Finland’s basic income test wasn’t ambitious enough

The payments encouraged beneficiaries to take work that doesn’t pay a living wage.

By Leonid Bershidsky, Apr 26, 2018

KELA, the Finnish social security agency, has failed to secure the funding it needs to extend its universal basic income experiment beyond this year. Although it’s sad that this grand leftist idea is suffering another setback, Finland’s trial effort deserved its fate.

Before the experiment was approved by the government in 2016, KELA officials talked of paying 800 euros ($974) a month in unconditional income to a test group of working-age citizens. But by the time the program began early last year, the amount was whittled down to 560 euros: If extended to the whole country, the cost of the earlier proposal would have exceeded the Finnish government’s entire revenue. A similarly impractical approach led to the failure of a 2016 Swiss referendum on offering a payout of 2,500 Swiss francs ($2,540).

It’s all but impossible to live on 560 euros in Finland. A one-bedroom apartment on the outskirts of Helsinki rents for almost that much. So the experiment’s designers settled on not really paying the UBI to the unemployed, who kept a higher level of government support — at least 32.4 euros a day for the first 400 days after losing a job. Only the working poor would benefit significantly from it.

That limitation was designed to address two problems. Finland has a low employment rate for a rich country: just 71 percent of the working-age population, compared with 77 percent in neighboring Sweden and almost 86 percent in Iceland. So the idea was to provide an incentive for the unemployed to step into the job market, even if it meant taking on part-time or badly paid work. The other goal was to simplify Finland’s complex system of housing, child-care and other benefits by replacing them with the lump sum payment.

KELA is not promising to release any results of the experiment, which involves 2,000 people, until the end of 2019 or even the beginning of 2020. But it was clear from the start that a basic income, even such a low one, is an extremely expensive way to boost precarious forms of employment. At 550 euros a month, KELA calculated, the UBI would cost 19.3 billion euros a year, while the government would only save 3.6 billion euros on existing benefits.

The Organization for Economic Cooperation and Development earlier this year expressed doubts about the Finnish plan. “Coordinating the tapering of various working-age benefits against earnings could drastically improve work incentives and transparency, while preserving the current level of social protection, and is hence a more promising route for future reform than a basic income,” the OECD said.

There are, in other words, less financially bruising ways of streamlining the benefit system. As for getting people to return to the job market, the center-right cabinet of Prime Minister Juha Sipila appears to be more interested in cost-effective negative motivation for the unemployed than in rewarding them for finding work that doesn’t pay a living wage. The government has proposed, for example, requiring out-of-work people to apply for at least one job a week to keep receiving benefits (unless they’re in job training programs).

Finland undertook its experiment for the wrong reasons. Using the universal basic income to increase labor market participation and phase out some benefits is like swatting flies with a sledgehammer. In a report on the future of work released earlier this month, the World Bank recommended the much more ambitious goal of considering UBI as a means of ensuring a “societal minimum” of welfare in a world of increasingly precarious employment and growing automation. If a society is to accept much higher taxes to pay for a basic income plan, it has to be for a revolutionary outcome, not a mere bump in employment numbers and a dent in the cost of social security administration.

Low UBI-like payments aren’t even likely to work well for the purposes KELA had in mind. Neither dividends from the Alaska Permanent Fund, which paid every state resident $1,100 for 2017, nor Iran’s one-year experiment, in 2011, with paying 96 percent of its population $45 a month, had any effect on employment. The Finnish program, of course, pays more but also below subsistence level, so its outcome is likely to be similar.

The UBI idea is not dead. It’s still worth watching other experiments, especially the ones that actually provide a living income. These include Oakland, California, which pays $2,000 a month, almost exactly at the poverty line, and the one in Kenya, which pays $23 a month, about half the average income in the country’s rural areas. Other tests, in the Dutch city of Utrecht and an upcoming one in Ontario, Canada, offer low payouts relative to the living standard, but still higher than in the Finnish test.

If these experiments show that tangibly increased financial security makes people more inclined to study, try more creative endeavors or even start businesses, the undeniably high cost of the UBI may yet seem justified.