Unemployment insurance scheme could cost up to $5 billion a year

An unemployment insurance scheme could cost anywhere between $450 million and $5 billion a year, depending on how many people lose their jobs, and how generous it is, the Ministry of Social Development (MSD) says.

The government is pushing ahead with designing a social unemployment insurance scheme with Business New Zealand and the Council of Trade Unions.

Such a scheme, which is common overseas, has been more seriously considered by the government in the aftermath of the economic shock from Covid-19 last year.

Amid questions about the adequacy of benefit payments, as well as the eligibility criteria, the government ended up introducing the higher paying 12-week Covid-19 income relief payment for people who lost their jobs because of the pandemic.

Minister of Finance Grant Robertson has indicated the government is looking at an ACC-style unemployment insurance scheme, providing people who lose their jobs with about 80 percent of their income, with minimum and maximum caps, for a certain period of time.

Robertson said last week it would take some to put in place, but the government was targeting 2023.

In a June 2020 report, released under the Official Information Act, MSD officials provided Minister of Social Development Carmel Sepuloni with rough estimates of the total revenue needed to support an unemployment insurance scheme.

In a year of low unemployment, where 70,000 people were laid off, it would cost $451.5m, if people were paid a less generous 60 percent of their income for three months.

But in a severe recession, 300,000 people could end up out of work and a more generous scheme paying 80 percent of someone's income for six months would cost $5.16b.

MSD acknowledged much more work would need to be undertaken to get a more robust costing.

Government, workers and employers would all pay into the scheme, but MSD said establishing it would require significant government investment initially.

The cost of the scheme would ultimately depend on the rate at which its paid, the duration of payments and other coverage criteria, MSD said.

Infometrics senior economist Brad Olsen said it was not cheap.

"Certainly some people will look at [the cost figures] and balk, but in my mind we have seen quite an increase in the amount of spending from government anyway, particularly over the last year, with $14 billion worth of wage subsidies being paid out."

For those who would otherwise be facing a significant loss of income, an unemployment insurance scheme would be an important lifeline, Olsen said.

"It could well help with smoothing that hard hit that income earners often see when they lose a job and ensure again that there is still money going around the economy during a time of severe unemployment."

MSD said an unemployment insurance scheme would have significant implications for the welfare system - but it said there could be options to incorporate elements of such a scheme into existing policies and initiatives.

Child Poverty Action Group economics spokesperson Susan St John said the fact the government was considering an unemployment insurance scheme pointed to the failures of the jobseeker benefit.

The government should be beefing up the welfare system further, widening eligibility for benefits and making them more generous, she said.

Temporary measures, like the Covid-19 income relief payment, were a better way to deal with job losses caused by economic shocks, rather than effectively setting up a two-tier system.

"The problem with social insurance is that it entrenches and ensures that there is special treatment for some newly unemployed, in times of every day unemployment," St John said.

MSD said said introducing an unemployment insurance scheme would be a significant policy change - and it would take some time to fully implement.