Proposed Income Insurance Scheme

Sunday, 1 May 2022, 5:58 am
Opinion: Ian Powell

The proposed ‘New Zealand Income Insurance Scheme’ (‘the scheme’) has attracted strong debate among the more left-wing and liberal groupings, within New Zealand-Aotearoa.

This debate should be seen as a positive rather than negative tension because of the opportunity to consider and learn from the implications and sharpen advocacy.

The proposed scheme is outlined in a report jointly developed by the Government, Business New Zealand and Council of Trade Unions (CTU) published on 2 February. They describe it as “a new way of better protecting workers and the economy”:    income insurance scheme.

It has been strongly opposed by economist Susan St John, Associate Professor at the University of Auckland and spokesperson for the Child Poverty Action Group, in an article published by Newsroom (13 February):  Questioning income insurance.

On the other hand, on 9 February, Stuff published a powerful defence from women union leaders Rachel Mackintosh (CTU Vice President & E tū Assistant National Secretary), Kerry Davies (Public Service Association Co-National Secretary), Laures Park (NZ Educational Institute Matua Takawaenga), Glenda Alexander (NZ Nurses Organisation Industrial Services Manager), and Sandra Grey (National Secretary, Tertiary Education Union): Scheme good for workers and country.

The problem it is trying to solve

So is this scheme is a solution looking for a problem or the other way around? It is clearly the latter. Every year, more than 100,000 New Zealanders are made redundant, laid off, or have to stop working because of a health condition or disability. 

Around 64% of New Zealand’s 5 million population are between 14 and 65 years (around 3.2 million). In other words, give or take, around 3% of the workforce every year lose their jobs for reasons other than dismissal.

This is a sizeable number of workers thrown annually into vulnerability. But their protections are few. Some are entitled to redundancy payments usually if they are covered by a collective employment agreement but this is a small number (and not guaranteed if the business goes under). Some, not all, become eligible for welfare benefits. A relatively small number of high income earners might have income protection.

Proposed solution

As proposed, the scheme will support workers with 80% of their income for up to 7 months if they lose their job through no fault of their own. The intent is to give them the time and financial security to find a good job that matches their skills, needs and aspirations, or retrain for a new career. 

Some of these over 100,000 workers each year will have a health condition or disability forcing them to stop working or reduce their hours, be supported to take time off work to recover fully, work reduced hours, or retrain. 

Funding the scheme would be like ACC for accidents. It will be funded by levies on wages and salaries, with both workers and employers contributing. 

The scheme’s key features are:

• broad coverage for different working arrangements;
• coverage for job losses due to redundancy, layoffs, health conditions and disabilities;
• a four-week notice period and four-week payment, at 80% of salary, from employers;
• a further 6 months of financial support from the scheme, at 80% of wages or a salary (capped at 80% of $130,911);
• option to extend support for up to 12 months for training and rehabilitation;
• a case management service to support people’s return to work;
• administered by ACC;
• funded by levies on wages and salaries, with both workers and employers paying an estimated 1.39% each; and
• workers would become eligible after 6 months of levy contributions in the previous 18 months.

Genesis of income insurance scheme

Although some of the construct of the scheme has origins in the social insurance approach to welfare in western Europe (eroded since the 1990s). But the immediate genesis can be found in the 2019 publication of the Welfare Expert Advisory Group Report (WEAG): Whakamana Tāngata (Restoring Dignity to Social Security in New Zealand) Welfare Expert Advisory Group Report.

The Report observed that:

Support for displaced workers is particularly weak. Compared with OECD best practice, New Zealand has an inadequate system of dealing with job loss, redundancies and labour market shocks (OECD, 2017). Redundancy pay is not required by law, the stand-down provisions between work and benefit entitlement see many workers and families plunged into poverty. In addition, eligibility for income support is based on family income, and workers may be ineligible for income support following job loss and redundancy if they have employed partners. This means a household can find itself losing more than half its income due to one partner losing their job but having no income support available through the benefit system. For many low-wage families, two incomes are required to get by and cover rent and other living costs. To alleviate this problem, the Welfare Expert Advisory Group recommends that workers made redundant or who lose their jobs should be entitled to welfare support for 6 months without regard to their partner’s income (up to some cap…) This would help families affected by redundancy where they have no (or too little) redundancy entitlement.

The Report went on to recommend (36) a revamped active labour market including employment and training policies across government to make them more coherent and effective. This would be the overall responsibility of the Ministry of Social Development (MSD).

Then, in more detail, the Report recommended

Establish a short-term (for example, 6 months) benefit for partnered people who lose their jobs or incomes (for example, due to redundancy) through an earnings disregard of their partner’s income (up to a cap).

Essentially the Government-Business NZ-CTU scheme builds on the Report and fleshes it out more, but shifts the emphasis from income protection to income insurance and its administration from MSD to ACC.

The Criticisms

Susan St. John opens her Newsroom article (linked above) with her view that “The welfare state should ensure there is always adequate income in the event of loss of employment, ill-health, old age, childhood and at other stages of citizen’s lives.”

She then observes that “New Zealand achieves this ideal with varying degrees of success.” For her the most successful part of our welfare state is the universal flat-rate pension provided by the New Zealand Superannuation Scheme (covering over 700,000 people and increasing each year). 

