The Strategist

Monetization of Social Benefits: The Finnish Experiment

12/09/2015 - 15:23

The Finnish government plans to pay monthly 550 euros ($ 810) to all adult citizens, regardless of whether they have other income. The amount will not be taxed. Instead, the Finns will have to give up all other social benefits, which account for an average of 600 euros, but no more than 1,500 euros (data from the Social Security Administration).

Jan Leineberg
Jan Leineberg
The government is going to finalize the idea and consider it in November 2016, according to the Finnish Agency Yle. If the program proves successful, the amount may be increased up to 800 euros.

The proposal to replace various guaranteed social benefits with a single sum - "national basic income" – was brought up by Social Security Administration (Kela). The idea was supported by Prime Minister Juha Sipilä. "Basic earnings will simplify the welfare system," - he said. According Kela, the offer was supported by about 69% of the population, but 54% of respondents would like to receive almost twice as much - 1000 euros.

According to Bloomberg’s estimates, the idea of every citizen paid more than $ 800 a month would cost $ 210 billion a year, or 30% of GDP.

The measure should reduce number of unemployed, writes Bloomberg. Now many Finns consider getting a temporary low-paid jobs unprofitable, as then they would be deprived of social benefits. Current unemployment rate in Finland is at a record high level since 2000. According to Eurostat, it exceeds 10% - about 280 000 people, 22.7% of them are young. In October, there were 234,000 unemployed people, which is 14 000 more than a year earlier, according to the Statistical Office of Finland.

Average income of the richest 10% of people in Finland is more than 4,900 euros per month and poorest 10% earn about 2,100 euros. Average salary amounted to 3,300 euros at the end of 2014. It should also be noted that almost 30% of revenues Finnish citizens give back to the state in taxes (excluding payments to the pension and social funds).

Such an experiment has already been held in Canada and brought positive results. Dutch Utrecht also introduced a basic income, trying to get people to go to work. The UK also planned to introduce the payment of 72 pounds per week, but refused the idea in the mid-1990s. In addition, a national basic income may be introduced in Switzerland. In September, Parliament voted against the proposal, but in 2016, the question will be put to a national referendum. According to Bloomberg’s survey, 49% of the Swiss are ready to vote for the initiative.  

 Economists have long discussed the model of unconditional basic income. Local experiments in the United States, Canada and other countries gave encouraging results. Yet, there is a problem - not every country can afford such measures. With its high standard of living and taxes (an average wage earner with an income of 41,000 euros per year pays 31.6% tax) Finland is qualified the best.

At the same time, the Finnish economy needs stimulation, and "monetization of benefits" can help here. It stimulates consumer demand and help solve the unemployment problem. Its level in Finland has been steadily increasing since 2012, and already reached 10% (Sweden - 8%, Denmark - 6%, Norway - 4%).

High redundancy payments give no incentive to look for work. The concept of a basic income is also criticized for allegedly encouraging parasitism. Yet, it is obvious that it can solve one important contradiction. In European countries with high levels of social security, a “professional unemployed” receives benefits comparable in size to an average worker's income after taxes. Replacing doles with basic income would lead to the fact that even a small salary will increase revenue compared with the "parasite income."

With an aging population and slowing economic growth, welfare states are increasingly thinking about changing the model. In September 2013, in his speech from the throne, the King of the Netherlands Willem-Alexander said that soon the traditional welfare state would be replaced by a state of total participation. Basic earnings is an easy transition model. It is not about shifting responsibility about the citizens’ well-being on their own shoulders, but about changing their social thinking - motivation to independently manage their social guarantees.