National Insurance should be abolished and replaced with a system of personal welfare accounts which could be used for savings, insurance and even loans, according to a think-tank.

The authors claim new accounts would help solve what its author describes as 'weaknesses and problems' with the National Insurance (NI) system.

The proposed personal welfare accounts would provide people with an income during periods of joblessness, parental leave, higher education and retirement, it argues.

Civitas says the accounts would restore the contributory principle, while addressing a huge state pensions deficit. The report argues that means-testing the state pension is all but inevitable, but suggests the problems could be alleviated by selling public assets, such as the sale of Royal Mail, part-nationalised banks and mobile phone licence auctions, and using the proceeds.

Based on the new workplace pensions, the main function of the new accounts would be to save for retirement, but they could also provide cover for short-term unemployment, while people could borrow against them to meet higher education costs, the report claims.

Civitas professorial research fellow Peter Saunders writes in Beyond Beveridge: "Personal accounts would overcome many of the weaknesses and problems in the current NI system, while strengthening the vital 'contributory principle' at its core.

"It would reduce pressure on the public finances as well as delivering an effective system of social security which is responsive to people's needs and widely regarded as fair by the public," Saunders writes.

He says that the move would promote a stronger sense of personal and civic responsibility by allowing people to control their own savings rather than having government do it for them.

NI is no longer fit for its purpose, he says, but the principle behind it must not be lost.

"NI is in a sorry state. It requires a radical rethink. But to allow the whole thing to collapse without rescuing and restoring the contributory principle at its heart, would be major mistake for which future generations would rightly chide us," says Saunders. "Many observers think the most sensible option is to scrap it altogether. But there is something uniquely important about Britain's National Insurance system which must not be lost."

Regarding the state pension, he says it is hard to see how future pensions can be paid without ­radical reform.

"Means-testing the state pension, to target benefits, is not only a sensible policy, it may be an unavoidable one."

John Dickie, a leading member of the Scottish Campaign on Welfare Reform, said: "We need to see reform of our social security system so it treats people with dignity and respect.

"Benefits need to be adequate to genuinely protect people from poverty and enable them to fully participate in society.

"New ideas are welcome but need to safeguard these principles, and avoid increasing the complexity associated with additional means testing."