the case law. so we've tightened that back up to make sure the money goes to those that really need the money. now we can work with people to make sure they get back to work. those are the main things that we're doing. >> with addressing processes and quite a bit of it is unknown. i mean, for me it's ironic having you here. i went to the british parachute school 30 years ago. one of the more interesting aspects was having to jump out of a balloon to find out if the parachute worked.

we're glad to see you take the first jump. as we face these challenges, unemployment rates are elevated, fewer people are looking for work. there's increasing family breakdown that leads to social problems and financial cost that you alluded to that you're dealing with in your own jurisdiction and it's critical that we develop approaches to integrate our processes and more effectively serve people, and issue i've cared about, having grown up in a single parent home and was on the form of assistance as a child, as well. i'm very interested in how you bring people over or avoiding this cliff of falling off and they find disincentives. i was wondering how you can elaborate on unemployment and work, family break down and the need for budgetary discipline,

and i understand wage data is playing a key in this reform. i was wonder if you could comment briefly on that. [ inaudible ] >> it's what leads you to the position of being unable to earn money for yourself as a household. those are the things like family breakdown, debt, drug and alcohol abuse and then your dependency. so those areas need to be wound into any kind of assessment. your lifestyle usually has a bearing on what happens to you. so we need to do more in advance

about dysfunctional family life. so early intervention has to be key to put dysfunctional moms and their kids right. and second to look at families on the edge of breakdown, so we're now investing money into help and support to help stabilize families before they break down rather than spend the huge sums we do rather than picking up the pieces afterward. if you put a bit of money into this, you can restabilize families. so that's a huge shift rather than dealing with the after effects of it. on the issue about how the system works in terms of employment, the reality that we have here is that right now we know what the static levels are for benefits. so what we're saying is that as people go in from benefit into

work, that the levels that they achieve in work for each hour should mean that their income is higher through that work process than when it is when they're on benefits. so the universal credit, it shifts some of the money down to the bottom end. we think that going into work is the biggest issue. and then moving up the hours is the secondary issue. so the participation tax rate, that bit going in, you need to get that right down so that they're always on an upward curve in income. that starts at our number one. that will hugely benefit, for example, lone parents who we want to go to work and their children realize work is part of life and part of your future and they see somebody from that household working.

so they may match that with some of their caring. but that needs to pay and to keep them in work is important. so as they get paid, withdrawals are lower, particularly in the early set and you do that by what i call disregards. as they enter work, each category of person will have an amount of their income disregarded. someone who is able bodied and young will have a very small disregard and a lone parent will have a disregard slightly bigger than that. the taper is the same for everybody. the disregard evaluates what your spectacular level of need is. that's where most of the money is cop sen traited on the investment. this will allow us to look at

conditionality. >> thank you very much. i would like to recognize my friend and the ranking member of the resources subcommittee of texas. >> thank you for your testimony. as i understand it, this universal credit is a new approach that you're just beginning to pilot or implement. >> that is correct. we're due to start that in -- it goes live in october next year. we are building a new software system and doing some early advance work on it starting in april of next year starting in key areas, running it out early in some key areas to see what the glitches are. >> is the goal once you resolve those glitches to have uniformity across the country, so you wouldn't have a different policy in wales from greater london or greater london from northern island? >> not in terms of the basic

structure, no. but now it's delivered later on could be a very localized delivery. right now we'll be doing a national delivery and then we're open for discussion whether that can be localized. the key to this benefit is we also have to change the way we report on taxation. this is a big change to create what's called a real-time information system on our tax base. so now what happens is because as someone goat to work, under the present system, the tax authorities assume that they earn so much money because that's their prediction. we know in part-time work hours change. so you're expected as an individual to report your hours change back to the authority so they can readjust your support through the tax credit as it existed at the moment. the problem is, you're coming from a group that doesn't like authority very much and gets

