The cost of supplementation of Social Security contributions

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WRITTEN QUESTION TO THE MINISTER FOR SOCIAL SECURITY BY DEPUTY G.P. SOUTHERN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY, 5th DECEMBER 2006

Question

Figures taken from Social Security accounts and from Jersey in Figures' reveal that the contribution from taxation to social security funds (supplementation) has risen over the period 2000 to 2005 by 40% from £36.2m to £50.7m, at a time when cumulative inflation was only 20% and numbers in employment remained more or less stable.

Would the Minister –

1. set out the reasons for this significant rise, and inform members what actions,if any, he intends to take to reduce this sum?
2. inform members what estimate he currently hasfor the 2006 actual supplementation figure, and account for any variation from the estimate given in the 2006 Budgetof £53.2m?
3. state whetherthesumof £54,657,800 allocated to supplementation in 2007 (Annual Business Plan Annex) will be adequate for 2007 according to current estimates and state what sums have been allocated for supplementation within the net expenditures figures for 2008– 2009 for Social Security contained in SummaryTable B of the Budget 2007?

Answer

Before answering the specific questions asked, I take this opportunity to remind States members that supplementation is the contribution from general taxation to the Social security records of low to middle wage earners to protect their entitlement to pensions and to ensure that they remain fully insured if unable to work. It is thereby a significant tool for alleviating poverty.

Each month an individual's earnings up to an earnings ceiling is declared and 10.5% of those earnings is the contribution collected and attributed to that person. Individuals with earnings below the earnings ceiling have their contributions "supplemented" to the level of contributions paid at the earnings ceiling. Those people with earnings at or above the earnings ceiling do not attract supplementation. High earners do not receive supplementation.

The parameters that drive the global sum for supplementation are the numbers of people earning below the earnings level and the earnings of these individuals. Increasing economic activity which might increase the number of workers, and salary levels particularly annual increases below the published earnings index would both have a major impact on supplementation. The effect of inflation on supplementation is at most indirect in that it can affect pay claims and thereby average earnings.

1. I remind Deputy Southern that contribution rates for supplementation were increased by ½% a year for each of the years 1998-2002. These increases which received widespread support were to maintain the Social Security Pension by building upreserves in the fundto help counter the effects of anageing population.

T h is forward planning has resulted in a financially robust Social Security Fund that is the envy of

many other jurisdictions.

T hese rate increases were reflected in the significant growth in contributions and supplementation over those years. As shown in the table below, over the 2 year period 2000 to 2002, Social Security contributions rose by 28% and supplementation by 33%, whilst Health Insurance Scheme

contributions the rate for which did not rise similarly and which do not attract supplementation rose by

16%.

B y contrast over the longer period of 3 years, 2002 to 2005, when contribution rates did not increase

Social Security Contributions rose by 11% and supplementation by 6%.

The rise of supplementation over the period 2000 to 2005 is principally a direct result of a decision of the States, made after extensive consultation and so I am somewhat taken aback by Deputy Southern asking what I intend to do about it.

2. B asedontheevidenceof contributions collected in the A and B quarters betweenJanuaryand June 2006, and the most upto date figures for the C quarter(July,August,andSeptember 2007) the most recent estimate ofsupplementationis £55.8 million. Asusual the budgetestimatewasmadebasedon contributions  received  in the  first  quarter  of  the previous  year, and  the  variation  is due  to a combination of factors; anincreaseinthenumberof contributors particularly those earning below the  earnings ceiling;  and an increase in the average amount of supplementation per individual earning belowthecontributionceiling.

T h is increase in supplementation in 2006 is unexpected and appears to be as a result of growth and

change in employment rates at the lower to middle income earning levels.

T h e Council of Ministers has agreed that the Social Security, Economic Development and Treasury

and Resources Departments, working with the Economic Advisor, assess the situation relating to supplementation, identify possible options and report back to the Council by mid 2007.  That work will be led by the Social Security Department.

I n addition to this significant review, Officers of my Department are investigating further and are

concentrating upon the declaration of earnings by some employers and employees to ensure as far as possible that when supplementation is claimed, that it is based upon an accurate declaration of earnings.

3. T  he current budget for supplementation, agreed bythe States for 2007 is £54.7 million.  Latest forecasts for 2007 are between £3-£5million in excessof this amount,hence the need for the urgent review agreed by the Council of Ministers.

T he  2008  cash  limit  for  the  Social  Security  Department  includes  a  provisional  estimate  for

supplementation of £56.3 million and for 2009, £58.0 million.

T h ese provisional estimates which were set in the first quarter of 2006, will be revised as a result of

recent experience and the review announced above.

As Minister for Social Security and as the former President and before that a member of the Employment and Social Security Committee, I am very proud of the wise and prudent decision taken by the States in having the foresight to build up a fund to contribute towards protecting the pensions of the future.