Is social insurance really a good idea?

Dr David Law
Insights Newsletter
28 May, 2021

When presenting Budget 2021 last week, Finance Minister Grant Robertson announced that work is underway to develop an unemployment insurance scheme.

Details are limited. Initial indications suggest the scheme might pay out 80% of an individual's previous wage if unemployed. The scheme would be time-limited and perhaps tied to education and training opportunities.

A two-tier unemployment benefit system would result. Unemployment insurance would be relatively generous, but at any given time only some unemployed would qualify – those who met past employment conditions and whose time on this benefit had not yet run out. The second tier would be less generous but more widely available, like Jobseeker Support is now.

Considering whether current policy settings support displaced workers adequately and exploring alternatives is understandable given the economic turmoil that Covid-19 has unleashed worldwide. But, determining whether an unemployment insurance scheme is a good fit for New Zealand is not straightforward.

In general, social insurance schemes can help protect people against negative economic shocks. But there are possible pitfalls as well.

Initial estimates put the potential annual cost of an unemployment insurance scheme in New Zealand at over $5b under some circumstances. However, social insurance schemes often grow to encompass a wider array of benefits than unemployment insurance, such as old-age pensions, sickness benefits, health care, and the like. The average level of social security contribution tax in the OECD is around 8 percent of GDP.

New Zealand’s labour market outcomes are generally good. We typically have relatively low levels of unemployment and high participation rates compared to other OECD countries. Social insurance schemes, however, can create perverse labour market incentives which could negatively affect these outcomes.

For instance, when at the OECD, one of the countries I worked on was Belgium. Their labour markets were not in the best shape, with limited mobility and low labour market participation, especially for older workers, and a very high proportion of unemployment was long-term.

Belgium has a very generous unemployment insurance scheme, and we were concerned that this was a contributing factor to their labour market woes. In some ways, the unemployment insurance scheme being envisaged for New Zealand would be even more generous.

Aside from the cost and labour market risks, social insurance schemes are difficult to design. For example, how should non-standard workers like the self-employed be dealt with? What is the best way to fund such schemes? How should different individual risk profiles be accounted for? Should benefits be redistributive or tied only to individual contributions?

The Initiative plans to take a closer look at social insurance schemes over the coming months. Stay tuned.

Stay in the loop: Subscribe to updates