Tax and the Unemployment Benefit are not Unemployment Insurance

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A few people of vastly different world views have been getting annoyed that the Welfare Reform group is going to be examining the option of unemployment insurance – and some think they should choose a better model to examine. I want to examine the reason why it is frustrating those on the left. No Right Turn claims, endorsing Jackson Wood’s analysis on Twitter, that:

We already have compulsory unemployment insurance. It’s called tax.

What we currently have is not an insurance scheme for at least four reasons:

1) Taxing and promising to pay fixed level of benefits is not an insurance scheme because premiums are not risk-related. If someone was in a particularly stable job (say, they worked for the Government), then their risk of needing to collect the unemployment benefit is lower. If it was an insurance scheme, they would pay lower premiums. Since they do not, they are in fact cross-subsidising those who are riskier.

2) Taxing and promising to pay fixed level of benefits is not an insurance scheme because insurance payouts are not related to contributions. If premiums were legally set as a fixed percentage of income, then payouts would adjust to increase for those who had a higher income. However, that is not the case.

3) Insurance schemes build a capital base from which to meet payouts, while the Government collects money in a year and pays it out in the same year. In other words, the sustainability of the insurance scheme is based on the Government’s ongoing right to tax its people. When schemes rely on future payments to meet obligations, they are typically called Ponzi schemes. Economists from the left and the right agree that benefits like Social Security are Ponzi schemes – they just disagree as to whether it is a good or bad Ponzi scheme.

4) If the unemployment benefit were an insurance scheme, then all Government benefit schemes could be classified as such. However, I’d like to see an insurance scheme with this degree of moral hazard survive in the marketplace. I haven’t seen NZ figures for the unemployment benefit, but there’s certainly evidence of the effect of unemployment insurance from overseas.

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3 Responses to “Tax and the Unemployment Benefit are not Unemployment Insurance”

  1. Eric Crampton Says:

    Oh, I’m not annoyed that they’re examining it; rather, I just think that Canada doesn’t give all that great a model to follow. A proper insurance scheme is definitely better than a benefit; a dirty insurance scheme likely isn’t much worse than status quo and may be a bit better.

  2. stephenwhittington Says:

    Yeah, sorry, I wasn’t clear enough. Will edit.

  3. Recruitment Auckland Says:

    This is interesting stuff.

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