Insurance ideas are no sure thing
There are fishhooks in plans to protect against sickness and unemployment
In these days of peril and pestilence, it is unsurprising that parties as different as Act and the Greens have turned to the concept of social insurance to mitigate some of the nasty tricks life can play on people.
Although common in other countries, social insurance is only really familiar here as ACC.
The Greens propose that ACC cover should be extended to those stricken by illness or disability, who must currently rely on the meagre income assistance provided by the welfare system. The principle is that it should not matter as much as it does whether you are incapacitated by being hit by a bus, or hit by a bug.
Act, meanwhile, is proposing an unemployment insurance scheme which would entitle taxpayers who lose their jobs to claim 55 per cent of their average weekly earnings — up to a maximum of $60,000 for a maximum of six months.
Given how low-slung and narrow the safety net provided by JobSeeker support is, that would make sudden unemployment a less financially brutal adjustment.
The concept of social insurance is also supported by the Council of Trade Unions.
And when the Government introduced the Covid Income Relief Payment, to a fusillade of criticism that it was creating a two-tier welfare system, Finance Minister Grant Robertson said work was under way on the possibility of a more permanent unemployment insurance scheme, in response to a request from Business New Zealand and the CTU.
But any move towards risk-pooling though social insurance — and there are a multitude of variants internationally to look at — has to address the obvious question of how it would be funded.
New Zealand is unusual in not having, apart from ACC, payroll taxes ring-fenced to finance some form of social security.
As a result, we have the second lowest “tax wedge” on wages in the OECD. The difference between the payroll costs of employing someone and their take-home pay consists almost entirely of income tax, whereas on average across the OECD, social security taxes take about another 10 per cent.
So one consideration would have to be whether it would make sense in a time of high unemployment to widen that wedge and increase the cost of hiring someone.
The Greens’ plan to reform the Accident Compensation Corporation into an Agency for Comprehensive Care would not, they say, increase levies for at least five years.
They propose to pull off this feat of much broader coverage with no levy increase by an act of larceny. And not petty theft. They are talking about $5.9 billion a year for starters.
ACC’s $46b investment fund, which is committed to fully funding the future costs of accidents that have already occurred, would be “redirected” to pay for income support to a much wider group of claimants, as the scheme changed to a pay-as-you-go model.
But this would expropriate assets built up by past levies (and the considerable skills of ACC’s fund managers) and apply them to another purpose, however worthy.
It would also increase the burden on future levy-payers. What would be next — raiding the Cullen Fund?
Act, for its part, claims that its unemployment insurance scheme would be fiscally neutral, paying for itself with automatically adjusted premiums and through savings on benefits.
It is hard to square that with the assertion that “Income tax rates remain unchanged but 0.55 per cent of the tax paid will be allocated to a ring-fenced Employment Insurance scheme”.
Over time, Act says, “the Government would adjust the 0.55 per cent levy so that the fund balances over a four-year cycle. In a high unemployment year the levy would increase. In a low unemployment year taxpayers would benefit from a levy reduction.”
But in the fiscal year just ended, personal income tax was forecast to yield $40b, 0.55 per cent of which would be just $220 million. And that is before the revenue hit from another of Act’s policies, eliminating the 30 per cent tax bracket.
Diverting the same proportion of the total tax take would only double the amount.
It would not go far. Especially when we are staring down the barrel of a large and sustained increase in unemployment. As it is, even with the wage subsidy, the number of people on JobSeeker support has risen by 47,000 over the past four months.
But the policy is not just procyclical and arithmetically challenged.
Act argues that unemployment insurance would be fairer to taxpayers than the status quo, which “fails those who pay generously into a scheme that does not support them adequately if they unexpectedly lose their job.”
It would, it says, also remove the “stigma” of collecting a benefit — “the stigma created by the long-term dependents who choose to stay on welfare as an indefinite lifestyle.”
The attitude on display there is one of the reasons why critics of the social insurance approach worry. They fear it would entrench a divisive themand-us mentality that would make it harder to address the underlying problem of repairing the welfare system along the lines cogently advocated by the Welfare Expert Advisory Group.
The special adviser to that group, Michael Fletcher of Victoria University’s Institute of Governance and Policy Studies, says now is not the time to focus on social insurance. Instead, the priority should be to remedy the defects of the existing welfare system.
Even if social insurance, provided it was well designed (no easy task), avoided those shortcomings for a while for those who qualify, it would not address inadequate support for those who are not covered, he says.
“Also Covid is likely to lead to rising long-term unemployment. Social insurance is unlikely to cover long periods out of work.”
So even for those motivated more by self-interest than solidarity, that should give pause for thought.
Any move towards riskpooling though social insurance ... has to address the obvious question of how it would be funded.