Income insurance would change habits
OPINION: The Government has proposed an ambitious, compulsory unemployment insurance scheme designed to take some of the redundancy and illness risk out of workers’ financial lives.
The scheme, which could be in place by next year, would have a profound impact on how many people run their money lives.
Some of the changes are predictable, but the rule of unintended consequences mean some will be unexpected, and even unwelcome.
The scheme is designed to take some of the risk out of workers’ money lives by requiring them to have compulsory income insurance funded by a 2.77 per cent levy on their salaries, half of which would come from workers’ salaries, and half paid by their bosses.
The immediate impact of this would be people having less in their pockets at payday.
It could also fuel already high inflation as employers would lift prices to recoup the extra costs, if their customers allowed it.
The scheme is designed to insulate workers from the impact of income loss through involuntary redundancy or illness.
It would replace 80 per cent of a worker’s income for amaximum period of six months, in the event of that worker involuntarily losing their job, either through redundancy, or ill health.
It would also bake into everyone’s employment arrangements a four-week redundancy paid for by employers, which the Government euphemistically calls a ‘‘bridging payment’’.
So what would this all mean for workers’ money lives? What could be the consequences, intended and unintended.
Well, suddenly some people might feel less pressure to have saved an emergency fund in case of illness or job loss. Experts always suggested aminimum of three months’ income.
Perhaps fewer people would bother to have emergency savings, and might even spend some of what they have already saved.
Emergency savings bring a lift in people’s happiness, and research shows an effective welfare state does that too.
Only four in 10 people have less than $1000 saved, so perhaps the scheme would lead to an immediate jump in national happiness, and reduce many people’smoney fears.
On amore profound level, the scheme might protect some poorer families from feeling their younger people had to drop out of school in times of economic crisis in order to take up low-skilled jobs to keep their families’ heads above water.
There would presumably be far fewer KiwiSaver financial hardship withdrawals, as few people would fall into financial hardship. But the income insurance scheme would also effectively underwrite bank home loans, and non-bank loans.
This should mean banks and other lenders cost of funds goes down, as loans become less risky.
In a truly competitivemarket, that should mean the price of home loans and other loans goes down too.
A possible unintended consequencemight be that an income insurance scheme might embolden some people to borrow more, as the personal risk of defaulting on repayments would be lower.
Similarly, it might encourage some lenders to lend more, especially lower-tier lenders, who would be a lot less frightened about breaking responsible lending laws when a national income insurance scheme has their borrowers’ backs.
On amore positive note, it might also result in some people who banks thought too risky to lend to, suddenly being able to secure shorter-term loans from banks.
The insurance industrymay not be desperately pleased with some of the likely outcomes.
Certain types of insurance, including loan repayment insurance and car loan repayment ‘‘waivers’’, would suddenly be less attractive.
Income protection and trauma insurance would also become less attractive to some earners.
Once people have come to know, and trust in the longevity of national-level schemes like Working for Families or KiwiSaver, they will respond to them.
Only time will show us how, and whether our responses to a national income insurance scheme would be for better or worse.