Do New Zealand workers need an national income insurance scheme?

Thursday, 6 August 2020

A national unemployment scheme could reduce the initial horror of unemployment for New Zealand workers.

ANALYSIS: New Zealand could get a European-style unemployment insurance scheme paid for by levies on workers’ incomes.

The idea was raised by the Productivity Commission in late 2019, but mounting job losses during the Covid-19 pandemic prompted the Government to consider introducing one here.

The idea of unemployment insurance is that workers make payments in the good times to ensure that if they lose their jobs, for example by being made redundant, they don’t experience a precipitous fall in income.

If Labour stays in government after the election, it looks likely unemployment insurance will get a thorough debating.

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Scandinavian countries have unemployment insurance schemes, and they are typically pointed to as the success stories New Zealand should seek to emulate.

That could see it added to the list of the national infrastructure of ordinary life we take for granted, like KiwiSaver, Working for Families, NZ Super and ACC.

WHAT IS UNEMPLOYMENT INSURANCE?

The rough model New Zealand is looking at would see people, and their employers, pay levies to a national scheme.

The robots are coming. It’s widely expected that New Zealand workers will need to retrain more often in their lifetime as technological advances reshape the work humans do.

In return, should they lose their jobs they would get a year or two of payments that replace a portion of their lost income - for example 80 per cent - until they found work again, or the period covered ran out.

It would, like ACC or the Earthquake Commission, be run by a government agency, and would be backed by an investment fund, reinsurance, and taxpayer guarantees.

It's argued that in countries with unemployment insurance schemes middle and higher income workers don’t suffer horrendous falls in income, should they lose their jobs, and find themselves on welfare.

They can then afford to retrain, should they need, and don’t have to take low-paid jobs in a panic to be able to keep paying the mortgage.

This can lead to “income scarring”, which is when people who lose a job take lower-paid work, and never recover to earn their previous income again.

The Productivity Commission warns that technology will change the workplace, and result in a lot of people’s jobs being replaced by robots, leading to them having to retrain.

The Government believes New Zealand shouldn’t go on with ad hoc responses to economic crises. The Great Depression, mass job losses in the 1980s, and the global financial crisis all saw big jumps in unemployment.

An unemployment insurance scheme could help reshape the workforce for a changing future.

DON’T WE HAVE WELFARE FOR ALL THIS?

Our welfare system is designed as a safety net, and benefit rates are survival-level payments only.

The Productivity Commission found income-replacement rates for displaced workers in New Zealand through the welfare system ranged from as high as 80 per cent for low -ncome households with children, to as low as 26 per cent for single people and those on high incomes.

When the impact of Covid-19 on unemployment became apparent, the Government rushed out a $490 a week Covid-19 Income Support payment, which many saw as an admission that welfare payments really didn’t work for middle New Zealand.

What’s more, the Productivity Commission found that about two-thirds of people who reported losing a job didn’t receive Jobseeker Support in 2015 because their partners’ income was taken into account in benefits means-testing.

The Council for Trade Unions (CTU) played a big part in getting the Productivity Commission to put unemployment insurance on the agenda.

The CTU and Labour do not see unemployment insurance as a replacement for welfare, but as a layer of social security on top of it.

CAN WE AFFORD IT?

We do not know what the levies might be.

Whether we get to debate unemployment insurance may depend on who wins the coming election.

Everything comes at a cost, but affordability is a matter of priorities.

Every time a big new piece of national infrastructure is created (national health service, ACC, Working for Families, etc) some people claim it is unaffordable.

The number of mortgage holidays that’s been required since Covid-19 damaged the economy shows how financially vulnerable many households are, which brings a cost for the whole economy.

On a personal level a national unemployment insurance scheme could save some people money. Borrowers often pay for loan protection insurance, which they would no longer need if unemployment insurance existed.

A national unemployment insurance scheme could hit insurers’ bottom lines as products like income protection, and trauma insurance, which are already too expensive for many households, wouldn’t be so attractive any more.

Expect some fierce lobbying from insurers in the coming debate. They may even argue private insurers should operate the scheme under government rules, as they tried for workers compensation insurance.

WHEN MIGHT WE GET IT?

The democratic process is a slow one, and getting the system right so as not to create too many unintended consequences, such as having poorer workers cross-subsidising wealthier ones, requires care.

With consultation in 2021, it might be possible to have a scheme in place within three years, the CTU thinks.

IS IT THE ONLY OPTION?

No. We could just carry on as we are, and let people largely look after themselves.

The best unemployment insurance, of course, is having a thriving economy with lots of job opportunities.

And when the Productivity Commission suggested unemployment insurance, it said there were two other options.

We could just change current benefit system. For example, the system could be set up to pay people made redundant a higher proportion of their lost wage for a period of time after they are made redundant, so they could afford to retrain.

Similarly, we could make student loans available to older people to retrain.

Another suggestion from the commission was that people be helped to build up individual redundancy accounts, which they could draw on, if they were made jobless.