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From the Social Welfare to the Social Insurance state

Newsroom logo Newsroom 21/06/2021 Dr Peter Davis
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Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

The Budget's signalled move towards an unemployment insurance scheme could open opportunities to expand the principles of the ACC scheme to even more of the welfare system, Peter Davis argues

An intriguing suggestion in the Budget was the proposal to explore moving to an ACC-style unemployment scheme which would be self-funded and contributory.

A social insurance scheme along these lines had been proposed by both the Labour and ACT parties, had been outlined in a research paper by the Productivity Commission, and was further brought into focus by the impact of Covid-19 - which showed the standard income replacement level in New Zealand for those losing employment under in the pandemic was among the lowest in the OECD (being about half that of Denmark).

With the United Kingdom, Australia and some other countries, New Zealand has followed the welfare state tradition of taxpayer-based funding for means-tested benefits, with near-universal health and superannuation support.

An alternative tradition, characteristic more of European countries, has been that of social insurance, with contributory, self-funding schemes of social protection, including in health and superannuation.

The only aspect of the social welfare architecture in New Zealand following social insurance principles is the Accident Compensation scheme established in 1973, initially restricted to those in the workforce, but in parts extended to non-employees for treatment, rehabilitation and some compensation for injury caused in circumstances unrelated to employment status.

Aside from this extension to cover injury among non-employees, ACC has remained a niche innovation and the only example of social insurance in the New Zealand welfare architecture. Treasury, as the guardian of fiscal probity, has generally remained opposed to extending the social insurance principle elsewhere in our social protection system.

In case anybody might think that a Denmark-style unemployment insurance system might be a bit of a “soft touch”, since, like ACC, it guarantees 80 percent income replacement for those displaced from the workforce, it needs to be noted that in Denmark this system is part of a comprehensive active labour market policy. So, yes, a displaced worker might gain 80 percent of their previous income, but they are expected to prepare for and gain further employment with a combination of enabling and, to some extent, “punitive” measures.

Tutoring for workforce re-entry, upskilling and training requirements, time limits, and subsidised childcare are all instituted to encourage a return to active employment. Denmark has one of the lowest levels of unemployment, and highest levels of workforce participation, in the OECD. This, alongside a high standard of living and low levels of poverty.

But what of those who are for various reasons unable to enter the active workforce because of long-term conditions such as physical disability, mental health issues, or substance addiction? ACC does provide long-term support for those unable to re-enter the workforce, or even enter the workforce in the first place (for example, birth injuries).

We only have to look over the Tasman to see how such a scheme could be extended. The Gillard government instituted a National Disability Insurance Scheme (NDIS) to support those with long-term conditions, and this has been retained by the subsequent Liberal-National coalition governments. Such a scheme would extend the certainty and effectiveness of ACC coverage for the long-term impact of catastrophic work-related injury to other long-term conditions and remove the poverty and stigma currently suffered by these groups in New Zealand. The Australian NDIS is a work-in-progress and provides a potential model.

What about the ACC “trifecta”; in other words, not just insurance coverage for income interruption and long-term disability, but treatment and rehabilitation beyond injury as well? Here again Australia has been a pioneer, with their universal public health insurance for non-hospital care instituted in the 1970s. We could follow the ACC principle of internalising external costs not just for workplace injury, but for harmful consumption products such as tobacco, alcohol, sugar, saturated fats, and so on. Levies on these products could not only fund non-hospital care but also reduce consumption and health effects.

There are potential disadvantages to a social insurance system. Strictly enforced, it might only provide coverage for those with a full insurance record. In such circumstances the taxpayer would need to step in.

As we have seen with ACC, there are constant demands for its extension. However, these have been largely resisted, and the scheme remains fully-funded, efficient, and well-targeted. It also contributes, like the Super Fund, to New Zealand’s balance of payments and general economic viability through its investment portfolio. Finally, as we saw in 1999 when ACC was opened to private insurers by the National government, the social insurance principle can provide an entry-point for privatisation, with a decline in service levels and an increase in costs.

ACC has been a niche and undeveloped innovation in our social protection architecture. In 2023 it will be half a century since its inception. That might be a fitting time to move core features of New Zealand’s welfare system to a more efficient, sustainably-funded social insurance basis drawing on both international and local models of performance.

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