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OPINIONPoliticsDecember 16, 2022

Why income insurance should be the first thing taken off Labour’s 2023 to do list

Image: Archi Banal
Image: Archi Banal

Labour’s proposed scheme comes with massive costs and not much gain for low- and middle-income New Zealanders, argues Michael Fletcher.

There has been considerable media speculation in recent days that Labour may be preparing to shelve its social insurance scheme idea. Politics aside, there are good reasons for ditching such a poorly thought-out proposal. Not the least of these is new analysis showing that most low- and middle-income New Zealanders in the scheme would at best receive modest benefits.

By Labour’s own description the social insurance proposal would be the biggest change to New Zealand social security since the introduction of ACC almost 50 years ago. The scheme is huge, costing an estimated $3.5 billion each year. Administration of the scheme alone is estimated at $500 million per annum. This bill is to be funded by a 1.39 percent tax increase on wages, matched by an equal levy on employers. As Inland Revenue has advised, most of the employer levy will eventually be passed on to workers via reduced wage increases, reducing strained family incomes by nearly 3 percent in the middle of a cost-of-living crisis. 

A lot of people, including the self-employed, many migrants, and some precarious workers, will not be eligible. For those who are, the scheme sounds generous – anyone who loses their job because of redundancy or illness will qualify for 80 percent of their lost wages for up to six months. That in itself is a problem because it sets up a two-tier welfare system with higher rates – one might think of it as Koru club welfare for insurance recipients, compared to other beneficiaries in cattle class.

What the “80 percent” promise also overlooks is that the scheme would be introduced on top of an already existing set of welfare and social assistance programmes. And it turns out that the extra those additional taxes would buy eligible workers in the event that they lose their job – the net gain over and above welfare entitlements – is far, far smaller for low- and middle-income workers and families. 

This critical point can be illustrated by looking at the net new benefits the scheme would offer for four different hypothetical families – a couple with two children, a couple alone, a sole parent with two children and a single person alone – assuming three earnings levels – minimum wage, median wage, and the proposed scheme’s maximum earnings cap (see Figure below). The calculations take into account the existing welfare system, Working for Families tax credits, and the Accommodation Supplement where it applies. They also assume the family gets the maximum of six months’ insurance pay-outs. If the person was unemployed for only three months, for example, the benefits would be half what the figure shows. 

For three out of four of the low-income family types, the net additional benefit from the scheme is between $3,300 and $4,900. When you take into account the total annual levies paid, these families would need to lose a job – and be unemployed for the entire six months – every two to four years to recoup their and their employers’ levies and break even. The gains are somewhat higher for middle income families, but still the payouts don’t match the levies paid unless the family loses a job every 2.6 to 4.7 years. 

At the top end of the income spectrum the scheme is a much rosier proposition. In particular, couple families where both earn $130,000 per annum or more, would receive almost $39,000 if one of them loses a job and is unemployed for six months. In most cases, these are the families that least need the support of a scheme like what Labour is proposing.  

The model family analysis also highlights one gap in our existing welfare policies. It’s an important hole, but it could be easily fixed without a $3 billion dollar per annum scheme and all the complexity that goes with it. Low- and middle-income couples, especially those without children, stand to benefit relatively more from the insurance proposal than other family types. This has nothing to do with insurance per se but is due to the fact that we income-test entitlement to welfare on the basis of total family income, so two full-time earner families typically miss out if one loses their job. It would be simple to tweak the welfare rules so as to disregard a spouse’s earnings up to some level such as the median wage, with benefit reductions only applying in respect of earnings above that amount. Much bureaucracy would also be saved.

Minister of finance Grant Robertson has described the income insurance scheme as the “missing piece” in our welfare structure. He is wrong about that. There are lots of pieces missing in the welfare system and plenty of scope for improvement, but this insurance proposal is not one of them. Hopefully, the summer break will be a chance for him and the Labour caucus as a whole to think again.

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