Ticon UK Ltd

The solution is already here

Prepaid cards are the answer to Iain Duncan Smith’s plea for a simpler, more efficient and dynamic benefits system.

With the current weight of government debt and unemployment bearing down on a fragile system of social welfare, the next Government will need to find a way of getting more people into work. But, according to Iain Duncan Smith and the Centre for Social Justice (CSJ), too many people on benefits don’t have any incentive to work. 

This appears to be borne out by the views of claimants: in a recent poll, only 25 per cent thought they would be better off if they worked. In contrast, 17 per cent said working harder would make no difference, 19 per cent were unsure and, disturbingly, 39 per cent thought they would be worse off. 

The CSJ identifies two problems; First, that when you get a job, you lose most of your entitlement and, second, the system is overly complex and costly to manage with too much interdependency between benefits. 

It points to benefit withdrawal rates, the amount former claimants lose for every £1 extra earned through work. If a claimant gets a job, he or she loses all their Jobseekers Allowance and Income Support, plus what are known as “passported” benefits such as free school meals and prescriptions. As they settle into work, they begin to lose housing and council tax benefits at the staggering rate of 85 per cent of post-tax earnings. 

The sheer complexity of the system exacerbates this problem. A project by Ticon to review payments to social care clients has identified that some people are receiving as many as 18 different payments from different government or state-sponsored bodies, with several coming from the same organisation. People are left to manage a network of changing options as they fall on one side or the other of eligibility thresholds, meaning that they often struggle to claim what is due to them. And the state has to bear the administrative cost of running such a complex arrangement, not to mention its own problems with calculating eligibility, redressing errors and fighting fraud. 

The answer, according to the CSJ, is to standardise benefit withdrawal rates for all claimants, increase the income level at which benefits are withdrawn and merge nine benefits into just two: a Universal Work Credit for those out of work or on very low incomes, and a Universal Life Credit to cover additional living costs for those in work, such as council tax and increased housing costs. The latter would be calculated by employers using the Pay as You Earn system. 

But to make this work, the state would need to know exactly how much claimants earn - something that requires massive legislative, organisational and infrastructural changes. But it could be achieved through prepaid cards. 

Prepaid works like any other debit or credit card – although they never can be overdrawn – but, because they would be state-owned, they could track both government income and earnings from work, including casual work. The Government could then calculate what benefits should be paid knowing how much a person has earned, rather than removing benefits just because they are earning something. This would remove the disincentive to work as claimants could be confident that working would not leave them worse off. 

Many governments use prepaid cards for payments and disbursements, including pensions, disability allowances and housing benefits. Here, local councils use them to disburse payments for social care, youth payments and expenses. Prepaid allows more efficient and simpler benefit payments. 

Simplifying the benefits system is a demanding challenge; IT systems will have to be written, laws passed and major changes introduced. These things need to happen now, not in five years time. Prepaid can be implemented today to deliver a simpler, efficient and dynamic benefits system.

9 December 2009

Ian Makgill. Managing Director of Ticon, a company specialising in corporate transactions,