Peter Saunders wants unemployed people to pay their own dole. In a recent paper for the Centre for Independent Studies, he suggests that unemployment allowances could be replaced with Unemployment Savings Accounts (USAs). Under this system workers would be expected to save enough to pay their own way when they were between jobs.
The idea of replacing unemployment insurance schemes with individual savings accounts has been floated by a number of prominent economists including Martin Feldstein, J Michael Orszag and Dennis Snower. Free market think tanks like North Carolina’s John Locke Foundation have also promoted the idea. Many supporters have looked to Chile, a country which is taking the individual savings account model from theory into practice.
Under most of the proposals, workers would make regular payments into a special unemployment account. If they become unemployed they could draw on their savings instead of claiming a welfare or unemployment insurance payment from the government. The accounts would be managed by non-government fund managers and deposits would earn interest. On retirement a worker would be able to withdraw their savings along with any interest earned. Because the unemployed would be spending their own money, there would be an incentive to find a job as quickly as possible.
While the idea sounds simple enough, there are a range of different models. It’s not clear which one Saunders favours (he plans to outline his proposal in a forthcoming paper). Part of the reason Saunders supports USAs may be because they would reduce the redistribution of income from the steadily employed to the intermittently employed. Australia’s non-contributory unemployment allowance system is more tightly targeted on the least well-off than the unemployment insurance systems of Europe and North America so the effects on redistribution are likely to be more significant. According to a research paper by the Department of Family and Community Services "Higher income groups in Australia get less from the welfare state than in nearly any other OECD economy".
Introducing USAs would transform the politics of poverty in Australia. It would create a far clearer division between individuals and families who can support themselves through the market and those who need to rely on government and charity. Along with American political scientist Lawrence Mead, Saunders argues that:
The key social division today is that between a self-reliant ‘middle mass’ and a state-dependent, marginalised ‘underclass.’
If that isn’t true today Saunders hopes he can make it true tomorrow. Along with other Centre for Independent Studies researchers, he hopes to make Australia a less egalitarian, more market oriented society. The new politics of poverty is one way of achieving that. Saunders would drive a wedge between low-paid but potentially self-reliant workers and those who rely most heavily on government help with income support, health services and housing. In Saunders’ preferred system lower-paid workers will receive less help from the better off — less help with health care, less help with education for their children and less help with family payments. The big winners will be high income earners who will save more in tax than they lose in benefits.
According to Saunders, Australia’s welfare state has four undesirable effects:
- Loss of control – Governments confiscate our earnings only to give them back to us later in cash or services. Taxpayers lose control over how and when their money is spent. Their incomes are churned through bureaucracies which make their consumption choices for them.
- Waste – Churning leads to waste. A significant proportion of taxes are lost in administration. Every new government program creates a new team of bureaucrats who spend much of their time (and your money) going to meetings, writing memos to each other, briefing politicians, and responding to parliamentary committees.
- Erosion of personal responsibility – Personal responsibility is like a muscle, if you don’t exercise it, it wastes away. By protecting individuals from the consequences of their own actions, governments undermine personal responsibility. The more protection they provide, the less responsible people become.
- Redistribution – The Australian welfare state transfers resources from people whose market position is strong to those whose position is weak. The health system takes money from people who are healthy and spends it on those who are sick and disabled while the income support system takes money from more educated and skilled workers and gives it to less educated and skilled workers who are more prone to repeated spells of unemployment.
Egalitarians won’t agree that redistribution is undesirable. But the first three or Saunders’ concerns ought to worry everyone. In most spheres of life consumers make better choices than politicians and bureaucrats. Waste undermines the state’s ability to improve the welfare of the worst off. And erosion of personal responsibility can mean lower levels of well-being for everyone.
A solution – USAs
Unemployment Savings Accounts would replace unemployment allowances with individual savings accounts. For employees the system might work something like this:
- Each pay-day your employer would make a deduction from your wages and deposit it into your unemployment savings account.
- You would have a choice of funds. Like super funds they would compete with each other for your business.
- Once you reached a certain level of savings your employer would stop deducting money from your wages.
- If you lost your job you could receive regular payments from your account. There would be a limit to how much you could withdraw each fortnight.
- When you retired you could get your money back (plus interest) in either a lump sum or a regular payment.
Under this system, savings would replace tax funded welfare. Workers would have more control over the money they contribute. Funds could compete with each other by offering lower administration costs, higher returns, or even ethical investment policies. In theory, competition should lead to lower administration costs. While they would be tightly regulated, the funds would not be burdened with the accountability requirements of government agencies.
Because unemployed workers would be spending their own money there would be more incentive to find a job quickly. A lump sum on retirement could be used to pay off the mortgage, help a son or daughter with a home deposit, or take an overseas trip. Funds would not need to monitor the unemployed the way Centrelink now does. This would save on administration – on forms, and work and job search programs designed to deter people from claiming benefits unnecessarily.
While USAs seem like a simple idea, there are a number of choices we’d need to make about how they would work in practice. These include:
- How much should workers save? – Should workers be forced to save enough money for several years of unemployment or only a few weeks?
