Why We Need A New Solution For Social Security

Picture by Andres Rueda

The big problem in Finnish social security is that it has not evolved with the job market. It’s become ordinary that people often work part time and short term jobs and social security needs accommodate this. Focus needs to be on maximizing work instead of penalizing wrong kind of work.

The current model for unemployment social security offers two benefits: basic unemployment allowance (€702/m) [2] and the salary dependent allowance (typically ~50–60% of your salary) [1]. Idea is that you are entitled to an allowance relative to your income, hopefully allowing you to maintain existing living conditions until you find new employment. For example if you work for 12 months with a salary of €3000/month you would get first €1669/m for 500 days and then €702/m.

Unemployment benefits after working 12 months at €3000/m

This system was created in 1980’s at a time when most people had long consecutive employments. I.e. the idea was that everyone first gets a job and will only lose it as an exception need protection while you get the next job. There are lots of rules related to being entitled to the allowances. To get the salary dependent allowance you have to:

  • work full time for 26 weeks in past 28 months
  • be a member of an unemployment fund for 26 weeks
  • have collected the allowance for less than 500 days

To be entitled in the basic allowance you have to:

  • earn less than €300/m
  • be not studying full time
  • be not an entrepreneur or employed in a family owned enterprise
  • be unemployed for at least 15 days (90 if you quit)

Challenges

In addition to the general problems of balancing costs and sufficient coverage, there are lots of concrete problems in the system that are counterproductive:

  • Since working means losing the allowance and possible other benefits and progressive taxation, you have to get a relatively good salary (€2000+/m) to get a net increase in your income.
  • Working part time and short term jobs are difficult since a period of work is followed by 15 day non-pay period.
  • When starting the 500-day allowance many feel there is no hurry in finding work and it’s an “earned benefit” that must not be wasted.
  • There is a lot of paperwork related to work days making extra work unmotivational.
  • Calculation of the salary based allowance doesn't properly consider variable income and can cause unrealistic allowances.
  • If your financial situation is tight, losing 40–50% of your income means you might have to relocate to cut costs even for short unemployment.

Rolling Allowance

Instead of fixed quota your allowance could be a rolling value that increases when you work and pay social security taxes and decreases when you collect the allowance. I.e. instead of going to full and staying there for 500 days when you qualify the rules, it would be pyramid with adjustable slope (how quickly does it increase/decrease) and height (what’s the maximum allowance level). Below is an example where allowance gets up to 100% of the salary in 12 months and declines in a slowing pace as the amount you can collect decreases.

Current and rolling allowance accumulation and collection

In our simple example case this would mean your allowance would start at €3000/m and decline to the baseline €702/m in about 18 months. This allows you to start unemployment with minimal impact while being concretely reminded of the need to find new work. With these parameters the rolling allowance would have 1.7% lower costs for the government than the current model, essentially a cost neutral change.

Rolling allowance after working 12 months at €3000/m

Another big advantage in this system would be that it’s beneficial to do any additional work. In addition to the net income, you are actually adding to your remaining allowance. For example in the case above taking a part time job of €500/m for 4 months will give you the €2000 extra income and also increase the total allowance collected by €549 as the work increases all remaining allowances. So instead of being penalized for finding work you are rewarded for any income.

Rolling allowance with a side job of €500/m for four months increasing the allowance total

Low Income Allowance

Second big challenge is making working motivational at low income situations. I.e. instead of losing your allowance, every € you earn should be a net improvement in your income. Rolling allowance could be adjusted to benefit income below the basic allowance levels. So for example if you would earn €100–200/m, you’d see a small increase in income from the base allowance

Rolling allowance when earning €100–200/m

If your income would increase to €200–400, you would again see an increase in the net income but the share of the allowance would drop. This would continue until you would earn enough to get no allowance.

Rolling allowance when earning €200–400/m

Subjective Allowance Collection

An interesting alternative in this model could be that the user is allowed to choose if and how much to collect allowance. System could be such that you can choose how much of the total allowance you want to collect, saving it for a longer period. For example if know you know you only need €1400/m to live you could only collect that and have 5 more months before it drops below that level.

Rolling allowance with limit to collecting €1400/m

A scenario going even further would be to allow total subjective control on collecting allowance in various levels of employment all the way to full employment. Basically you could consider it as a ‘social security savings account’ that you can use to balance changes in life situations. However this model comes with risk as the social security tax payments don’t cover the costs (i.e. you are not actually saving 100% of your allowance) and the system depends on most people not collecting allowances. So use of subjectivity would likely require some checks and balances to prevent abuse.

Student Allowance

Currently students are not entitled to unemployment allowance but have a separate student allowance, which is only €250/m. The problem in this model is similar that it’s hard to combine study and work, so they could also benefit from a system that makes it easier. I.e. would make sense to apply same rules but with a lower baseline. Also we should be moving towards a model where education is not a one time task at the beginning of life but something that integrates to our careers and would make sense to combine the systems. Currently the big difference is that you can get the student allowance only for limited period. However when you are no longer entitled to student allowance, you are entitled to other more expensive social security benefits. Since student allowance is the cheapest form social security benefit it would make sense to not limit this, but rather try to integrate it with main system and allow combining of work and studying.

Entrepreneur Allowance

Like students, entrepreneurs are not part of the normal unemployment benefits but there is a separate similar system for them. The problem especially for single entrepreneurs is that “unemployment” means temporary lack of customers and inability to collect pay. Getting unemployment benefits after bankrupting the business is not the real problem and also not the best interest of the society as entrepreneurs are net contributors and growth drivers. The subjective allowance scenario could be extended to cover this kind of solution also, i.e. allow entrepreneurs balance bad months by collecting allowance. This is again a riskier scenario and might require a different rules so it can’t be abused.

Universal Basic Income

This system shares some similarities to universal basic income at least in trying to address same problems of motivation. Especially if you go subjective allowance, you’re essentially allowing people to collect a small UBI with an option to save it and collect more when you need it more.

Challenge with UBI is that it’s a bigger change and comes with more unknown problems. To cover the costs you need to raise taxes that creates a new big transfer of income from the rich to poor, making it a political challenge. Also since UBI is such a big change in the system, it’s likely to introduce a new set of problems (e.g. scenarios which it can’t handle or where can be abused). And there is no middle ground, you have to go all in to be able to get the benefits.

One advantage of the rolling allowance system would be that it could be implemented with minimal systemic change, i.e. just change how the allowance is calculated not the rules who is entitled. This could also be a stepping stone towards UBI by first solving the big problems within the current system and creating a platform where to experiment with the more forward thinking options.

Conclusions

It’s clear that we need a reform. The fundamental problem that todays work market will be less and less long term regular work and more part time, freelancing, gig economy, etc. more flexible arrangements. Both the employers and the workers are asking for this (perhaps not always at same place) and it’s not a problem that will disappear. We need a solution that is relevant to the lives of the people who pay forit.

A rolling allowance system would address most of the critical issues while being a change that could be implemented inside the current macro system (e.g. how money is collected, who are involved, etc.).

Any thoughts, comments, complaints? Leave a reply or write an email to [matias at rational dot zone], I want to hear your opinion.

References

  1. Salary based allowance: https://fi.wikipedia.org/wiki/Ansiosidonnainen_ty%C3%B6tt%C3%B6myysp%C3%A4iv%C3%A4raha
  2. Basic allowance: https://fi.wikipedia.org/wiki/Ty%C3%B6tt%C3%B6myysturva#Perusp.C3.A4iv.C3.A4raha