds. This would provide a major boost to small employers and start-up companies many of whom are now afraid to take on staff solely because of the pension issue.