Compulsory unemployment insurance proposed

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A proposal for a compulsory unemployment insurance scheme, run by the private sector, has been put forward by a think-tank.

All workers would contribute to the nationwide unemployment insurance scheme, with payments offset by reductions in payments into National Insurance, covering the costs of the first three months of unemployment, replacing the contributory element of Jobseekers' Allowance (JSA).

The scheme would be run by multiple insurance providers and fund managers with the government as a lender of last resort, said the report titled Making Contributions Count from the Policy Exchange think-tank.

Steve Hughes, author of the report, said: "We need a benefits system fit for the 21st century. The current system does not reflect the contributions that people make through their working lives. It does not reflect changes to the modern day labour market such as the rise in self-employment. And it does not meet the variety of needs that individuals have."

A personal welfare account would also be set up for every employed person "my fund", which would include the 4.6 million self-employed who are not eligible for JSA, and draw on it for costs such as retraining, or put the money into their pension upon retirement.

Nigel Wilson, CEO, Legal & General said: "We support the Policy Exchange's proposals to reform the welfare system. As it stands contributory sickness (ESA) and unemployment benefits (JSA) cost the government over £5 billion annually, if you combine the cost of the benefits and the lost tax revenue. As it stands they are complicated to administer and are not genuinely ‘contributory' - merely another aspect of tax and NI. They could be scrapped and replaced with a simple insurance-based solution that makes use of the structures put in place for pensions auto-enrolment.

"This would allow a genuinely contributory system to be built which could give people the same or better income replacement than the present welfare system. And it would cost less: £10 per month or around the same as one lottery ticket a week. The carrot for people to join the scheme and their employers to administer it, could be reduced national Insurance contributions, particularly skewed towards small employers and the lower paid.

"This could be funded by using half the savings generated from pension tax reform and 40% of the savings from reforming contributory benefits and would make a real difference to incomes, and to jobs."

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