What’s a ‘social insurance’?
The government’s proposed income insurance scheme is being described as a “social insurance” scheme. What does that mean, and why is the characterisation important for how you think about the scheme and how it could be funded?
What is the proposal?
Basically, the idea is that if someone loses their job through redundancy or for health reasons, they get 80% of their usual salary for up to seven months, and help to try and find a new job. The employer pays a ‘bridging payment’ for the first four weeks. The scheme is funded by workers and employers.
What’s insurance?
Fundamentally, insurance is about transfer of risk. We’re all at risk of bad stuff happening to us. People sometimes pay for private insurance so that, if bad stuff does happen, it doesn’t affect them so badly. Some example of bad stuff that people insure against: getting sick and needing treatment or losing income, damage to your car in a car accident, accidentally causing damage to someone else’s car, and losing property in a house fire.
What’s social insurance?
Social insurance is when insurance is provided by a government-mandated scheme rather than individuals choosing to contract with private insurers. The social insurance scheme New Zealanders are probably most familiar with is ACC. There are several important ways in which social insurance differs from private insurance:
Compulsory
‘Government-mandated’ means that participating in the insurance scheme is compulsory. That a scheme is compulsory doesn’t necessarily mean that it has to be run by a government entity. It could be provided through private insurers although they would be subject to regulations and have less freedom than they normally do.
Universal
The other side of the coin of a scheme being compulsory is that it is universal: it covers everyone affected by the risk that it insures against. This is especially important for people that might find it prohibitively expensive or even impossible to get insurance in a private market, because insurers do not want to take them on.
The government decides on the funding
Private insurers will generally try and make what a person has to pay for their insurance reflects their individual risk. If we’re talking about say health insurance, that’s a combination of the risk that they will become unwell and the losses they will suffer if they do (loss of income, treatment costs etc.)
With social insurance, the government gets to set the funding. This can be done in a way that takes into account individual risk. For example, employers pay into the ACC scheme based on industry and individual accident records. But, since the government gets to set the funding, this can also incorporate other goals and values. Social insurance schemes can have those who are better-positioned financially bear more of the costs, even if that means that their payments are out of proportion to their risk. That means that a social insurance scheme can cover people who may have difficulty getting private insurance.
Why is it important that this scheme is ‘social insurance’?
Characterising the scheme as ‘social insurance’ helps us understand how it is and is not like other things. It also provides a useful reference point for thinking about whether the scheme, and the way it’s proposed to be implemented, is a good idea.
I’ve seen the scheme described as a “new social welfare net”. I don’t think this is a helpful characterisation. There are several ways that the proposed social insurance scheme differs from social welfare. First, social welfare systems are generally aimed at meeting people’s basic needs. The proposed scheme would pay people 80% of their actual lost earnings. Basing payments on actual losses is characteristic of insurance not welfare.
Second, welfare systems are generally aimed at supporting the worst-off in society. The proposed income insurance scheme does not do that, since you need to have a job for six months in the first place before you can qualify to get paid for losing it. This leads to the objection that it creates a two-tier welfare system that would compound inequality. I think these concerns are legitimate, but also that “the perfect is the enemy of the good” and “politics is the art of the possible” aren’t merely platitudes, and that the scheme is an improvement on the status quo might be enough of a reason to implement it.
And, while critics might paint the scheme as being for middle-class public servants and white collar workers, many families are more financially fragile than we would like to think, and the scheme benefits any family that is just one unexpected job loss away from crisis. One of the reasons for making the scheme compulsory is that many people do not appreciate how vulnerable to job loss they actually are. And, although the scheme may not offer direct assistance to the worst-off, it does alleviate poverty in the sense that it makes it less likely that a job loss plunges a family into poverty.
Finally, social welfare systems are usually funded through general taxation. In contrast, the costs of the proposed scheme would be funded out of an account specifically set up for that purpose. The proposal is for workers and employers to contribute equally to the scheme, each paying around 1.39% of the worker’s earnings.
Understanding the scheme as social insurance also helps frame how you can think about whether the proposed funding system is fair. The government needs to be able to persuade people about the funding as well as the idea of providing something to people who lost their jobs.
National has characterised the scheme as a “jobs tax”, which strikes me as rather un-constructive knee-jerk opposition. There has long been a long-standing political consensus on the benefits of the ACC scheme, which is also funded in part by levies paid by workers and employers. This is the sort of thing a centre-right party that wants to show that it cares about people, not the economy, should be able to have a sensible conversation about. Yes, in the current climate of astronomical housing costs and rising inflation, it’s a tough time to be asking workers to give up more of their hard-earned pay. But those same circumstances also mean that losing a job is especially hard to recover from. By the way, I don’t think Grant Robertson’s insistence that this is a levy not a new tax adds much to the dialogue either. For the worker who is being asked to give up money that would otherwise be going into their pocket this may as well be a tax.
There are some important questions to be asked about the funding and scope of the scheme. Is the 50:50 funding from employers and workers fair? Should the levies be sensitive to risk, like insurance usually is? Is it possible to identify industries that are more at risk of making workers redundant, and require them to contribute more to the funding of the scheme? Should someone who is known to be more susceptible to losing work for health reasons contribute more? To what extent can employers affect whether a worker loses their job for health reasons? Business NZ and the EMA have objected to the inclusion of health, and I think there is something to the argument that businesses have more control over job losses through redundancy.
When it comes to funding, comparisons can be made with ACC and superannuation funding. ACC aims to bring in each year enough money to pay for all of the costs of injuries sustained in that year. However, ACC can potentially be paying out for years and years after someone is injured, while under the proposed income insurance scheme the payments end after seven months. Superannuation is almost like the reverse of insurance: you get paid out if something good happens (you live long enough to qualify), and usually there’s a long lag between when people are working and contributing to the funding of the scheme, and when they get to benefit from it. Both ACC and superannuation funding raise intergenerational fairness issues, because there can be a distinction between the group of people paying the levies and the group of people receiving payments. With an ageing population, this raises the question of whether it’s fair to expect the current working generation to pay for superannuitants, or whether each generation should put money away to cover their own future costs. I don’t think intergenerational fairness issues are as pronounced when it comes to the proposed scheme, because people are essentially insuring themselves each year for the following year.
What I think
I’m still going over the details of the proposal, but I’m broadly in favour of the scheme. MBIE is undertaking consultation. They’re inviting feedback on all sorts of aspects of the scheme, including which job losses are included and how it is funded. The government developed the proposal along with Business NZ and the NZCTU, but there are lots of other voices that should be heard. For example, I don’t think those entities represent the self-employed especially well, and the proposed coverage for the self-employed is somewhat limited. If you have something to say (and that includes if you’re vehemently opposed to the very idea) then I encourage you to submit.