The Life Account — Welfare and Saving
Nordic liberals are taking inspiration from Singapore in a new welfare model named the life account.
Universal Basic Income (UBI) is a hot topic. There is no shortage of articles analyzing it from different angles, but reasonable alternative reform options are hard to find. Despite being a UBI variant, the life account (perustili in Finnish) is one of those rare original and credible alternatives. It is a model put forward in 2013 by Libera, a Finnish liberal think tank. Being an advanced welfare reform, and possessing features of the Singaporean social model, it is based on saving. This short piece investigates this concept, mostly relying on Libera’s life account report and Osmo Soininvaara’s analysis of it. The life account report was written by Paul Lillrank, Marko Hamilo, and Elina Lepomäki. At the same time, Soininvaara is a Finnish politician and long-time advocate of a basic income, published several books on this topic. Some of the following text is just a direct translation from his 2013 evaluation. Before going more into detail, here is a picture from the report explaining the life account:
Ambitions
Just as UBI, the life account is hugely ambitious. These reform ideas have lots in common, aiming to replace most current cash transfers, including student aid and unemployment benefits. Furthermore, the life account is influenced by the Singaporean model, based on savings. It foresees a loan-based social security system, in which records are kept of the charges paid and benefits received over one’s lifetime. Its official goals stated by Marko Hamilo, as translated from Libera’s website include the following ones:
a) The middle class needs to assume greater responsibility for its financial sustainability.
b) Disadvantaged people must have the opportunity to improve their living standards by being allowed to earn income on top of the social security they receive. People should not be punished by losing welfare benefits for accepting work.
c) Households should be able and encouraged to employ people with lower bureaucracy and broader tax cuts.
d) Tutelage must be progressive. First, a carrot can be used (with financial incentives without interfering with individual freedoms). A “stick” can be used only if they do not work (needs analysis, bureaucracy, consideration for work, or participation in the course).
How the life account works in practice
The life account is personal, and its holder receives 20,000 euros as base capital when turning 18. As stated in the life account report, this amount would be enough, for example, for a student to draw a student grant of 400 euros per month over four years without any additional amounts having to be credited to the account. As long as the balance is over the base capital, one can withdraw money without any restrictions. If not, withdrawing is restricted to those 400 euros a month. The account holder must deposit 10 percent of earnings to the account, but this does not have much importance if the balance of the account exceeds the base capital of 20,000 euros, because all this money can be withdrawn at any time.
On the other hand, it is conceivable to deposit more. Revenue becomes taxable only when it is withdrawn from the statutory account. This leads to a kind of progressive spending pattern, as revenue that is deposited on a statutory account will not be taxed until it is withdrawn from the account and can be used to purchase services.
When wanting to buy services from self-employed people, it would be possible to transfer money from one’s account to a service account owned by the one that sells the services. The money would only be taxed once when the seller withdraws the money from his account, instead of twice in most systems today. This would reduce the tax wedge on services purchased by households and encourage self-employment.
The life account is a variant of UBI. As stated earlier, the account holder can always withdraw up to 400 euros, whether there is money on the account or not. The balance has no limit and how negative it can go. Thus, each person is guaranteed a basic income of at least 400 euros per month, making the life account a complex UBI. For those who cannot earn sufficient income, the model is a basic UBI. Those people will receive 400 euros in cash, and if they earn income, they will have to deposit 10% of it on the account. As with UBI or the ASG, accepting a job is always worthwhile with the life account.
Is it a good idea?
Ambitious ideas are easy to criticize, and it would be shortsighted to blame the life account for not being a perfect plan. It takes audacity and creativity to think outside the box and propose an original welfare reform. Despite not being a flawless concept, the life account would potentially solve several current issues. In this system, social security would move into a genuine transfer of responsibility and lead to a great deal of freedom. The life account has its social side, helping the most disadvantaged by not forcing them to pay the debt back when retiring, and allowing them to have a negative balance.
The life account has the advantage of making people accountable for their activities by keeping count, but as UBI, it does not solve the problem of involuntary unemployment. The latter could become a significant issue if automation destroys more jobs than it creates, or if unemployed people’s skills do not match the job openings. Placing too much responsibility on citizens over their welfare could also be hazardous.
The life account could decrease tax revenues for governments, allowing people to save money in the short-term instead of paying tax on it right away. Taxes must be paid at some point, but as written by Osmo Soininvaara in his analysis of the life account, states tend to prefer getting the tax money immediately. Another problem with the system proposed by Libera is that the tax reduction for services would only concern services bought from self-employed people, and not from more prominent companies. This should not have to be the case.
The numbers given by Libera on the life account, in general, would not need to be precisely the way the report indicates. The life account could be more or less social and generous, depending on the government’s ideology implementing it. The 20 000 euros of base capital and the 400 euro withdrawal limit for when the balance is under 20 000 euros could and should both be discussed depending on how many welfare programs the life account would replace. If concerning services from any company and not only from self-employed people, the ability to purchase services with money from the life account could encourage households to buy even more significant amounts of services and from companies of any size. The idea of a life account is compelling, and more thinking should be put into it to produce a second report, with an updated version of it.
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