Bigger payouts for Covid beneficiaries could end up benefitting everyone

There’s more to the finance minister’s controversial move than meets the eye, argues Max Rashbrooke.

If you’re a current beneficiary, I can see how it looks like a slap in the face. Finance minister Grant Robertson yesterday announced that people rendered unemployed by the coronavirus will receive a 12-week benefit of $490 a week, nearly twice the standard benefit of $250. It looks like a two-tier system in which long-term beneficiaries are less important than those who have just lost their job. But it could, in fact, herald a shift towards a world in which we support everyone better, and manage the biggest risks collectively.

In the history of modern welfare states, one choice looms large. Should welfare be a “contributory” system, in which you initially get higher benefits if you have paid (contributed) more tax, or should it be “non-contributory”, so that everyone gets the same benefit regardless? These are, in essence, two different ways to carry out social insurance, although only the former is usually given that name. Both help collectively insure ourselves against risk: people pay tax into a communal pot in good times, and can draw from it in bad times, when unemployment – a massive risk, and one for which there is no effective private insurance – forces them to seek support. The difference, of course, is that in the former, you get more insurance the more contributions you have made.

When the first Labour government was drawing up its landmark Social Security Act in 1938, it faced a choice between these two systems, and largely chose the latter. This is unsurprising, as contributory schemes can look unfair when you have a particular desire to help the worst off, the welfare state’s primary audience. Those who have paid more in tax are already more fortunate; why should they receive more?

Other countries, though, took a different path. No proper welfare system can rely completely on contributory benefits: that would be too brutal. But Scandinavian and Western European countries do make much greater use of them, on top of their standard non-contributory benefit systems. This means, crudely speaking, that their employers and employees pay so-called social security contributions, effectively an extra income tax that is earmarked for paying out benefits. In the first few months after people lose their job, they correspondingly get a higher benefit, though it diminishes over time. In the Netherlands, for instance, the benefit is initially worth three-quarters of the average wage, as opposed to 30% in New Zealand.

These schemes can be justified on philosophical, practical and realpolitik grounds. The philosophical argument, though I find it the least convincing of the three, is a familiar one: if you have put more in, why shouldn’t you get more out? Practically, and more persuasively, people on middle incomes have built up higher costs – in particular, larger mortgages – for understandable reasons. Society is better off if they receive a higher benefit initially, allowing them to hold house and home together while they hunt for a new job, rather than being abruptly dumped onto a fraction of their former income and probably seeing their life collapse around them.

Equally persuasive is the realpolitik argument. In his recent book Transforming the Welfare State, the leading scholar Jonathan Boston argues that countries with contributory schemes actually generate more support for non-contributory schemes. That is, higher benefits for the recently unemployed go hand-in-hand with higher benefits for everyone else. As this table shows, citizens of countries with contributory benefit schemes are much more likely to agree that the government should provide “a decent standard of living” for the unemployed, and less likely to urge benefit cuts. They also have higher core benefits.

Why so? Because, Boston argues, it means the middle classes are more likely to feel they have a “stake in the system”. Being able to see what they are getting from it, they are more relaxed about others benefiting. Social insurance helps counter the “them and us” attitudes that so corrosively separate “hard-working taxpayers” from “beneficiary scroungers”. Of course, one has to beware correlations. Some third factor, such as an underlying national solidarity, might explain both results; and absent that solidarity in New Zealand, a move to social insurance might not generate the desired attitude change. But I still think it would, at least in part.

This, in short, is the intellectual backdrop to Grant Robertson’s latest move. Of course his announcement satisfies a short-term political need to help those suddenly rendered jobless by Covid-19. But the finance minister has also commissioned work on “the possibility of a more permanent unemployment insurance scheme”.

What this might look like is of course unclear. On Twitter, Victoria University law lecturer Eddie Clark argued that the Canadian version of social insurance, which he had seen first-hand, “[has] lots of exclusions, makes unemployment a personal responsibility thing rather than a community solidarity thing, and gives an excuse to drastically cut [other] unemployment benefits”. New Zealand’s politics tends to be more like those of Canada than the Netherlands, so we should heed Clark’s warning.

But things could also turn out much better. The government’s failure to raise benefits in the Budget took many, even on the right, by surprise. That may reflect a lack of courage. But it could also imply that, as rumoured, New Zealand First blocked any such attempt, or that an alternative strategy is underway. If these temporary Covid-19 payments really do make the middle classes feel better about the welfare state, they could be a precursor to both permanent social insurance and core benefit increases.

And there is no doubt in my mind that those benefits need to rise. As the Welfare Expert Advisory Group’s research established, many beneficiary families have incomes $100, $200 or even $300 a week below what they would need to pay their bills, participate in their community and lead a life of at least minimal dignity. But raising those benefits is not incompatible with creating a social insurance scheme.

All this is conjecture, of course; I have no more idea than most people about the government’s true intentions. My only point is that the Covid-19 payments, far from being an insult to the already unemployed, are not just a sensible way to cushion the blow of a colossal economic shock: they could be a step on the way towards a welfare system that genuinely, and generously, helps us collectively insure against the social risks that are far too large for any one individual to manage.