The Government is consulting on an income insurance scheme for New Zealanders, including its detailed design. Developed jointly by a Working Group comprising Government Officials, Business New Zealand and the Council of Trade Unions, it follows a Budget 2021 pledge to consider such a scheme, particularly in light of the economic impacts of COVID.
Key features of the scheme
- The scheme will provide employees (and those in other working arrangements) with up to 80% of their previous income (capped at $130,911) for up to six months following loss of employment due to redundancy or loss of capacity to work due to a health condition or disability
- Where an employee is made redundant, their employer will need to give four weeks’ notice and make a ‘bridging payment’ of 80% of the employee’s wages during the notice period. Payments under the scheme will begin after the end of the notice period.
- Employees will be able to earn up to 20% of their previous income, without abatement of payments made under the scheme
- The costs of the scheme will be funded by a 2.77% levy split equally between the employee and their employer (i.e. approximately 1.39% each).
- The levy will apply on income up to $130,911 and for employees will be collected through the PAYE system. The employer levy will be collected by ACC which will also manage the scheme. The scheme would operate two funds to meets claims: one for loss of employment claims and the other for health and disability claims.
- To be eligible, employees will need to contribute for at least six months in the previous 18 months preceding a claim.
- Claimants under the scheme will need to seek new employment, re-train or undertake rehabilitation and remain in New Zealand.
- Payments made under the scheme will not be subject to asset testing or reduced because of partner income. Payments will however be treated as a taxable income and may affect calculation of Government support that is income tested, such as Working for Families.
Feedback on the scheme is requested by 26 April. If a decision is made to proceed, the Government is proposing to introduce legislation in 2022, for the scheme to commence operating in 2023.
The case for reform and costs versus benefits
The scheme is based on the concept of “social insurance”, which a number of other OECD countries have adopted.
The discussion document notes that:
- An estimated 115,000 people each year risk sudden falls in income, unemployment and long-term wage losses while around 20,000 people stop work due to health conditions or disability. The wage losses alone are estimated at over $15 billion annually.
- New Zealand currently has limited support for displaced workers and those with health conditions or disabilities. For example, the welfare system provides only modest financial support as it aims to help meet essential living costs and alleviate poverty, and is not tied to previous income, so workers can face significant income drops following a job loss.
- Income insurance would better “smooth incomes”, so people do not face abrupt falls in income and the associated financial and mental stresses due to loss of work. It could act as an “automatic stabiliser” for the New Zealand economy during an economic downturn by supporting incomes, expenditure, and Government tax revenue. Businesses can be expected to benefit, overall, from greater opportunities for displaced workers to retrain and upskill as well as sustaining consumer demand in recessions.
- While there would be additional costs to employers and employees (estimated to be $3.54 billion annually from the levies), an income insurance scheme was preferred to other alternatives by the Working Group.
Devil in the detail
The full discussion document is over 170 pages. Both it and a summary are available here.
For a reform of this magnitude (the discussion document notes that it would be the largest of its kind since the introduction of accident compensation in the 1970s), there are many matters of detail which will need to be carefully considered.
Views on the feasibility of the scheme, and support (or otherwise) for it, may well depend on some of these design features.
We strongly encourage clients to engage in the upcoming consultation process.