Finnish efforts to simplify benefit systems and reduce non-take-up Peer review on coverage and take-up Helsinki, 13 and 14 March 2018 – KELA offices Olli Kangas

CONTENT OF THE PRESENTATION Non-take up and adequacy as a problem Maybe adequacy is a bigger problem than non-take up (residence-based social protection) Cursory inspection of some schemes Simplifying social policy Income transfers Basic income Other solutions Social and health care services Conclusions

Adequacy and non-take up as problems

Problems in adequacy (possibly) (Honkanen 2017; Kangas & Niemelä 2017) Compensation levels (%) of some transfer schemes in relation to average wage wage)

Basic pensions are universal but not perhaps fully adequate (= problems in coverage of employment-related pensions) Poverty rate according to 40% (vertical) & 60% (horizontal) poverty line

Unemployment benefits Impacts of the activation model on take-up rates Social assistance will partially compensate cuts Creates more severe disincentive problems A dual system: Flat rate basic benefits: basic daily allowance and labour market subsidy paid by Kela Income-related benefits paid by unemployment funds Membership is voluntary In principle all are covered at least for basic benefits Not all for income-related benefits

Number of households getting only housing allowance or social assistance (cs 40,000 households in 2017) (indicating non-take up in ‘primary’ transfers) (Korpela 2017) Total number Housing allowance Social assistance

Consequences of the centralization of social assistance (SA) to Kela in 2017 Negative Positive Increased costs: + €95 mill Too long waiting periods Legalism, strict formality Problems in mediating information from Kela (paying ‘basic’ SA) to municipalities paying out additional and preventive SA Breaks between transfers and social work Non-take up in social / employment services might have risen Easier to apply No stigma Non-take up rates decreased In 2016 ca 237,000 and in 2017 ca 277,000 households got ’basic SA’ (+45,000 hh) Elimination of different municipal practices equality Easier to get reliable & comparable statistics on poverty and social exclusion

Non-take up in social assistance (SA)among youngsters and the NEETs In municipal system non- take up of SA was 25%-50% In 2017 SA was centralized to Kela 2017 recipiency rate was app. 20% vs 15% in 2016

Recipiency of social assistance according to age group in Finland 2017 (Raittila 2018) %of the age group Absolute numbers

Non-take up as a problem long-term care services for the elderly (Sotkanet 2018) % of those getting home-help among 85+ yrs according to major regions 1995-2016

Too complicated services system causes problems and non-take up (e Too complicated services system causes problems and non-take up (e.g care-chains of a person suffering from dementia (Kalliomaa-Puha & Kangas 2018) There are many providers (a multi- producer system), financing comes from different sources (multi- channel financing) The system is not always transparent enough difficult to know where and how to apply help Does SOTE improve the situation???

Problems in adequacy and take-ups in a number of core programs in Finland Social policy program Problems in Adequacy Take-up Transfers / Basic benefits   Pensions yes no Unemployment benefits no (partial) Child allowance No Social assistance no (any more) Sickness benefits Partial Disability pensions Earnings-related benefits Sickness insurance Daddy periods no  Yes Social services Child care yes/no (?) Health care yes (access) Long-term care Problems perhaps are more cute in the adequacy of benefits than non-take up rates Take-up problems are often linked to ‘boarder-line’ cases E.g. too sick to work but not sick enough to qualify to disability pensions In health & elderly care access is a problem

Simplifying the social security system: services

Multi-channel financing and multi-producer system in social care – will SOTE improve the situation? Mixture of pure in kind benefits and cash for care Most of services are provided by municipalities (ca 310) but also by the 3rd sector and private for-profit firms (that are rapidly expanding their shares in social and health care) Financing comes from municipalities (municipal tax), state (via Kela), insurance companies and from the users (user fees) The whole social and health care service system will be totally changed by SOTE, the social and health care reform Instead of municipalities 18 counties will organize care. Freedom of choice of the producer, vouchers and individual care budgets more room for private for-profit providers to operate Simplification of the system Nobody knows

Simplifying the social security system: transfers

Non transparent ‘jungle’ of benefits The Finnish income transfer system is a result of process where all substantial reforms demand broad consensus between political parties and social partners No master plan but piecemeal development Often layering of benefits As a result, there is a ‘jungle’ of benefits that is difficult for a client to understand Different benefits have different impact on pension accumulation Different benefits have different household concepts and consequently, different income concept Some benefits are taxable some are not There are different ‘bonuses’ for dependent children Income-testing varies from scheme to scheme

How income transfers accrue pension rights How income transfers accrue pension rights? Income for pension calculation The annual pension accrual rate is 1.5% of income In the case of social benefits the pension-giving income is as follows Parental leave: 117% of income that forms basis for S/P benefits Unemployment 75% of income that forms basis for UE benefits Sickness / care of sick child 65% of income Care leave A flat rate basis of €728.34 a month Basic benefits do not accrue pensions

As a rule, benefits as well as taxation are individual Different family / household concepts cause problems and tax-rates depend on the benefit As a rule, benefits as well as taxation are individual There are exceptions: Housing allowance Social assistance National pension (amount smaller if a claimant has a spouse) vs. guarantee pension (individual) What is a household vs. family? Whose income is taken into consideration? Co-habitation, communes? Taxation varies E.g. pension of €10,000 a year is tax-free but unempl. benefit of €10,000 is subject to tax of 28%

Family members count differently in different schemes (different equivalent scales) Tervola (2017) http://tutkimusblogi.kela.fi/arkisto/3905 Legends “1. aikuinen” = 1 adult “Muu aikuinen” = other adult “Aikuinen lapsi” = adult child “14-17v” = child 14-17 yrs “10-13v” = child 10-13 yrs “0-9v” = child 0-9 yrs “Viitebudjetti” = reference budget calculations “Köyhyysmittarit -2001” poverty measures ->2001 “Köyhyysmittari 2002-” poverty measures 2002-> “Toimeentulotuki” = basic social assistance “Yleinen asumistuki” = general housing allowance