confused. so they go on to pay you too much money over the year. at the end of the year they turn around and say we've overpaid. now we need to claw that money back. but you're dealing with a group that spends every penny you give them immediately. this means every month we reconcile. if your hours change, we don't need you to tell us, because the business reports that in their immedie report and it adjusts automatically. >> are your projections overall that this will cost more to your national treasury to have this universal credit or less? >> we are investing money to get it in. once it's in, you will more than save that money because. the first feature is -- >> how much? >> you have huge levels of fraud and huge levels of error that are costing billions will be

eradicated. >> how much more are you investing short term? >> about $2 billion a year investment. once that's embedded in, you'll be making your returns immediately. we'll more than offset that through the errors we make in the fraud alone. >> one of the obstacles we found in this country to people moving freely from one job to another or setting up a small business is the lack of access to health insurance. is it your feeling that access to health insurance in the uk is helpful to promoting employment? >> our system is fundamentally different from what you have over here. we have the national health service and everybody gets access free to the point of delivery. >> so you don't have any barrier to employment from people being

locked into an insurance poli policy -- >> people do have private insurance, but i don't think it plays anything like it plays here. >> what we have and what has been adopted here is very dissimilar. but it does reduce that. when we were considering it, one of your european parliament members was telling how terrible it was. is it still a great national institution in the uk? >> and it's been reformed, making it responsive to what people need and overall, we spend less money on health care than you do over here. >> with the concept of reform but not with repeal so that we have access to health insurance

for our workers here. thank you for your testimony. >> i thank the gentleman and the chair now recognizes the doctor from louisiana, the chairman of the oversight subcommittee. >> thank you. welcome. great to see you here today. we appreciate the tremendous work you all are doing to reform this complex system in the uk. to really align the incentives, to make sure that work pays and those receiving benefits will understand that moving -- crossing that threshold to get to work is where they need to go. of course, how do you keep them in employment? i want to focus on a different part of what you were doing with reforms. i think it's called the work program and it's a system of delivering employment services to these individuals. as you restructured the benefits, the welfare benefits

and tax benefits, you're also looking at your delivery system for these benefits and my understanding is you have ways to leverage nonprofit organizations, certain private organizations, not only to help these individuals get into the workforce but stay in the workforce. could you elaborate? >> we describe the work program, which i think is unusual for two reasons. the first is that it's a payment by result system. so the risk is not taken by the taxpayer, but by the private and voluntary sector who run the program. so we don't pay them until they've got somebody in work and kept them there for a minimum of six months. after that, they get further payments. the second point about this really is that we also call it a black box system. by that, it's not my job to tell them what to do. it's their job to figure it out. this is where the voluntary

sector comes in. there are 18 prime contractors, and they will have underneath them, different subcontractors. and they will use that to deal with systemic problems that an individual has. for example, somebody -- and we know this by knowing what prisoners are. they have no ability to read or write at the age of 10. you get somebody in front of you like that, no good in trying to put them straight in work because they will fall out because they're incapable of doing half the jobs. so what they'll have to do is back load them very quickly to probably a voluntary organization to do remedial education.

it's these more difficult ones, and they get rewarded at a higher level for the more difficult ones. so the risk is taken by the private company. it all works for them in terms of their total reward. >> this was a big departure from past practice. >> it's huge. it's now national and we're not quite into the first year and it's two-year program and we have targets for them. if one of the primes fails and doesn't achieve the results, we will get rid of them and somebody else will come in. we keep the risk away from the taxpayer and in turn, it's in their interest and we mentioned holding them in work. that's the bit that's been missed by the government agencies, which is you churn massively after about seven of eight weeks.

