An argument for Universal Basic Income as a means to rationalize the way we currently handle old age, health risk, and non-employment.
Today’s pension system is built on a paradigm that conflates the inability to work with old age, creating what we call longevity risk. In a thought experiment, let us examine the Universal Basic Income (UBI) as a means to handle both the inability to work and old age – separately, as they should be.
Basic income should replace the existing welfare bonanza – including old-age state pensions. But today’s plans for BI don’t want to replace the old mess – they come on top of that.
The concept of universal basic income only makes sense if it replaces the current welfare chaos, including the ever-expanding pension system. That would be a complete departure from the welfare state model, both its need-based and contributory models. They are highly popular, their replacement with a more rational model is therefore unlikely.
In this new paradigm of UBI, the state pension age should go and the decision about the ability to work must be left at the discretion of the individual.* It is indeed high time to separate old age from the inability to work in order to treat both reasonably and to cover longevity risk. Individuals should thus keep saving for a private pension.
This post is not suggesting the introduction of the Universal Basic Income, merely examines one arguments for it – and we have already presented two against it.
The UBI would make sense…
- Because means testing provides absurd and negative incentives
- Because the pension system is unsustainable
- Because old age and the inability to work should be treated separately
- Because the byzantine system of welfare benefits provides an inappropriate tool for social engineering and political meddling
But the latter is also the reason it will never replace the old, meddling system.
1. Health-based inability to work is only loosely related to age.
Inability to work can come from multiple sources (such as educational deficit, unwillingness to work, caring for family, taking a sabbatical, health-related issues or even structural unemployment and recession) and it is impractical to treat them differently. Nothing, other than our deep-seated desire to judge makes it necessary to make a distinction between different causes of non-employment.
The idea of not working in old age is not a natural one – but it is based on assumption that the ability to work declines with age. Due to ill health. But the two things (health and age) are only loosely correlated, and the ability to earn money is an even more complex issue.
2. The UBI would kill perverse incentives
BI supplies its very own perverse incentives against work – but so does the current paradigm. Incentives and motivations and what their absence does are probably the least important questions to discuss – this is probably why they get the most attention in public debate.
Everyone agrees that the current system of welfare payments is byzantine, irrational and provides a plethora of perverse incentives. Anything that’s rewarded by a society will flourish: being afraid, offended, weak or incompetent. When any of these brings in money, the recipient will be motivated to rewire her brain to find reasons to fear, causes to be offended, ways in which she is weak and incompetent – to stay deserving.
The basic income would cut through this paradox and leave the decision on one’s inability to work were it belongs: at the individual.
(I would also not exclude the possibility that forfeiting these payments could become a cheap and easy gesture for those who don’t need it. But it is really not the point of this thought experiment – just as moral preaching about laziness should not be.)
But the impact of BI on human motivation is unimportant because there is simply no statement about human nature that would fit everyone. And even if we substitute “everyone” with “but the majority” – we are still coming up short, because people’s reactions are dynamic. They adapt to new situations. Give them some credit – they can prove you wrong any time. So stop planning on that one.
It is also the wrong question to ask. When designing incentives, one shouldn’t form a view on human nature – but cater for the honest and decent ones. Because whatever personality we keep in mind when we design our punitive, vindictive, nudge-heavy systems, the system will create that personality.
3. No more tragic farce around disability benefits
One of the fields where the current approach’s shortcomings are bare to see is the way one has to apply for disability benefits. The applicant has to gear up his mind to complaining and victimhood – to see new ways in which he is disabled. Then he has to clash with a committee checking boxes and arguing on how he could still stuff envelopes.
Disability benefits and the farce around securing them are proof of this fiasco. One’s ability to work depends on the type of work one is able or willing to perform.
Making money is not necessarily work-related (see working poverty) and work is not necessarily health-related. And just like old age, inability to work is only loosely related to health. Maintaining a bureaucracy and the undignified procedure around it is not only costly, but provides the most perverted incentive of all: for the victim to insist that he or she is unable to work/make money.
BI could remove the distorted motivations around the inability to work. No need to prove inability one way or another.
This undignified farce could stop if incapacity would be left at the individual – and his incentives would then be to find something he could still do. It would be entirely self-assessed whether the health status of the BI recipient would allow her to make money and whether she is willing to perform what it takes. Don’t push people in the corner where they have to argue and think up ways on how they can’t do something.
4. Cuts billions of working hours and paperwork wasted on means testing
In short, keeping the few rich people out of the list of recipients costs more than paying them. (Yet, keeping them out would be the first step into BI losing its universality, with full public support.)
Stop patronizing the recipients (aka. each other). Why don’t we think, just once, about the perverse incentives BI would provide to the politicians?
Bureaucracy, however, never allows itself to be cut. This argument is the most hypothetical of them all and carrying it out is even less likely than people letting go of their punishing instincts that permeates welfare thinking (in the form of cutting off rich, felons, single mothers, or anyone who didn’t suffer enough or enjoyed themselves).
The real question: Can we afford it?
Wealthy welfare states have more or less cleared off the incentives to work already. I say more or less because some states are just wealthier – and they can afford to truly pamper their unemployed. At least until they run out of taxable economic activity to underwrite this spending. Others couldn’t keep their unemployed pampered if they wanted to.
And that brings us to the next important question: funding.
And the discussion should end here, but it won’t. Of course not. People are made to regard the state as being able to just print money. Beware what you wish for.
According to OECD numbers and the calculations by the Economist, Hungarians would get 4500 dollars per annum if all social expenditures (apart from healthcare) went into the pot and redistributed equally and without the stupefying means testing bonanza (talking about wrong incentives). And that includes saying goodbye to the current old age pensions – that is hardly sustainable, but its removal would meet epic resistance nonetheless. So the amount wouldn’t help anyone but cripple the taxpayer anyway.
So yes, I do understand the appeal of removing means-testing and the condescending, paternalistic bureaucracy that does it to us, but it would 1) never happen and 2) it would probably not save enough to make up for a rotting economy’s incapability to pay a living basic income.
* This article doesn’t touch the subject of healthcare provision and insurance – even if old age tends to correlate with health deterioration. Health insurance deserves its own study – following its own logic and realities. Conflating the two things clouds thinking and promotes nonsensical policy. Neither does it concern itself with the mechanism through which it can be phased in – respecting the acquired rights for those who followed the incentives of the previous paradigm.