- Should workers with large families be forced to save more? – Should we force workers with a dependent spouse and several children be forced to save enough to support their entire family?
- What happens when the money runs out? – Some of the unemployed will eventually run out of money in their accounts. Young people, the recently unemployed and women re-entering the job market may not have been saving long enough to fund their own unemployment. Do we keep a safety net income support system, allow people to run negative balances or just send to them charities?
- Should the government chip in? – Should school leavers and other new entrants open their accounts with a balance of zero or should the government make a starting contribution? Should governments top-up contributions by low-paid workers?
- Should savings be redistributed? – Economists J Michael Orszag and Dennis Snower argue that the government ought to tax the contributions of the rich to subsidise those of the poor.
- What about farmers and contractors? – Should the scheme be restricted to employees or should other groups be forced to take part as well? For example, farmers could be forced to set aside money for drought periods instead of seeking support for government.
- Should employers be forced to contribute? – Under some proposals employers would also be required to make payments to the employees savings fund. The rate of these contributions could vary between different industries.
- What about tax? – How should contributions to USAs be taxed? If there are tax advantages, should workers be allowed to make voluntary contributions?
- How much control should people have over their savings ? – Home buyers might prefer to put their savings onto their home loan instead of into their USA. Retrenched workers might want to spend their savings on a university course or some kind of retraining. Trades people might argue that they will become unemployed unless the government allows them spend their savings on new tools or equipment. Other workers might want to use their money as a wage subsidy rather than as a living allowance. How flexible should USAs be?
If the government did decide to introduce USAs, welfare groups would lobby for a system that allowed people to run negative balances and have any debt cancelled on retirement. They would want the contributions of high earners redirected into the accounts of low earners as well as large initial contributions by government. USAs could be part of a larger ‘asset-based welfare‘ agenda where government not only redistributes income but also redistributes wealth. New taxes on wealth could redistribute money from older, better off Australians into education, health, and unemployment accounts for young Australians. Government would control how much goes into each account and set rigid rules for how the money would be spent.
At the other extreme, USAs could be part of move to a libertarian welfare model where governments stop redistributing income or providing services like health care. Under a libertarian model workers would receive a large tax cut and a brochure or fridge magnet advising them to start saving in case they lose their job, get sick or want to send their children to university. Compulsory superannuation would be abolished but anyone who wanted to stop work before they died would also be strongly advised to keep setting money aside. People who found themselves unable to save enough to provide for themselves and their families would be directed to private charities and reminded that ‘social justice’ is an oxymoron.
More likely we’d end up with a model somewhere between these extremes. It’s unlikely that the National Party would ever support a scheme which expected farmers to pay their own way through droughts. And few politicians or bureaucrats would trust people to save voluntarily for unemployment, sickness or retirement. Contributions would end up being compulsory and individuals would probably have little control over how much they saved or how they spent their money. The current welfare system would almost certainly remain as a safety net. Once an unemployed worker had exhausted their savings they would apply for a means tested income support payment. Many of the most disadvantaged would never save enough to escape the welfare system. For them, life would go on much the way it does today.
Are USAs a good idea?
The kind of USA system we’d end up with after the lobbyists, fund managers, politicians and bureaucrats had finished arguing would be a complex hybrid of compulsory private savings, the current welfare system, and the existing superannuation scheme. The system could become even more complex if policy makers decided to create additional accounts for health and education. USAs would probably not solve Saunders’ problems of loss of control and waste but they might succeed in reducing voluntary unemployment.
Under the most likely USA models, taxes would only fall by the amount saved on paying and administering income support payments to the short-term unemployed (the fraction of the caseload with the lowest administrative costs). Governments would probably not force people to save for more than six months of unemployment. Top-up allowances or tax benefits for dependent children would supplement withdrawals from unemployment accounts. Payments to the aged, single parents and people with disabilities would continue to make up the bulk of social security spending.
Workers whose risk of unemployment was low would, in effect, be forced to increase their retirement savings. Unless policy makers allowed workers to shift their savings onto their mortgages (assuming they have a redraw facility) the new system would give them little additional control over their income.
It is not clear that USAs would reduce waste. Unless the existing social security system was slashed, we’d end up with a more complicated system supporting teams of fund mangers, lawyers, accountants and investment advisers. People who are confused by their mobile phone contracts and superannuation options would have even more choices to make. The system would create a new group of lobbyists eager for media attention and a fertile field for marketers and advertisers. Naturally, there would need to be regulators and industry bodies. The industry would provide new job opportunities for retiring politicians and government regulators looking for a career change.
The major benefit of USAs would be their effect on job search behaviour. Workers would have more incentive to stay employed and to find work quickly when they became unemployed.
Anti-egalitarianism and the new politics of poverty
Before the long economic boom after World War Two and the rise of the welfare state, many ordinary working families experienced deep poverty. During the Great Depression thousands of families found themselves destitute through no fault of their own. In this political environment anti-poverty activism went hand-in-hand with the struggle for economic equality. The new politics of poverty is different. While egalitarians will always want to improve the position of low-paid workers, people who are most concerned with absolute poverty are satisfied once destitution becomes rare. Their attention then turns to issues of social order — crime, illegitimacy and welfare dependence.
