Stuff: How social insurance could provide a safety net for NZ’s most vulnerable workers

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For Craig Renney, chief economist of the Council of Trade Unions (CTU), it’s personal. Growing up in northeast England as the son of a coal miner, he saw his community “devastated” by the closure of Ellington Colliery​ in 1994​, with the loss of 1100 jobs​. Making no attempt to soften the blow, the government of the day simply “shut the door and threw the key into the North Sea”.

This experience partly explains his support for social insurance, which could be one of this Government’s biggest – and most controversial – legacies. Operating in every major developed society bar ours and Australia’s, social insurance schemes require workers and employers to pay a levy – typically 1-2 per cent of salary – into a fund. When people are made redundant, the fund pays them a time-limited benefit that’s usually a set proportion of their previous salary, capped at a certain amount.

The Government is expected to shortly launch consultation on its proposed scheme. Unusually, it has the support of both Renney’s unionists and Business New Zealand’s corporations. It’s unpopular, though, on the left, where it’s often seen as ushering in a “two-tier welfare system”. And that critique has some merit.

But social insurance is trying to do something different from standard welfare. It’s about preparing for rapid economic shifts, managing risk, and avoiding the phenomenon known as wage-scarring, or long-term income loss. Every year, roughly 1-2 per cent of workers lose their jobs involuntarily, and although the predictions of robots pinching your job are overplayed, still that pace of change may pick up.

New Zealanders, who receive neither social insurance nor compulsory redundancy payments, have one of the least protected workforces in the developed world. Accordingly, we suffer severe wage-scarring. Motu research shows that five years after redundancy, the typical worker is earning up to one-fifth less than they did in their old job.

Receiving, at best, the standard $315-a-week unemployment benefit, the newly redundant have little time to assess their options or retrain. Instead, in desperation, they often grab the first job going; hence the former Air New Zealand pilots stacking supermarket shelves.

A social insurance payment, in contrast, can give them time to find the right job or upskill, and helps avoid forced house sales and other desperate measures. International comparisons suggest the result is less wage-scarring.

It’s not clear yet what New Zealand’s scheme might look like, but the overseas versions often pay people 60-80 per cent of their previous salary for 6-12 months. Ministry of Business, Innovation and Employment (MBIE) documents released last year modelled various options, many of which cost about $1 billion. Those documents also suggest wage-scarring costs us nearly $10b a year, so if social insurance reduced that by just one-tenth, it might pay for itself.

Who would be the winners and losers? High earners would contribute the most (in dollar terms), while low-paid workers would benefit most because, evidence suggests, they get made redundant more often. Within the paid workforce, social insurance might be progressive – and would get employers to bear some of the cost of laying people off. This would rightly help reverse a long-term shift of risk from firms to individuals.

One common criticism is that casual and gig-economy workers, who are disproportionately young, female, Māori and Pasifika, wouldn’t benefit, nor would those with interrupted work histories. But the eligibility criteria in overseas schemes vary, and we could design ours so the payouts are based not just on past salary but also on expected income. Social insurance would then increase support for some of the most vulnerable workers, and do so better than compulsory redundancy payments, which generally favour older, longer-established staff.

Overseas, social insurance can also cover people whose illness forces them to stop work, or at least take a break. Following that path would take us a step towards the much-needed extension of ACC cover from long-term injury to long-term illness.

Of course, the critics’ point remains. Labour may have boosted benefits by $90 a week, but a further $1b spent there would do more than social insurance to help the most vulnerable, and should be top priority. Good luck, though, getting employers and employees to stump up for that, in the Government’s view.

So prioritising social insurance is a political choice. But it’s also, in itself, a good idea. The British coalfields where Renney’s father worked have, over time, brought forth new industries, new jobs, new livelihoods. But a 2014 report found the consequences of the closures “still all too visible in statistics on jobs, unemployment, benefits and health”.

Here, economic change has visited similar damage on towns like Tokoroa, and could do so again. Social insurance alone won’t stop that. It could, though, be one way to ensure that we don’t leave such communities to their fate, but instead help them forge a better future.