Mon Aug 9

Why is New Zealand's Labour government trying to push through a two-tier benefit system?

Written by: Michael Fletcher, Senior Research Fellow, Institute for Governance and Policy Studies, Te Herenga Waka — Victoria University of Wellington

If it goes ahead, the social insurance scheme ^[1] currently being discussed behind closed doors would be the biggest change to New Zealand’s welfare system since the introduction of the accident compensation scheme ^[2] in 1974.

That change took a royal commission, seven years’ debate and hard, considered work to prepare the ground.

This time, a small group of trade union officials, business representatives and public servants is busy developing a scheme that would introduce a two-tier benefit structure into the welfare system.

And it appears the government is only promising a discussion document once the shape of such a scheme is formulated. It’s expected this will present a single preferred social insurance policy option, no non-insurance alternatives, and a plan to have legislation passed before the next election.

Not much is known about what this might look like, beyond it being an “ACC-style ^[3]” scheme. It would pay eligible people who meet the work history criteria and lose their jobs 80% of their previous earnings up to a cap for a period of six months or more (the ACC cap is currently NZ$130,911 per year).

What is clear, however, is a social insurance scheme (sometimes being referred to as a social unemployment insurance scheme) will almost certainly favour those with higher long-term incomes at the expense of those on the lowest incomes. Others, like many school leavers, sole parents and people with disabilities, won’t qualify at all.

Alternatives need to be considered

It also seems clear other solutions that avoid such inequities are not being seriously considered. This means the public will not be given an opportunity to ask basic questions, such as:

what problems are intended to be solved by social unemployment insurance?
what are the alternative options — including non-insurance options — for addressing these problems?
what perverse incentives might the scheme create?
would the money to be raised for the scheme be better spent on alleviating poverty and unfair outcomes in the current welfare system rather than a new, more generous, middle-class insurance system on top of the current one?

The ‘wage scarring’ argument

Among the problems social insurance is claimed to solve is so-called “wage scarring”, where people who are made redundant find they experience a long-term drop in earnings once they return to work.

There is indeed evidence ^[5] wage scarring occurs in New Zealand, and on average it may be higher here than in other OECD countries.

But wage scarring can occur for a number of reasons. There is also little evidence it is happening here due to unemployed workers having no unemployment insurance and therefore having to take low-paid jobs rather than spend more time looking for better paid work.

Moreover, if wage scarring is the issue, other more equitable solutions should also be considered.

For example, higher base benefit rates, combined with some individual entitlement — so a partner’s earnings are less likely to disqualify someone from receiving a benefit — would also go a long way to allowing laid-off workers to manage incomes while they look for jobs. This would also help other beneficiaries, including those currently penalised heavily for entering a relationship.

Compulsory redundancy paid by employers is another option.

The future of work

Another rationale offered relates to economic changes and the changing nature of work. There are two dimensions to this, and it is far from clear unemployment insurance is the best policy response to either.

The first involves structural economic change, including deliberate policy decisions to quit certain industries for environmental and climate-change reasons.

Such “just transitions ^[7]” — out of harmful or declining industries towards a low emissions economy — are crucial. But they require far more than simply an insurance payout, even a generous one.

Just transitions need bespoke industry-wide packages that include support for multi-year trades and university training, assistance with the relocation costs and new housing — as well as income support.

It would be highly inefficient and wasteful to provide an expensive, economy-wide social insurance scheme to meet the needs of specific industry transitions.

The second dimension is the commonly cited rise of insecure, temporary and gig-economy work. However, precarious and low-earning workers would almost certainly be better served by a well-functioning and generous benefit system than through insurance.

Many of the most insecure workers won’t even meet the eligibility requirement for insurance. Most of those who do will receive payouts considerably less than better paid workers, because payouts are linked to past wages.

Coping with economic shocks

Another argument used to justify the proposed scheme is the frequency of economic shocks and the fact many New Zealand workers are poorly safeguarded against them.

Protection against poverty and hardship caused by economic recessions was one of the driving motivations for the establishment of our welfare system in the 1930s. For many years, it proved largely effective in those aims. It could do so again.

Given economic downturns affect many who would not be covered by insurance, it’s far from obvious social unemployment insurance is a better policy solution than improved welfare for all who need it.

What’s more, as we learned from the COVID-19 experience, a very large economic shock requires a tailored response.

With COVID, the government — quite rightly — protected people with its wage subsidy scheme, which ensured most people retained their jobs post-lockdown. An insurance scheme may have provided some with more money in the short term — but only once they had been laid off.

Full discussion of all options needed

Social unemployment insurance would undoubtedly benefit some people. But a lot of the gains are likely to go to those with less need. Meanwhile others — including young new job entrants, insecure self-employed workers, sole parents and people with reduced work capacity due to disability — will gain much less, or even nothing.

Even after the government’s recent welfare increases, a large number of beneficiaries remain below the poverty line.

To forge ahead with developing an expensive insurance scheme before addressing those issues raises serious questions about the government’s commitment to equity and well-being.

Such a large and fundamental change should not happen without a full, transparent and open discussion of all the issues and all the alternatives.