Is there anyone who could be against something as positive sounding as ‘Social Unemployment Insurance’?
Social Unemployment Insurance, a scheme the Government is currently developing, evokes compassion and a desire to help those in need. It promises to ease the fear of falling into a hole if ever laid off. It gives us all the assurance that we can count on our community in times of need.
What could be wrong with any of that?
Well, there is a lot more to it than first meets the eye. It is not just the economics; it is the politics as well.
Understanding social insurance schemes requires some history – and, in this case, coming from Germany helps. Germany is the place where social insurance started in the late 19th century. A century and a half later, you can study the long-term effects of social insurance there.
Ironically, the introduction of social insurance in Germany was not the work of socialists. The idea originated with an arch-conservative monarchist, Chancellor Otto von Bismarck. His goal: to combat the Social Democratic Party, Germany’s version of Labour.
Marxism and industrialisation had sparked a workers’ movement across Europe, and Bismarck tried to curb socialism’s spread in Germany. On the one hand, he outlawed Social Democrats associations and their publications in 1878. On the other hand, he wanted to woo workers with a host of social insurance schemes.
As weird as it may sound, Bismarck’s creation of the modern welfare state was designed to quell the workers’ movement and preserve the conservative status quo.
In his memoirs, Bismarck later wrote: “My thought was to win over, or shall I say bribe, the working classes to see the state as a social institution that exists for their sake and wants to provide for their welfare.”
Bismarck’s social insurances thus served a political purpose (fancy that!), and initially, there were three: health insurance (1883), accident insurance (1884) and an old-age pension insurance (1889).
The political nature of the insurance scheme was most visible in the old-age pension. When it was introduced, the age of eligibility was 70 years. Meanwhile, life expectancy for men at birth was 37 years. Very few workers would qualify for it. But that was the point. It was politics, pure and simple.
For German politicians, social insurance was a tool. It gave them more power, more money and more discretion.
No wonder social insurance grew after Bismarck with more schemes being attached to it: unemployment insurance in 1927, a separate insurance scheme for artists in 1983, and then an extra scheme for long-term care insurance in 1995.
But just as social insurance expanded, so did its costs. As of today, Germans pay huge chunks of their salaries into the various pots of social insurance schemes. And this is on top of ‘ordinary’ income tax.
New Zealanders who have never worked abroad may not appreciate just how much Europeans contribute to their various insurance schemes. So maybe a quick calculation will help to illustrate this.
Take an average German single earner on an annual salary of €47,000 ($79,800). Income tax is €7,605 ($12,700) – and that is actually a bit lower than what it would be in New Zealand ($17,254). But on top of this income tax, there are social security contributions totalling another €9,505 ($15,900).
So, in total, average German employees pay €17,110 ($28,600) in taxes and social insurance levies. The German net pay on the same salary is thus about 20 percent lower than in New Zealand.
The situation is even worse because the employer pays additional social security contributions. These are not technically part of the salary but extra costs to the employer – in this case, a further €11,500 ($19,200).
In sum, the average employee will cost the employer €58,500, have a gross salary of €47,000 and receive a net income of €29,890. So, once you include employee and employer contributions, the average worker would be about 40 percent better off after tax under New Zealand’s tax laws.
When looking at the Ardern Government’s proposal of a social unemployment insurance, the numbers for New Zealand are lower – for now. It may just cost an extra 3 or 4 percent of tax on income that New Zealanders will be required to pay. Put that against the promise of no new taxes. And the keywords here are ‘for now’.
The problem is the precedent such a new scheme would set. As the German example shows, social security schemes tend to grow: From modest beginnings in Bismarck’s time to a system that costs the average employee more than income tax, that is the story of Germany’s social security system.
Germany also shows how the huge amounts of money involved in the schemes attract politicians. Intent on meddling with the scheme, they can use it for their own purposes and pet projects.
At the time of Germany’s unification, Chancellor Helmut Kohl needed funds to pay for his policies. He found them in the social insurance pots. That allowed him to, for example, pay pensions to East German retirees who had never paid into the scheme.
You can also see how politics interferes with social security in the introduction of long-term care insurance in 1995. This is a scheme to pay for the costs of old-age care. People receiving such care would have had to pay for it themselves, which would have reduced their estate. So, by introducing such an insurance scheme, the real beneficiaries were their heirs – and that made it good politics.
Of course, employers were not keen to make their contributions to this scheme. To compensate them for the levies they now had to pay, Germany abolished a public holiday (the traditional Day of Repentance and Prayer).
Figure that: a public holiday gets abolished to help extend a social security scheme in a way not to harm businesses and to protect the inheritances of baby boomers. This is the politics you get with social insurance systems!
So, the question for New Zealand is this: Do we want to get started on the path towards social security with the proposed unemployed insurance when we already have a welfare state? Are we keen to have an extra social security system that will start modestly only to carry the seeds of its own overreach?
Do we want a system that politicians can play with, that gives them plenty of options to channel funds towards their pet projects through schemes hidden from public view?
Would we really like to end up with an arrangement that puts a massive wedge between people’s gross and net incomes? A system, by the way, that also harms employment outcomes, especially for the most vulnerable?
Or would we rather not repeat Germany’s path into the politicised super-welfare state?
If you asked me, I know which option I prefer.