if they're not right for work, they will not stay in work. and therefore, what happens they turn out -- it's very expensive because you're chasing them then. so when you get them once, you've got to make it tell once. so that means that the provider has to check on the individual who is at work constantly, see if they have any problems and deal with them and hold them and talk to the employer if necessary. >> thank you very much. that's excellent work and hopefully we'll continue to learn from the experience that you have there in the uk. i yield back, mr. chairman. >> thank you. the chair recognizes mr. neil from massachusetts. >> thank you, mr. chairman. mr. secretary, just to follow up. one of the reasons that data suggests that the welfare reform act of '96 here worked was in some measure because we added a

number of mitigating issues to the overall package, including job training, child care and not to miss the point, people were able to keep their health insurance. that had a profound impact on that flexibility. i'm not going to trespass into domestic politics in the uk, but just having observed 3,000 miles away the prime minister, during his election cycle, he suggested a much more radical transformation of the health care system in the uk than he was able to deliver on. and i understand that, because that's just the reality of what happens. but i think as followthrough, i think the prime minister probably discovered that the health care system in the uk was pretty popular. is that a fair statement? >> you've got to understand from the standpoint of the ushg, in

this area, it's quite different from where you are here. there's no question, because of its basic principle, which is that no matter what your means, you are -- you will always be able to get treatment at the point you need it without any requirement for money. that is -- and that was a big change. so that's engrained in people's psyche. they don't want to see that shifted, so they would have to start forking out for treatment. but we are a coalition. i'm in a coalition which is not wholly conservative. so we sometimes have to cut our cloth according to what we can do in parliamentary terms. but the reforms by and large that we got through will make a big difference to recentering where the decision making should lie. much more with those who are responsible for the treatment. and also knowing how much that treatment costs and bearing town

and understanding how that money is spent better. >> one of the problems we ran into in '96 was the suggestion, i think that was fairly accurate, that for many people who were receiving public benefits, they stayed with health care through the medicaid system. the problem was that two people conceivably living next door to each other, one who went to work every day and did not have health care benefits, came to resent the person who was receiving a public benefit and keeping the health care benefit. so those mitigating circumstances that i referenced earlier about a level of maintenance for health care, in your instance seems to give you a little more flexibility in terms of experimenting. >> it possibly does. the only comment i would make on that is we all, as politicians, make this argument that i don't know where i'm going but i know i wouldn't start from here.

so dealing with our position as to where we are, we don't have that issue about health treatment in the two houses living next door to us. but we do have issues around welfare and that resentment in welfare is a big issue right now in the uk. where someone going to work on low income looks at the house next door with the curtains closed and realizes they're earning pretty much what they are, but they're not working. so that resentment does exist. and a lot of people in work are now deeply resentful of those who are not in work. so this is where our cultural shift is on health care. >> this morning in belfast, mark mcginnis and the queen shook hands. a lot of people like me to participate over 35 years and to witness these huge changes. but as you noted in an earlier conversation that we had, there are still very stubborn

elements, smaller in number year after year, who are still rejectionists. but the link between poverty and high rates of unemployment and violence, it was the best -- i shouldn't say the best, but one of the best recruiting tools for the men and women in those neighborhoods to organizations who saw destiny as never finding a common moment. >> yes. my comment would be this, really. first of all, i was a soldier many years ago. i served in northern island. so i have firsthand memories of some of the violence. i lost friends who had been killed in service in northern island. no one is happier than i am to see the possibility of peace in northern island. it's been a dreadful running sore in the united kingdom for

far too long. but you're right, it is a peculiar cocktail. also, religious division and a lot of residual violence. some of those are still in place today when i visit some of those communities and breaking those down is a very big job. >> thank you. >> i thank the gentleman. mr. secretary, we thank you for taking time out of your schedule to come and share some of your experiences in the uk you can. we're going to continue to monitor closely and look forward to learn from what you're doing and continue. thank you again. >> thank you, mr. chairman, for the opportunity. as the secretary departs, i would like to thank my colleagues for their unanimous

consent in altering our normal agenda with opening statements until afterwards to accommodate the secretary's time. i would like to proceed with opening statements and now i will begin. today's hearing is on disincentives to work built into current welfare programs in the united states. as we already heard, our countries are wrestling with the same issues. secretary duncan smith's presentation, as well as the testimony of our witnesses will help us as we consider making changes on this side of the atlantic, as well. two weeks ago when president obama spoke in cleveland, ohio in the state of the economy, he talked about his vision for how we need to provide ladders of opportunities for folks who aren't yet in the middle class. today, we'll consider whether the multitude of programs create effective ladders of opportunity or missing important runs. to explain this complicated topic, one of our witnesses

