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BusinessMay 28, 2021

Bernard Hickey on social insurance: ‘Koru class dole’ or not, this is a really big deal

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Thinking through the plan to insure workers’ incomes, I’m reminded of my childhood in a once-thriving town later devastated by 1980s economic reforms, writes Bernard Hickey.


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Two aphorisms came to mind when the government announced last week it had launched a tripartite investigation – comprising BusinessNZ, the Council of Trade Unions and the government – to investigate the creation of a European-style unemployment insurance scheme to pay redundant workers around 80% of their income while they retrain and find another good job.

If it seems too good to be true, it probably is

The first question I’m struck by is why two bodies supposed to be at loggerheads would want a build a scheme that seemed so generous. Who is going to pay for this – employers? Workers? The government?

Why are these arms of capital and big labour being so cosy? Is this a sneaky attempt to sock taxpayers – especially the low-to-middle-income ones already unfairly overloaded with PAYE and GST – with another income tax hike instead of a proper redistribution of wealth to rectify the effects of the K-shaped Covid recovery?

It’s tempting to suspect the idea is designed to ensure highly paid white men with real jobs in factories get a massive new dole that the already-unemployed, women and young contractors in the precariat of the gig economy can’t get. It also looks like a permanent version of the Covid income relief payment (CIRP) to those made redundant for most of the last year, which was almost twice the regular dole payments and without the onerous rules about getting partner support.

There seems to be a real risk that the scheme will embed and widen the yawning gap between the rich and the poor, creating a two-tiered welfare system with a Koru class dole for those in well-paid jobs about to be restructured — the worthy unemployed — alongside the current much more punitive system for the long-term unemployed, the unworthy and hopeless poor. Vanessa Cole from Auckland Action Against Poverty made the sceptics’ case well in this Spinoff piece last Friday.

But also, don’t look a gift horse in the mouth

It’s possible that this is landing at a once-in-a-political-lifetime confluence of employer need and worker desires, and at a perfect alignment of the political and economic cycles. This scheme could be the pathway to a “just transition” for workers marooned by technological and climate change in the decades to come. And it might be the way to sneak in a massive improvement in our social safety net.

If it’s politically impossible to increase benefits much for the unemployed, the sick and the disabled, then perhaps this is the clever way to engineer an improvement in benefits by forcing richer workers in secure jobs to “overpay” for income protection insurance that is then paid out to poorer workers in less secure jobs.

Maybe this is an opportunity to create a fully-featured health, disability and accident insurance scheme to fill the gaps currently left between the sickness benefit for those who can’t work any longer because of illness and those who are well compensated and helped to get back to work after an accident. This was case expertly made by E Tū’s Sam Gribben on The Spinoff this week.

Scenes from Murupara, the small central North Island town near where Bernard Hickey grew up (Photo: Lynn Grieveson )

This is a really big deal

Like most last week, I initially focused on news that the government would right the wrongs of the benefit cuts in Ruth Richardson’s 1991 ‘Mother of All Budgets’ by increasing main benefits by up to $55 a week. That mattered, but the $700m scale of it pales in comparison with both the overall $5.2b per year cost of all of the Welfare Expert Advisory Group’s recommendations, many of which are yet to be adopted, and the $1.4b business-as-usual increase in NZ Superannuation payments this year because of the ageing population and average wage indexation.

The government’s decision to push ahead with some urgency to develop social insurance will be a massively more important announcement in retrospect if it turns into legislation and a scheme before the election in late 2023. It would effectively transform our social safety net in one fell swoop.

The urgency is no accident. All three parties in the tripartite arrangement understand the next two years will be the last chance in decades to make such a politically sensitive and economically weighty set of reforms. Labour is unlikely to win with a majority in 2013, diluting its power to push through reforms unpopular with the left and right. Proposals in mid-2020 for such a scheme were reportedly quashed by New Zealand First in those frantic few weeks before the election.

Employers also know the political winds are behind a push to improve worker rights and security as it becomes clear that the last 30 years of wage suppression, job insecurity and union busting is generating backlashes all over the world. The immediate threat for employers is the potential for a hardline Labour government to force through mandatory redundancy clauses, similar to those in other countries around the number of weeks of salary that has to be paid out when someone is laid off. The longest serving workers can get paid several years worth of salary. That introduces a liability onto company balance sheets that would immediately reduce the value of companies. That’s the more cynical, self-preserving reason.

Scenes from Murupara, the small central North Island town near where Bernard Hickey grew up (Photo: Lynn Grieveson )

Brace for massive labour force disruption

The other reason is the more enlightened and often larger employers can see massive disruption coming in the labour market as robotics, AI and climate change wipe out entire classes of skills and large employers in small towns, generating masses of workers with the wrong skills in the wrong places. Covid-19 has only reinforced the risks for employers of needing to hire new workers, but then finding the ones looking for jobs have the wrong skills. McKinsey has estimated the shift to remote working during Covid meant five years worth of digital adoption was done in eight weeks.

Climate change is also accelerating these big shifts. New Zealand has plenty of its own large examples to point to. The transfer of Tiwai Pt’s renewable power into the rest of the grid was a near and present danger to over 1,000 highly paid workers in Invercargill until only a few months ago. Most still assume it will happen in the next five to 10 years. This week Refining NZ announced with little fanfare the confirmation of its plans to turn Marsden Point into an import terminal, destroying hundreds of highly paid and highly specialised refinery jobs in the coming couple of years. Kawerau was shocked last week to find out the owner of its paper mill, Norske Skog, had decided to leave with a loss of up to 160 jobs because of falling demand for newsprint and high electricity prices. Japan’s Oji, which has a similar number of workers at its pulp plant on the same site at Kawerau, is also thought to be considering pulling out because of high power prices. Not far away in Whakātane, SIG Combibloc, announced in March it was likely to close by the end of next month with the loss of over 200 jobs, largely because it was not large enough or competitive enough to match newer, higher-tech and often subsidised mills in Asia, where power is cheaper and business investment is higher.