Different bonuses for dependent children (different economic of scale in different schemes) Tervola (2017) http://tutkimusblogi.kela.fi/arkisto/3905 Legends: “1. lapsi” = 1 child etc “Köyhysmittarit / viitebudjetti” = poverty measures / reference budged “Lapsilisä” = child allowance “Toimeentulotuki” = basic social assistance “Työttömyysturvan lapsikorotus” = child bonuses in unemployment benefits “Eläkkeen lapsikorotus” = child bonuses in pension

To make it a bit more complicated… Several schemes for the same purpose Different rules for income-testing There were 4 housing allowance schemes: General one, pensioners’, students’ and conscripts’ 1. august 2017 students schemes was merged together with the general scheme Plans to merge pensioners’ allowance with the general one (1.1.2017) failed Different schemes for guaranteeing basic security Basic unemployment allowance vs. labour market subsidy, social assistance, basic sickness, invalidity, rehabilitation etc. benefits In housing allowance and unemployment benefits in work benefit of €300 a month E.g. if single then labour market subsidy is decreased by c75 by each € from employment and c50 for couples In social assistance €1 per €1 Housing allowance has its own rules

Simplifying the system

Some back ground data form the OECD economic report (2018)

Some back ground data (OECD 2018)

Political background Changes in the labor markets Does our social security system properly correspond to changes in labor markets? Or are there any changes at all? ‘No’, say the opponents of BI ‘Substantial’, say the proponents of BI Elimination of incentive traps Too many cases where work does not pay (enough) Elimination of bureaucratic traps Clients’ fears on bureaucratic machinery To create a more transparent system

Different possibilities to simplify the overly complicated social security system Basic income Nation-wide randomized experiment running 2017-2018 Negative income tax Possible experiments 2020 Participation income (a’la Anthony Atkinson) Municipal experiments going on Universal credit Political support growing Smaller steps to homogenize benefits levels and regulations Income guarantee

EU and possibilities to simplify the national welfare state (Kalliomaa-Puha, Tuovinen & Kangas (2016): “The basic income experiment in Finland”, JSSL Vol 23:2, pp. 75-88) When trying to simplify the national legislation the EU legislation plays a role depending on the scheme in question Insurance-based (social security contributions) benefits are portable benefits Some benefits were planned to prevent portability Merging them together may cross the ‘red line’ Taxes Contributions

To abolish incentive traps There is a number of income-tested ‘basic’ benefits paid on top of each other create effective marginal tax rates of 80- 100% or so labor market subsidy + housing allowance + social assistance and income-related day care fees Work does not pay (enough) How the benefit receivers value their free-time? How to make work pay? Basic income as such is not enough and the implementation of BI does not solve the incentive problem unless the BI is very high e.g. €1,000-1,500 a month However, levels of taxes collected on income coming on top of BI: Tax = 70% to 80%

The Finnish BI experiment http://www.kela.fi/web/en/experimental-study-on-a-universal-basic-income

A single person is an ‘easy’ case Composition of income and effective marginal tax rate of unemployed person living alone. The current tax-benefit system and partial BI models €550 with simple flat-rate tax (basic unemployment allowance, rent 411 €/month). Income Marginal tax rates A single person is an ‘easy’ case Marginal tax rates are high The marginal tax rates are higher in the BI model Among low- income brackets in particular

Participation tax rates of a wage earner living alone, current model and basic income of €550 and €750 a month

There are incentive problems Composition of income and effective marginal tax rate of unemployed single parent with 2 children in day care (some day care fees), rent €761. Present system and BI of €550. Income Marginal tax rates There are incentive problems Increase in earnings €1,000 to €3,000 does not necessarily increase net income.

Participation tax rate of a single parent who is unemployed/becoming employed (adjusted basic allowance, eligibility for housing allowance and social assistance, day care fees considered), work income of €0->€2,000, current transfer system and basic income of €550 and €750 current tax system and flat-rate taxes

Basic income as a possibity (Honkanen, Kangas & Simanainen 2017): https://link.springer.com/content/pdf/10.1007%2Fs10272-017-0652-0.pdf Universal basic income is not a universal solution Much depends on the context E.g. if a claimant is getting many benefits BI may not be better than the present one when it comes to incentives But there are other dimensions, too

Implanting a seemingly simple system into a very complex social policy system is no that easy…

The OECD (2018) recommends universal credit insetad of basic income

Prime Minister’s two expert groups (EG) An EG for combatting inequality Dead-line the 21st 2018 Homogenization of some basic benefits and a possible unification towards universal credit Political and institutional obstacles Many ‘basic’ benefits e.g., sickness and unemployment are based on contributions -> the payers have vested interest (to say no) The EU legislation? An EG for activation and basic security Dead-line in spring 2019 In principle can make plans to reform everything A wide representation of political parties and social partners Hard to achieve consensus on big reforms E.g. a universal unemployment insurance will be opposed by trade unions

Bureaucratic traps Shifts in employment / social security statuses may cause problems and uncertainty among the benefit recipient The vicious combination of income traps with bureaucratic traps “If I accept the job for 6 months or so do I again qualify to that benefit I had?” To simplify and tighten the basic security safety net so that Nobody will fall through Nobody needs to be afraid of losing the safety net Encourage people to take risks Ffö Ff A person is unemployed, gets sick, recovers, waits for labour market statement to qualify to unemployment benefit and gets social assistance until gets again unemployment benefit All these benefits are paid by Kela Thus: there are possibilities to stream-line the system