describes an income dead zone which a family earning $40,000 per year is barely better off financially than a family not working at all. once all tax credits are taken into account. other experts call this phenomena a poverty trap. he says the bottom line is if you're poor, the government is ensuring that you have little incentive to improve your condition. what it boils down to is this, the more benefits the government provides, the stronger the disincentive to work harder. many of the programs in question are designed to alleviate poverty, but when combined with refundable tax credits, the collective weight can have an unintended side effect. this is not a new problem, but it's about to get a lot worse.

the massive new health insurance subsidies under the democrat's health care reform will extend its reach well into the middle class, affecting families earning up to $90,000 for a family of four. the exchange subsidied under obama care will yield marginal tax rates over lower middle incomes above 55%, and sometimes above 70%. those are some staggering numbers. but as we'll learn, the tax rate can exceed 100%. that means the family is worse off when they work and their earnings increase. here's how another economist describes the story of one woman who went from earning $25,000 a year to $35,000 and could not make ends meet anymore as a result. "she lost free health insurance and had to pay $230 a month. her rent associated with her section eight voucher went up by

30% because of the income gains, which is the rule. she lost $280 a month in subsidized child care voucher she had for after school care for her child. she paid payroll tax on the additional income and the new job was in boston and lived in a suburb. now she has $300 in additional gas and parking charges. he estimated that the government imposed a 130% implicit marginal tax rate on her." we look forward to all of the witness' testimony today. this is an issue i have wrestled with for many years and trying to find a way to build a bridge that would smooth this transition to work without creating a cliff, particularly for single parent families that are trying to make a go of it and improve the quality of their

lives. with that, i would like to turn it over to the ranking member, representative lloyd doget. >> if we can perfect our tax system so it does more to reward work, we should do it. and if we can ferret out any abuse of tax credits that are not being used in accordance with the law, we should take corrective steps. but i must say respectfully, it's my belief that the focus of this hearing and the focus of the overall work this year, last year of the ways and means committee is misdirected. let's look at the facts. the richest 1/5 of americans are reported to own 84% of the wealth of this country. while the bottom 40% are estimated to own about 3% or 4% of the wealth of this country.

the congressional budget office reports over the last three decades after tax income for the top 1% soared by 277%. while 2/3 of the income gains from 2002 to 2007 flowed to the top 1% of households. the focus of this hearing is not on the 1500 millionaires who paid zero income tax in a recent year. it is not on those corporations who not only paid zero, such as in some years again electric, boeing, wells fargo and in some cases actually received money back in credits from the government. it eems not on the area where revenues are not flowing to our government. it's not on those at the top. it is all focused on whether those have an ownership interest in 3% or less of our nation's wealth, whether they're getting too much.

the overall concept of this hearing seems to follow closely the report last year of the house republican study committee concerning the disincentives of our current system. this is the same group and same set of reports that condemned as welfare and seemed to call for reductions, condemned as welfare pell grants, title one grants to disadvantaged schools, head start, the school lunch and school breakfast programs. i believe that is a mischaracterization of those important initiatives that help those who are struggling to become part of the middle class and to share in the american dream to help them advance, that it is wrong to continue to deny those opportunities. when a mother with a couple of children who lives in usaen or san marcos or san antonio leaves the welfare program for a

full-time minimum wage job, the tax credit are available to help her and other working families. that increases the value of her work in a significant way and is an incentive to advance. at the same period of time through the recent recession, there were reports by the pew research center that hispanics particularly represented the hardest hit by the recession. a 66% drop in wealth from 2005 to 2009. a widening of the gap in our country that has not been seen in the last 25 years during the time that data was collected. these are serious problems that need to be addressed to encourage and help people move into the middle class and to so our nation has the revenues it has to sus tape those