Rather than costly, clunky and complex social insurance, what about KiwiSaver, which already operates as a de facto unemployment and sickness account?
Opinion: The main problem the Government’s proposed social income insurance scheme intends to address is the immediate drop in consumption following job loss due to redundancy or sickness. In the jargon, social insurance is designed to solve a problem of short-term “consumption-smoothing” (in the Government’s proposed scheme, short-term is up to seven months – the maximum duration of the social insurance payment).
Politicians and policymakers do not appear to have fully assessed the large number of existing institutions that allow families to short-term “consumption-smooth” following job loss. These include the welfare system (defined to cover not simply first-tier benefits, but also the accommodation supplement and Working for Families and many other income-related payments), as well as accessing private savings, purchasing income protection insurance, and existing redundancy pay entitlements (this list is by no means exhaustive).
In this context, it is worth considering KiwiSaver as a better, cheaper, less disruptive policy option than social income insurance to help people smooth their short-term consumption following job loss.
The purpose of KiwiSaver is to transfer consumption, via current savings, from a person’s working life into their retirement. So, it is a programme inherently set up to smooth consumption – exactly the main problem social insurance seeks to address – but simply later in life.
Unbeknownst to many, KiwiSaver operates as a de facto unemployment and sickness account. Under some circumstances, when you lose a job because of redundancy or sickness, you can dip into it to maintain short-term consumption. People can access their accounts before 65 in times of “significant financial hardship” and “serious illness”.
Significant financial hardship includes situations where a person cannot meet minimum living expenses, cannot pay the mortgage, needs to pay for medical treatment for themselves or a dependent family member, or has a serious illness. Because family circumstances are part of the reasons for access, all family KiwiSaver accounts are potentially accessible, not simply the account of the person who loses the job.
Figures from the 2021 KiwiSaver report show there were over three million people in KiwiSaver with total funds of $86 billion and an average value of $26,000.
In 2021, 21,000 KiwiSavers took $159.3m out of their accounts for hardship reasons. The average value of these withdrawals was $7,584. In the same year, there were $58.7m serious illness withdrawals. Thus, KiwiSaver provides $218m of working age consumption-smoothing – only 0.3 percent of total funds available.
KiwiSaver is one obvious institution on which to build if one considers short-term consumption-smoothing following job loss to be a policy problem. Policy advantages of building on KiwiSaver, rather than constructing an entirely new mandated, government-run, levy-driven system of social insurance, are many. They include:
* KiwiSaver is already in use for working-age consumption-smoothing, but systemic nudges encourage people to use it only as a last resort.
* Most workers are already in it, with significant positive balances for many.
* As a pre-existing institution, it is easy to build on without incurring high costs in setting up a new social insurance agency, an annual cost estimated by officials in excess of an eye-watering $500m.
* It involves competition between private providers, which drives down costs, while social income insurance has a unitary government provider with no competition.
* KiwiSaver can be used to smooth consumption for all forms of income loss, not just the standard job loss covered by social insurance. For example, someone who is forced out of a job because of bullying or sexual harassment and does not wish to take a personal grievance can support their consumption, while they cannot under social insurance.
* Its definition of hardship is already family focused, allowing family members to share their KiwiSaver in times of family need. This potential pooling of job risks within the family improves the efficacy of KiwiSaver as a consumption-smoothing device.
* KiwiSaver avoids considerable third-party moral hazard issues plaguing social insurance. The consequences of using savings for extended periods falls on the families concerned, not third-party levy payers as it does for social insurance. Thus, there are far fewer risks of people ripping off or gaming the system.
* In a KiwiSaver solution, people can make their own decisions to pay in and draw down – exercising their tino rangatiratanga by self-defining the size of their own consumption-smoothing problem. It allows people to adjust to their family circumstances and desires, as opposed to the one-size-fits-all, centrally mandated system of social insurance.
Policy-wise, as an alternative to social insurance, we have a minimalist and low-cost option. Systemic nudges can be cheaply created, better signalling to the many people with a significant KiwiSaver balance that it could be used to smooth consumption if they lose their job. Withdrawal processes could also be streamlined in the event of job loss.
For those who don’t have significant KiwiSaver balances or other savings, such a policy could (if wished) be combined with other imperfect consumption-smoothing substitutes that focus more on genuine need – including regulated minimum periods of redundancy pay, higher minimum sick leave entitlements and a more generous core family welfare floor.
The risks of such a broader policy package going horribly wrong under rapid implementation deadlines – such as those that appear to be contemplated by the Government for social insurance – are orders of magnitude less than those involved with introducing social insurance.