By Jon Kristian Pareliussen, Economist, OECD Economics Department
“If you don’t know where you are going, you might wind up someplace else.”
– Yogi Berra
Many Finns seem to agree that the social welfare system should be reformed, but there is no agreement as to which form such change should take. Recognising that the decades-long process of piecemeal welfare reform responding to the pressing issues of the day is behind many of the current problems, the OECD Economic Survey of Finland 2018 argues for developing a common vision for the future of social welfare in Finland, so that upcoming reforms can consistently pull towards the same goal.
In Finland, as elsewhere, income taxation and the withdrawal of benefits reduce the pay-off for individuals who go from benefits to work. Multiple benefits interact in complex ways, trapping individuals in unemployment, underemployment or inactivity. Complex benefit rules combine with administrative practices to create “bureaucratic traps” when individuals taking up temporary, part-time or unstable employment face a real or perceived risk of losing eligibility or receiving benefits with a delay as their claims are re-evaluated. This can further reduce the attractiveness of work for risk-adverse, often cash-strapped, recipients. A third weakness of existing welfare systems is that they are built around traditional employer-employee relationships, and are thus ill-adapted to the future of work, which is likely to involve more changes in careers, part-time work, self-employment and platform work.
Two different benefit reform scenarios are developed in the Survey to inform a common vision for the future of social welfare in Finland. The first is a uniform benefit for all, a universal basic income. The second is a universal tapering rule inspired by the universal credit welfare reform in the United Kingdom. This scenario radically simplifies the existing benefit system and makes it more transparent by merging various benefits and withdrawing them at a single and moderate rate as income from work increases.
Comparing these scenarios with the current system illustrates the inevitable trade-offs between work incentives, inclusiveness and fiscal cost, the policy trilemma at the heart of social insurance and redistribution policy. Neither a basic income nor a universal credit can defy the laws of gravity. But some specific incentive issues can be resolved without much sacrifice by improving benefit design, and the general direction of reform has great consequences for outcomes.
A universal credit would consistently improve work incentives and reduce complexity, with limited changes to the income distribution and limited fiscal cost. A basic income would also remove some incentive traps, but would entail a major redistribution of income, widening inequality and increasing poverty. This happens because the design of a basic income with one uniform benefit for all is too simple to achieve the redistribution of the current system or a universal credit, where benefits are targeted to those who need them more. Assuming that the distribution of income in a longstanding democracy reflects Finns’ social preferences, it seems clear that merging and simplifying existing benefits is a better solution for Finland than a universal basic income. This conclusion is also likely to be relevant for other developed countries with solid and targeted social safety nets.
Simulating reforms is one thing but implementation can be a quite different story: experience has shown that major welfare reforms can come with significant costs. Implementation should hence be stepwise and build on the existing institutional context. Important technical building blocks, such as harmonised tax treatment and income definitions for different benefits as well as the new income registry should be fully operational and tested before reforming the overall architecture of the system.
Moreover, many current weaknesses, such as the cliff-edge loss of unemployment benefits once an individual works a certain amount of hours per week, the extended unemployment insurance for older workers and barriers to work for mothers created by childcare fees and the homecare allowance, can be overcome with relatively limited changes to the current system. Such measures should be taken without delay, but every step forward should be a stride towards an agreed vision for the future of Finnish social welfare – a vision where benefits continue to support Finnish citizens throughout their lives, protecting them from shocks and misfortune, but in a coherent, transparent and flexible way, fit for the future of work.
References
OECD (2018), OECD Economic Surveys: Finland 2018, OECD Publishing, Paris. http://dx.doi.org/10.1787/eco_surveys-fin-2018-en
Pareliussen, J., H. Viitamäki and H. Hwang (2018a), “Basic income or a single tapering rule? Incentives, inclusiveness and affordability compared for the case of Finland”, OECD Economics Department Working Papers, forthcoming, OECD Publishing, Paris.
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This paper regarding the labour market in Finland has one fundamental error – it does not include the labour market in its model. In the UK 78% labour participation has been reached so close to full employment and Universal Credit claimants have found it difficult to find a job in this environment. If Finnish people can’t access a job they accrue none of the benefits set out in this paper. The paper also in it absence of a labour market fails to say what would happen in a declining labour market both to claimants and the cost of administration.
This paper makes no admission that the labour market has inequality so in Finland women work part time jobs more than men. The Finland government does not produce statistics on ethnicity but if similar to UK then further inequalities are bound to be found. This gender and racial bias would disproportionally effect the aforementioned groups at the flat 65% marginal rate.
The basic income proposed in this paper does not conform to the basic income set out by the Basic Income Earth Network (BIEN) and the funding model set out in this paper for a basic income makes no mention of subsidies to capital or a wealth tax.
Universal Credit is a subsidy to capital and some political background has to be afforded to this paper. The Finnish government hamstrung by the Euro has to find a way of making production more competitive, its answer is to drive down labour costs. It is not interested in improving productivity in Finland which fell in the last quarter. This would result in those at the bottom of the income spectrum experiencing further erosion of their living standards.
The Orwellian elements of the Universal Credit scheme have been glossed over in this paper but conditionality does have consequences. In the UK errors in administration have led to homelessness, suicide and mental breakdown. The punitive element of Universal Credit – its sanctions – leave people feeling humiliated and degraded on a base level of humanity. The policy of Universal Credit seems to suggest that if people can’t find work then in order to make them “work ready” they should undergo in work training or workfare.
In conclusion this paper states that no optimal level of incentive can be calculated, and in absence of this evidence punitive conditionality should be imposed on people anyway as a way of improving labour costs and participation rates in Finland.
Dear Rob Pearce,
As any model, this one is a very imperfect representation of reality. During an economic upturn it will be easier to get a job no matter how the transfer system is designed. In a severe downturn with low labour demand, incentives might matter less. So far I think we agree.
I do not agree that there is any bias against women and immigrants in the universal credit scenario we modelled. A person out of work gets the same amount as today. Those worst off would receive social assistance today, and the universal credit scenario treats these persons more generously than the existing transfer system.
You propose that increased taxation of capital and wealth should be part of the funding model for our basic income scenario. I fundamentally disagree. Taxing capital and wealth is notoriously difficult, and demands close international cooperation. The OECD is working towards this end with our BEPS project, but the world is not there yet. Taxing immovable property and inheritance is a good idea, but often politically difficult. The introduction of a basic income does not solve any of these tricky issues, and if extra revenue was raised it is not obvious that a basic income would be the top priority of neither politicians nor the electorate.
You call universal credit a subsidy to capital, presumable because an in-work transfer might lead to downward wage pressure. I can agree to this in principle, but the same is also the case with a basic income and the current system, which both provide in-work transfers. This argument is also less relevant in Finland than in the United Kingdom, because of centrally coordinated wage bargaining.
Conditionality has been tightened in the United Kingdom, but this is a totally separate issue from the structure of the transfer system. Atkinson has for example proposed a “participation income”, which is a basic income with some form of conditionality attached. That said, international experience show that even though conditionality can seem intrusive to some, it increases job search and job finding rates. It thus allows higher transfers and better protection against income loss, and is as such an important tool for building an inclusive society.
Respectfully,
Jon Pareliussen
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