A Proposal for an Earnings-Related Redundancy Insurance Protection.

1          Summary

1.1       This short paper sets out a scheme for reducing the shock of lost income from redundancy.

2          Preliminaries: Dealing with a Private Market Failure

2.1       This proposal arises because the private market has not been able to provide adequate income protection for those who become unemployed from redundancy. In particular there is a need for short term coverage to reduce the shock of the loss of income following termination of employment.

2.2       I have no problems about proposing public solutions where the market fails to deliver, or its delivery is very expensive. Moreover, I would support such interventions in areas even if they resulted in increased inequality. (An example is the government subsidising the NZSO which most benefits an elite). There are other policy instruments to compensate for the change where it was desirable to deal with such equity effects. (E.g higher income taxes at the top which enables the funding of the NZSO.)

2.3       The view that the state should never operate in the interests of the ‘middle class’ is a favoured neoliberal position (much honoured in the breach). It comes from a belief that there are no significant ‘market failures’ – except where the minimalist state is (grudgingly) involved. My view is that the market often does not provide adequate outcomes and that sometimes well-designed public interventions may add to wellbeing – including for the middle class.

2.4       To be clear, if the scheme is to remedy an inability of the private market, progressing with it requires that workers desire such a remedy. If they did not, I would not progress it.

3          Tiers and Piers

3.1       I have long pondered over how to integrate the flat-rate social security system which began, say, with Seddon’s Old Aged Pension in 1898 with Bismarck’s earnings-related social security system which was introduced into New Zealand with the 1903 Workers Compensation Act (Seddon again).More recently it is the contrast between Social Security (as codified by Thaddeus McCarthy) and Accident Compensation (as proposed by Owen Woodhouse).

3.2       The solution to which I am attracted, was the ‘Henry Lang’ one of a flat-rate first tier, plus an earnings-related second tier (and a third tier of private provision). This is discussed more fully in Chapter 5 of The Whimpering of the State: Politics After MMP.

3.3       The advent of Kiwisaver introduced the three-tier principle into the provision of retirement incomes. (There is a sense that there may be another tier of home ownership.)

3.4       If a worker is to be provided with earnings-related support, then the scheme has to be contributory, not only for equity reasons, but because the contributions define the level of protection. (A person with a record of part-time, short week, or intermittent employment is going to get less coverage. But the shock from her or his income loss is smaller too).

4          Design Parameters

4.1       Having established the framework of the proposed scheme, it is necessary to put the cladding on the structure. Here I set out some possibilities, although were different parameters chosen I would not be fussed. (Where they are comparable I have tried to use the ACC parameters.)

4.2       First, to set the proposed rate of compensation. Median weekly earnings from wages and salaries was $1,060 in the June 2020 quarter. A target of 80 percent (before-tax) compensation means the level of short-term compensation for the median worker following a redundancy would have been $850 a week. (The benchmark income for the redundant would be earnings over the last year, or whichever the ACC uses.)

4.3       At that time the unemployment benefit (job-seekers) for a single adult was $281 per week. (See para 5.2) That leads to the calculation that were the redundant to receive 54% of their previous wage topped up by the unemployment benefit they would reach about 80 percent of their pre-redundancy earnings. (I would happily settle for 50% with the proviso that the benefit be set at 30% of the median wage.)

4.4       The effect of this measure would be that those on below median wages would receive more than 80 percent compensation (if they were over 25) and those above less. As for ACC, the level of compensation would be capped.

4.5       The compensation would be paid for up to six months (although this could be changed). The evidence is that most workers find a job within that period. What happens if they do? This involves a long and complicated argument about the interface with an active labour market program (see para 6.2). We can wrestle over the exact arrangement.

4.4       The scheme would be funded by a levy on employers and employees. The balance is a political decision I leave to others.

4.5       The levy would be calculated to cover a couple of business cycles. – say ten years. In prosperous times the scheme would build up a reserve to run down during downturns. (There would be a proviso that in particularly severe times when the reserves run out, funding would be supplemented by the government – a sort of overdraft facility – to be recovered when the economy returns to prosperity.) The reserves should probably be held in government bonds (anything to keep the madness of the ACC and the actuaries out).

4.6       A difficult issue is how much of the burden should go onto employers (including what happens to current redundancy arrangements). There is a temptation to try to load as much as possible. Whatever the political wisdom of this, the ultimate impact is that it will affect worker take-home pay either from levies or from employers setting lower pretax wages to maintain overall employment costs or a one off price rise.

4.7       There is a lot of fine tuning to be done. For instance, what constitutes redundancy? (Consider employers requiring layoffs and asking for volunteers.)

5          Interfaces

5.1       I have not thought a lot about how the scheme interfaces with Accident Compensation (the complication is that this scheme provides for permanent income loss). However, wherever possible the assumptions and parameters of the two schemes should be consistent with the possibility that one day there could be some merging.

5.2       It is probably necessary that in order for the scheme to work it will be necessary to convert entitlement in the flat-rate social security system from a household basis to an individual basis. (The current system, based on a distant past, assumes that there is only one earner in a household and that the household can be easily identified.)

5.3       The impact of the scheme on child poverty would be small because the causes of child poverty are different (as my work from the 1970s explored). That requires a very different approach.

5.4       Note that the scheme contributes to an automatic fiscal stabiliser, especially in a major downturn, since spending goes up (and reserves run down) as the economy slows down.

6          Extensions

6.1       I have been mindful of devising a scheme which could be extended to short-term sickness coverage. It might be best to introduce the sickness scheme at the same time.

6.2       This scheme is designed to deal with the shock of an income loss from an unexpected event (redundancy or sickness). It is separate from an active labour market program which, among other purposes, aims to facilitate the redundant’s return to quality employment. If we ever get around to introducing such a program, interfacing will be necessary but it would be fine tuning.

7.         Conclusion

7.1       Were this scheme for redundancy coverage to be extended to short-term sickness it would represent the greatest extension of the welfare state since 1938, especially by integrating the two modes which is operate – say Woodhouse and McCarthy.