End the 'National Insurance' pretence

Readers of my previous post may have wondered why I didn't provide any examples of how the deficit could be reduced by raising National Insurance contributions.

The answer is that NI is a sham. Employee's NI is a complicated form of Income Tax. Employer's NI is a complicated form of Corporation Tax that biases business decisions about employment vs capital purchases (it discourages job creation, and favours investment in machinery).

NI contributions are expected to bring in £97 billion for 2010/11 — almost twice the £50 billion held in reserve in the National Insurance Fund [1].

In this same period, £117.2 billion will be paid out in pensions alone. Pensions are paid not from previous savings, or returns on investments, but by current contributors. Most people would recognise this as a Ponzi scheme.

According to the House of Commons Note [1],

The National Insurance Scheme was established on 5 July 1948 to provide unemployment benefits, sickness benefit, retirement pensions and other benefits in cases where individuals meet the contribution and other qualifying conditions

One year's pensions payments wipe out the NIF in its entirety, and leave £35bn of current contributions, which doesn't come close to covering the annual £119bn spent on healthcare or the £60.4bn spent on other welfare payments.

We should end the ridiculous pretence that National Insurance funds our Welfare State, and roll NI into Income Tax.


[1] National Insurance Fund: 1975-2010, House of Commons Library, Standard Note 797, Last updated 14 June 2010.