BOOK REVIEW: You get what you pay for

For 30 years from the late Forties, the London School of Economics was a powerhouse of ideas for the welfare state. Under "Titmuss and the Titmice" - the chain of academics that began with Richard Titmuss and stretched down through his protgs - it churned out analysis and criticism, defences and proposals for the welfare state's advancement and reform.

The scheme that became the State Earnings Related Pension Scheme was devised there. It was LSE academics who "rediscovered" poverty in the mid-Sixties and helped to highlight in the Seventies the poverty and unemployment traps caused by a new and vicious interaction of taxes and benefits that is still with us.

Then in 1979 came Margaret Thatcher. Her arrival coincided with an exhaustion of ideas and disillusion on the democratic left. Academics specialising in welfare were no longer welcome at court - unless they were market-oriented economists or right-wing philosophers, two groups that proved good at the grand theory but notably less so at the nuts and bolts. The school's influence on the welfare debate declined.

But in recent years life has returned to the LSE. A Conservative Party split between the remaining One Nation Tories and Michael Portillo's reductionist idea of welfare has coincided with a Labour party interested again in ideas. Suddenly, there is an audience for new views of welfare.

The LSE welfare state group's latest effort is a statistically dense book that uses a computer model to re-examine the welfare state. It looks at it not as something static - who gains and loses this year - but as something dynamic: who gains and loses over a lifetime of education, health care, pensions, contributions and taxes.

What it illustrates is that the system is not just a tax subsidised, state-run Robin Hood, stealing from the struggling middle classes to fund the often not-so-deserving poor. On the contrary, the group concludes, the welfare state's main function has been to smooth incomes over a lifetime. Despite all of it being funded on a "pay-as-you-go" basis - taxes raised this year are spent this year, not invested for future use - the welfare state has none the less acted almost as a savings bank as people pay in during the easy times and draw out when life is harder.

There have been gainers and losers. The generation born between 1901 and 1921 has gained, having paid for only 80 to 90 per cent of what they have received. For the rest of us the books broadly balance. Each five- year "generation" gets back at least 90 per cent of what they have paid in. And of the money people pay in, around three-quarters is picked up again at some point in their lives; only a quarter is redistributed from the better off to the less well off.

These findings may explain why opinion surveys repeatedly find a powerful attachment among the British to their welfare state: perhaps an instinctive understanding that it is about helping ourselves and each other, not just helping the poor.

The model also points out that the game works only as long as it is honoured. Any attempt to abolish or substantially scale down the welfare state would lead to younger generations losing heavily - having to invest for their own private provision as they continued to fund those who have not done so because the welfare state has been there.

This is not used as an argument for no change. The book canvasses ideas for an improved student loan scheme and a new unified pension that is so radical it takes the breath away. But the findings should give pause for thought to those of us who want to believe that if we could only cut the welfare state and taxes, we would all be better off.

Nicholas Timmins