Thanks to economic growth and the welfare state, destitution has become rare. But for egalitarians influenced by thinkers like John Rawls the struggle goes on. Rawlsian egalitarians aren’t so concerned with reducing the well-being of the most well off as they are with maximising the well-being of the least well off (if an increase in inequality improves the well-being of the worst off then they’ll support it). This puts them at odds with utilitarians who don’t care who is made better off as long as somebody is. It also pits them against libertarians (influenced by thinkers like Robert Nozick) who regard market outcomes as fair and government redistribution as inherently unfair.
The conflict between egalitarians and anti-egalitarians is far clearer now that absolute poverty is rare in societies like Australia. Peter Saunders is against equality — not just equality of outcomes (which many egalitarians oppose) but also equality of opportunity. Saunders likes to think of society as a game of Monopoly — if one of the players succeeds in driving the others in bankruptcy there’s no problem so long as everyone obeys the rules (players don’t get to choose the rules). For Saunders’ analogy to work some players would have to start with a big pile of property and a fat wad of cash while others would have to start with nothing. Perhaps in the this version it might also be possible to privatise the bank. The banker would hold an auction and the tray full of money would go to the highest bidder. What could be unfair about that?
Egalitarians don’t stop worrying about the interests of low-paid workers just because they’ve managed to climb out of absolute poverty. They are not exclusively concerned with the interests of the small minority of people who spend most of their lives dependent on welfare. What anti-egalitarian activists like Saunders hope to do is drive a wedge between the welfare dependent non-working poor, and low-paid workers. Saunders wants the low-paid to identify with the wealthy. He wants to make them advocates for cuts to education, health and income support – programs that can benefit them and their families (at the expense of higher income earners).
In contrast to the old egalitarian politics,the new politics of poverty is focused on the ‘underclass’ poor, not low-paid workers. It focuses on people whose lack of income seems to be due to their inability or unwillingness to abide by reasonable social norms. In the new politics of poverty, poverty is not an economic problem — it’s a social and psychological problem. Like crime, the new poverty appears as a problem of self control and moral character. The underclass poor are unwilling to work in tedious low-status jobs — they prefer welfare. Men father children they refuse to support. And drug abuse, alcoholism, domestic violence, and petty crime are rife. Who wants to pay taxes for this?
USAs would make the distinction between occasionally unemployed workers and the more disadvantaged long-term unemployed much starker. It would be easier for activists like Saunders to foster an ‘us and them’ politics where welfare recipients are portrayed as malignant parasites who live off the earnings of ordinary working people. Dependency politics would drive egalitarian issues off the agenda. Workers who voted to cut welfare hand-outs would discover that they had also voted for cuts to health care and education.
On their own USAs wouldn’t stop government spending on the welfare dependent poor. And they wouldn’t generate personal responsibility among people who rarely engage in paid work. What they might do is force low-paid workers to spend more than they do now to protect themselves against poverty due to unemployment. Money that better paid workers might once have paid in taxes would end up as personal retirement savings. And money that more vulnerable and lower paid workers might once have spent on their families would now substitute for welfare payments.
There are individual savings account models that have positive effects on the distribution of wealth. Despite the likely complexity of politically feasible savings account models, they are worth looking at. The Centre for Independent Studies may have inadvertently renewed the debate on asset based welfare.
Find out more:
Saunders, Peter (2005) ‘Six Arguments in Favour of Self-Funding: Part II in a three part series ‘Restoring Self-Reliance in Welfare’.’ CIS Issue Analysis No. 61 (pdf).
Orszag, J. Michael; Snower, Dennis (2002) ‘From Unemployment Benefits to Unemployment Accounts.’ IZA Discussion Paper No. 532 (pdf).
Orszag, J. Michael; Snower, Dennis (2002) ‘ Expanding the Welfare System: A Proposal for Reform.’ CEPR Discussion Paper No. 1674 (summary).
Feldstein, Martin (1998)’Unemployment Insurance Savings Accounts’ NBER Working Paper 6860 (summary).
Kock, Udo; den Butter, Frank A. C. (2001) ‘Can individual unemployment savings accounts resolve Okun’s equity-efficiency trade-off?’ SERIE Research Memoranda 2001-26. (pdf).
Carrington, Don; Jordan, Jonathan (1998) ‘Savings & Loans: Reforming Unemployment Insurance Through Competition and Compound Interest.’ John Locke Foundation (pdf via Heartland Foundation).
Brunner, Lawrence; Colarelli, Stephen M (2004) ‘Individual Unemployment Accounts’ The Independent Review, v. VIII, n. 4, Spring 2004 (pdf).
Conerly, William B. (2002) ‘Chile Leads the Way with Individual Unemployment Accounts.’ National Center for Policy Analysis Brief Analysis No. 424 (pdf).
Vroman, Wayne (2003) ‘Unemployment Protection in Chile’ Urban Institute (pdf).
Mead, Lawrence (1992) The New Politics of Poverty: The Nonworking Poor in America. New York: Basic Books (Amazon).