Scenes from Murupara, the small central North Island town near where Bernard Hickey grew up (Photo: Lynn Grieveson )

We should never let a Murupara happen again

Just an hour’s drive up the road from Kawerau and Whakātane is the small forestry service town of Murupara. It is at the junction of the Rangitikei and Whirinaki rivers and right next to the Galatea dairy farming valley that hugs the edge of the Uruwera National Park. I grew up on a dairy farm there through the 1970s and went to Galatea school between 1972 and 1978. My grandfather, who was wounded in the trenches of the Somme and invalided home, was given the undeveloped land as a ‘rehab’ farmer in the mid-1930s. My father left Galatea school at the age of 13 to work on the farm through World War Two. A lot of my rugby-playing and athletics and fishing friends lived in Murupara and I went there often for shopping and social events. We always went there on a Friday night for fish and chips and to the Catholic church on Sundays. Our family farm backed onto the Whirinaki River and was less than a kilometre as the crow flies from the church, which is itself 400 metres from the very-well-groomed Church of Jesus Christ of Latter Day Saints in Murupara.

I remember Murupara as a thriving and hopeful community with lots of good forestry jobs and many growing Māori families. We always sung Māori hymns at church and there was usually a hangi out the back of the church on a Sunday afternoon every couple of months. I associate the church with that smell of the hangi being lifted out just after the Sunday morning service finished.

I paint this picture of 1970s Murupara because the changes there have become something of a touchstone for prime minister Jacinda Ardern in her own story, and in her framing of the argument for social insurance. She argued in a speech to a business audience last Friday that she did not want to repeat the austerity and benefit cuts of the early 1990s that effectively sentenced many of those laid off in the economic reforms of the late 1980s, and their children, to three decades of poverty. She knows the challenges of the “future of work” and climate change will force similar labour force disruptions and rightly wants a “just transition” as more factories are closed and workers have to retrain and retool mid-career or even when nearing retirement.

Scenes from Murupara, the small central North Island town near where Bernard Hickey grew up (Photo: Lynn Grieveson )

Murupara was devastated from the mid-1980s onwards by the destruction of the state-run forestry service and the sale to foreign interests of the forests on the central plateau. The shock of the job losses, the massively lower incomes and the resulting social stress ripped through the community. Ardern spent her earliest years in Murupara when her father was the policeman there, and her family were part of the LDS community in the town. Her first three years of schooling, from 1985 to 1987, were at Galatea school.

Ardern doesn’t want the mistakes misery visited on Murupara to be repeated during the restructures and job revolutions that are on their way in the age of robotics and climate change.

“I saw this first hand when I was growing up in Murupara, some of you may have heard me talk about this short period in my life – and while I was very young, I saw the poverty and remember the impact of privatisation of the forestry industry and lack of government support for those affected by this dramatic change of course,” Ardern said in a speech the day after the budget.

“As I said when I entered parliament, I developed a passion for social justice over many years, but in part from living through that and seeing people lose their jobs and seeing families struggle,” she said.

“For all of the downsides of politics, and the negativity it attracts, I have always believed and still do, that politics is a place where you can make a positive, long term, sustainable difference.”

I’d love to avoid another Murupara too. I visited again for the first time in 30 years last June, just after the lockdown. It broke my heart to see how it had declined. I broke down in tears walking behind the now-disused church and seeing the empty and abandoned area where the hangi used to be held.

So what is needed to square the circle?

If Ardern, Grant Robertson, the CTU’s Richard Wagstaff and BusinessNZ’s Kirk Hope can work together to build a social insurance scheme, it could be Ardern’s enduring and transforming legacy.

But there’s a lot of devil in the detail to work out, and a few people on either side of the political divide who don’t want it. The activist left see it creating a two-tiered benefit system that recreates and embeds the privilege of old white men, and risks creating a new generation of contractors locked out of “proper” jobs by employers who don’t want to take on the cost and liability of a full time employee. This locking out of youth from the permanent labour force is a particular problem in Europe, where gold-plated social insurance schemes and expensive redundancy rules have forced many employers to avoid taking on new staffers and instead use contractors and gig platforms.

The proponents of an ACC-style scheme here point out contractors are also in ACC, but they are also the only contributors, whereas employees have employers to help them pay.

Then on the right, opponents see it as an expensive and stealthy way to push more “hard earned taxpayers’ money” into social support for the unemployed, regardless of whether they’re “deserving” or not. Act has pitched a swap of tax cuts in exchange for the scheme.

The key elements that will decide whether it is agreed, created and succeeds will be around who shares the cost; whether it is done via PAYE or a share of remuneration to ensure contractor costs are included; and whether it includes health and disability as well as unemployment, to fill in the last big gap between joblessness through redundancy and redundancy through illness.

Those on the left would prefer to simply see big increases to the main benefits to make it viable for workers to retrain and transition to new jobs.

The clock is now ticking because social insurance will be competing for parliamentary and cabinet time with RMA reform, DHB reform and ocal government reform, not to mention the ongoing dramas around Covid.

The devil will be in the detail, and the schedule.


Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

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