Social Security contributions are not the answer to filling the taxation black hole. That's the firm message from Deputy Mary Lowe, Social Security Minister. 

'The black hole is a taxation problem that needs a taxation solution' says Deputy Lowe. 'We mustn't turn social security into a stealth tax to plug the gap.' 

The consultation document on Guernsey's future taxation strategy includes a revision of social security contributions and earnings limits among the package of measures that may be needed to compensate for the anticipated fall in tax revenues from 2008. This would be with a view to reducing the general revenue grant to the Guernsey Insurance Fund. 

'The social insurance scheme needs the continuing three-way funding partnership of the individual, the employer and the state' says Deputy Lowe. If one of the partners pulls out, the other two will have to bear the brunt. So if the States reduce the grant from general revenue - and I will certainly be arguing that they mustn't - the individual and the employer will have to pay more.' 

'We were really pleased, last November, to report to the States that the latest actuarial review and forward projection showed that the Guernsey Insurance Fund was in a healthy position. We know that we are going to have many more pensioners in the years ahead and that contribution rates will have to increase in order to pay all the pensions and other benefits. But the report showed that the contribution rates could be kept reasonable, while continuing to pay a good pension, if the present funding arrangements were maintained.' 

Deputy Lowe thinks that one of the criticisms in the tax report about the grant to social security is actually a strength. 'The report says that the mechanics of the contribution matching process means that as more people are employed and pay more contributions (because of a buoyant economy) there is an increased drain on general revenue resources.' says Deputy Lowe 'But that is what is so well designed in the system. When times are good, the grant to the fund goes up and when times are less good and unemployment rises the grant goes down.'  

Deputy Lowe says that comparisons with the Isle of Man and Jersey schemes are to be treated with caution, because you are not comparing like for like.  

'For convenience, the Isle of Man has simply replicated the UK legislation on social security. It means, like the UK, that contribution rates are nearly double the Guernsey rates and there is no limit to what the employer pays. That's clearly a tax system, not insurance, says Deputy Lowe. 'And when it comes to Jersey, yes their contribution rates are higher, but so are their benefits.' 

Deputy Lowe thinks that increasing the upper earnings limit beyond the current cut off of £660 per week (£34,320 p.a.) would cause the high earners to be double taxed. 

'At present, if you earn at or above the upper earnings limit, you pay the full price of the insurance contribution for the scheme. People who earn lesser amounts pay lower contributions and their shortfall is made good by the States grant.' explains Deputy Lowe. 'But the high earners are also high taxpayers. Plans to reduce the grant to the insurance fund will not include any reduction in individual's personal tax. They will still pay their 20% after allowances. But then you will also turn their social insurance into social tax and ask them to help pay other people's contributions as well. That's not fair.'