Is the Government income insurance scheme a good idea?

Would you and your partner agree to pay over $200,000 during your working life for protection against job-loss? If you’re single, would you fork out $120,000?

This is a very real question, because it’s a good estimate of what a typical Kiwi might pay under the Government’s glamorous sounding “Income Insurance Scheme”.

It will cover us for job loss caused by redundancy or illness and pay out 80% of our wages for six months.

The scheme will be paid for with a tax of 2.77%. While this cost is split between us and our employer, it’s still money that’s factored into wage rounds and arguably part of our overall salary package.

It has admirable social intentions – but is it a good idea?

For me, no. It comes down to two things; the opportunity cost of paying the levy (what else we could do with that money) and how you view the role of insurance and job loss (the fairness test).

The money

When you see the cost, it’s not just “ouch”. It’s bum-on-fire expensive.

A family of two working adults will pay over $200,000 in levies during their career. If these same payments were invested and achieved a 6% net return, they’d have $700,000 cash for retirement. If you are single, your levies could grow to $450,000 (as you’ve not taken career breaks).

The model in the table below calculates costs on a starting salary of $50,000, 45 years in the workforce, 2% annual wage increases and a 10% boost each decade for a job promotion. It also assumes one adult will take a significant childcare break.

Which would you pick?

Back to my original question. The money or the insurance? Would your family part with $200,000 when you can take a filler job, switch childcare roles, put your mortgage on hold for a few months and cover each other for short periods? Two adults inherently have a form of self-insurance.

Yes, redundancy is very stressful, but is it $200,000 of stress? Even more poignant, is it worth giving up $700,000? Because that’s the opportunity cost of this tax with compounded returns.

Society sharing risk

Every form of insurance is a type of social contract, even when run by profit-making companies. As a society, we agree to the concept of spreading risk and often pay hundreds of thousands of dollars over our lives for policies we don’t claim on.

In most cases, we get charged for individual risk, based on the address of our home, smoking habits, or the age of people driving our cars. Even ACC charges a builder a higher levy than a desk-sitter.

Is this tax fairly spreading risk?

We are on the cusp of agreeing to universal redundancy insurance with no individual risk factors priced in. It will mean we forgo six-figure sums to allow people with widely different work histories, career choices and attitudes on returning to work, to make claims for job loss.

The six-month cover kicks in after an employer has given a month’s notice and made a one-month bridging payment (so there are actually eight months to secure a new job).

While it’s unlikely, we can claim on the scheme every 18 months. We won’t suffer means testing on other income, assets or the wealth of our partner. There’s even an extension for retraining. And don’t forget, you can nip out of the country for 28 days for some R&R, while your fellow citizens keep funding those 80% payments.

In the name of productivity, don’t fret about taking a filler job. It’s simply not good for us and we’ll be encouraged to wait for employment offering equivalent pay and conditions.

The whole kit and caboodle comes with a big government machine of case managers (bolted on to ACC) cajoling us into giving up the 80% payments and getting back to work. I wouldn’t rush.

As you can tell by my tone, it has pushed too many buttons for me. Policymakers appear to have built in some serious levels of privilege to the scheme. Personal choices and work-ethic behaviours are too wide to make this format feel fair.

Perhaps a lower levy should be considered to cover pandemic-type job disasters, with the design remaining fluid to respond at the moment.

But if the government really wants to improve our financial resilience to economic shock, most of us would be better off with 2.77% being credited to our KiwiSaver accounts, creating a separate accessible emergency fund for redundancy and illness (or $700,000 if we don’t touch it). We’d become miraculously self-regulating when trusted with personal responsibility.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management and can be contacted at moneytips.nz@gmail.com