Unemployment insurance: What we know about how social unemployment insurance might work

Sunday, 23 May 2021

Finance Minister Grant Robertson explains some of the details from Budget 2021.

ANALYSIS: Finance Minister Grant Robertson has announced the Government will consult with the public on a social unemployment insurance scheme before the end of the year.

He gave few details about how such a scheme would work or what it might cost but some of his comments and a discussion document released by officials last July provide a number of hints.

It is also easy to guess at many of the arguments that are likely to be made for and against the scheme.

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So what is social unemployment insurance?

Robertson has said the plan is for an “ACC style” scheme that could pay out people who lost their jobs 80 per cent of their previous income for a limited period of time.

Finance Minister Grant Robertson’s Budget comments and a ministry discussion paper provide enough hints to show roughly what a social unemployment insurance scheme would look like.

It would provide a temporary soft landing for people losing their jobs.

If they were not back in employment by the time the insurance pay-outs came to an end, they would then be entitled to whatever social welfare benefit applied to their situation.

Budget 2021 increased benefits, but it had nothing for “middle New Zealand”, nothing for the economy, and nothing for taxpayers, said the National Party leader.

The reference to ACC suggests the scheme would be compulsory for employees, and perhaps for the self-employed and contractors.

It also suggests workers, employers and the Government would all chip in to the cost of the scheme, in the case of workers through premiums deducted from their pay.

Why have such a scheme?

The main argument is that it would give the newly unemployed time to adjust to their new circumstances or to undertake training to re-enter the workforce.

It might reduce the risk that the jobless were forced into quickly taking whatever job they could get, out of financial necessity, when they might be more productively employed if they took a bit of time over their job search and retrained.

It could also reduce the shock to the economy of a sudden economic downturn by temporarily supporting people’s incomes through a recession.

How long would people get 80 per cent of their previous pay?

The discussion paper put out by the Ministry of Business, Innovation and Employment (MBIE) suggested somewhere between three months and “a year or more”.

In what seems an intriguing comment, Robertson said the insurance scheme would be “linked to training opportunities”.

That would seem to suggest there might not be a single cut-off and that the newly jobless might instead get the pay-outs while they were training.

But people don’t usually have training lined up in advance just in case they get unemployed, and may need time to take a breath and assess their options.

One option might be for the insurance to pay out to everyone who was made unemployed for three or six months and for a further year if they then moved into training but that is speculation.

Leaving that aside, would everyone be treated equally?

Probably not quite.

Robertson has suggested minimum and maximum income caps would apply.

The latter would mean people who lost their jobs would only receive 80 per cent of their previous pay up to a certain level.

The MBIE document touted setting the cap at $134,328 a year, the same as maximum ACC compensation.

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The comment about minimum caps is harder to fathom, given the suggested 80 per cent pay-out level.

The Government presumably would not want a minimum cap to raise that above 100 per cent, as that would mean people would be better off if they somehow conspired to lose their job.

The maximum cap alone though would mean there was some level of wealth transfer through the scheme, from high-earners to everyone else – as well as from people in work, to those out of it.

What would it cost?

It would depend on how many people lost their jobs each year and how long they received the insurance pay-outs for (bearing in mind that would not be for their full period of entitlement if they found work earlier).

MBIE has suggested a ballpark cost of between $800 million and $1.3 billion a year based on 75,000 people claiming on the policy each year, and having a year’s entitlement to the pay-outs but only claiming an average of $14,000 for each spell of unemployment.

That would translate into an average social insurance premium of 65 cents to $1.10 from every $100 of workers’ earnings – so it would cost about 1 per cent of people’s pay.

Why is the Government considering this now?

It wants a better replacement for the controversial short-term relief it provided to the newly unemployed through its Covid Income Relief Payment (Cirp) scheme that ended in February.

That scheme paid $490 a week, tax free, to people who were working 30 hours or more a week and who lost their jobs due to Covid, and $250 per week to people on fewer hours.

What are the arguments against such a scheme?

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A common criticism from the political Right is that such schemes undermine personal responsibility – that people should plan for hard times themselves, rather than forcibly have the ‘’nanny state’’ do that for them.

A common objection from the political Left is that such schemes can disadvantage people on social welfare.

As fewer people might expect to need to rely on social welfare there is less incentive for voters to ensure it is possible to survive on those benefits.

There is also an argument that even if the insurance pay-outs are deemed desirable, it might be more efficient to pay for them through general taxation.

If pay-outs are heavily tied to training or education, there may be a risk people take courses just for the sake of the payments, without being committed to them.

A political curve ball is that the scheme might highlight the situation of people who are unable to work due to sickness or disability.

They neither qualify for ACC nor would they likely qualify for social unemployment insurance, leaving them out of the loop.

MBIE noted that if they were included, that would increase the costs of the scheme “very substantially”.

Any other niggles and fishhooks?

Lots of little ones, though such schemes are common overseas, so none should necessarily be viewed as showstoppers.

If people had redundancy provisions and benefits, or private income insurance, would they be excluded from receiving pay-outs from the scheme, and would they then also be excluded from having to pay into it?

What sort of underwrite would the Government need to provide in case there were a lot of claims early in the life of the scheme due to an economic downturn?

Conversely, if the scheme built up a surplus, how would that be dealt with?

If pay-outs are to be tied to people undertaking training, exactly what sort of activities would qualify? Could people still access the pay-outs if they used a period of unemployment to prepare to launch their own business?

Is it going to happen?

That may depend on whether the idea is popular or not, given it would be a big policy that is likely to generate lots of debate when more is known about the plan.

Unions appear on board, as does BusinessNZ at this stage, although that may depend on the details and the Government probably can’t take businesses’ support for granted as it nails those down.

How the public responds to the idea once more details are confirmed may be more important, and that may in turn depend in part on how supporters and critics of the scheme succeed in framing the debate.