Her beef is that the scheme’s discussion document is highly aspirational but with little detail over how it work to the benefit of those to whom it is targeted. She questions the role of ACC in running the scheme both from the point of its capacity to do so and to manage the contradiction between accident compensation being based on ‘no fault’ (including when it is the worker’s fault) and social insurance requiring that loss of the job is ‘no fault of the worker’.

St. John warns against the complexity of the scheme and instead proposes the alternative of reforming benefits (increasing levels and accessibility); extending access of all seriously disabled without regard to cause to the level of rehabilitation and medical treatment currently provided only to accident victims; and fully paying tax credits for children in all low-income families.

The defence

The strong response of Rachel Mackintosh et al (see above link) is firm. Her colleagues represent unions primarily involved in the state sector. But, as well as being CTU Vice President, Mackintosh is also a senior leader of Aotearoa’s largest private sector union. This is significant.

They describe the scheme as revolutionising support for workers linking it to the impact of unexpected economic change. In noting that protecting workers from a sudden loss in income is something done well in New Zealand, they cite the absence of statutory redundancy, statutory income protection, or statutory notice periods.

Further, they assert that the scheme “will most support those workers most likely to be made redundant”  who are most like to be workers on low income including women, young people, Māori, and Pasifika.

These union leaders also focus on the importance of economic security, training opportunities and wrap-around support. They note the experience of the “painful restructuring of the 1980s” and the effects on workers of the international economic recession of the late 2000s. Such a scheme, they argue, would protected workers during these times of upheaval and help the economy to regenerate.

What to make of it all

Susan St. John makes some very telling critiques that deserve serious consideration and following through on. The difficulty with her cogent advocacy is that it requires a transformational left-wing  government to follow their direction and that is exactly what this government is not.

This government is incremental at best, not transformational. It is social liberal and technocratic (leading it to be elitist) rather than left-wing. To the extent that endeavours to be transformational it focusses on restructuring through centralisation as well described by Max Rushbrooke in Stuff (23 April): Centralising restructuring isn’t transformational.

Curative and preventive

St. John is right to highlight the failure of this government to implement the kinds of measures they highlight that would help bring many people out of poverty. But there are two equally critical dimensions to addressing poverty – curative and preventive.

The scheme, which has origins in the WEAG Report, falls within the latter dimension. Keeping 100,000 people each year out of poverty can’t be sneezed at. It is significant and potentially transformational for them.

The same applies to workers who would otherwise be victims of economic shocks. These are not annual events but they do happen. The transition of the economy from dependence on fossil fuels and other climate change threats pose financial risk for these workers.

Improving the scheme

But the scheme does need improvement. It would be better to call it, as WEAG suggests, income protection because of the sharper focus on protection and the negative connotations of insurance. Even better, call it ‘employment protection’. Shifting its administration from ACC to MSD should be considered.

I’m troubled by the fact that, unlike superannuation, the scheme links payment to income levels (subject to the cap) rather than a flat rate. The term insurance takes the scheme down this path.

The rationalisation for this income levels linkage appears to be that is what income insurance is and that people tend to spend according to their income. Further, higher income earners would have contributed more to the fund in absolute terms.

There is truth in this as far as it goes but a flat rate has a stronger equity dimension. The scheme is more about protection than equity but these should not be seen as alternatives. The problem with a flat rate is that New Zealand has a low wage economy and it would be odd to have a scheme payment higher than some wages.

Nevertheless, equity is territory for further work including knowing more about the incomes of the over 100,000 that the scheme is targeted at. Whether it is a flat rate or not, however, it is time than the living wage becomes the minimum wage. This might help consideration of a superannuation-type flat rate or variant of it.

It will be also important that the aspirational retraining envisaged in the scheme has a strong material mandatory and entitlement basis. Mandating and entitling are not synonymous with the potential negativity of prescription. Accessible, relevant and quality retraining is as critical to the scheme’s success as income protection is.

Further actions are justified (more than just increasing the minimum wage to the living wage). These includes legislating for a minimum redundancy entitlement (the lack of a legislative entitlements risks the scheme becoming an excuse for employers not to provide redundancy) and significantly improving the accessibility and levels of welfare benefits. The CTU should be more on the front foot advocating these measures.

 But these actions are not a justification for opposing the scheme. The scheme’s both transformational and poverty preventive potential is commendable. It is a good achievement as a starting point for further development.

This is especially the case when working with a largely non-transformational government. The buy-in of Business NZ helps ensure the scheme’s endurance in the event of a change to a government more of the right.

Blending revolutionary heart with a strategically pragmatic brain?

In over 35 years working for unions I negotiated over 100 collective agreements (including predecessors) through collective bargaining (possibly a record of some sort). Each one was an improvement of what it replace and each one did not achieve all that I wanted. But each settlement provided a stepping stone to the next negotiation.

I like to think I have a revolutionary heart which interacts with a strategically pragmatic brain (a contestable view).

This is the context in which I see this scheme especially if it replaces its insurance focus with income or employment protection.

© Scoop Media

Ian Powell

Otaihanga Second Opinion is a regular health systems blog in New Zealand.

Ian Powell is the editor of the health systems blog 'Otaihanga Second Opinion.' He is also a columnist for New Zealand Doctor, occasional columnist for the Sunday Star Times, and contributor to the Victoria University hosted Democracy Project. For over 30 years , until December 2019, he was the Executive Director of Salaried Medical Salaried Medical Specialists, the union representing senior doctors and dentists in New Zealand.

Contact Ian Powell

• Website - Otaihanga Second Opinion