Is now the time for Universal Basic Income?

Paper family with coins

Universal Basic Income: What is the concept?
In this Blog post we look at what Universal Basic Income is and how the concept has developed since the concept was first put forward by writer Thomas More in his 1516 novel, “Utopia.”. We also look at how this is relevant to actuaries and how we can contribute to the debate.

Universal Basic Income (UBI) is conceptually a government programme in which every adult citizen receives a set amount of money on a regular basis. The goals of a basic income system are to alleviate poverty and replace other need-based social programmes that potentially require greater bureaucratic involvement.  Implementation could vary considerably but is most likely to be based on the cost of a bare minimum of life necessities. 

The introduction of UBI would need a great leap in thinking as it would be a huge and controversial shift in the overall corresponding state budget. For actuaries, it requires a different way of thinking about benefits compared with traditional actuarial principles around the valuation of benefits dependent on certain decrements or transitions. We should note that some countries have introduced elements of UBI or are in the process of implementing pilot schemes. COVID-19, which has greatly increased demand for government-financed safety net payments, may provide some of the conditions to consider radical changes such as UBI.

The idea of a minimum income guaranteed by the government to all the members of a particular community is far older than the more specific and radical idea of an unconditional basic income. This has led to most Social Security Systems targeting minimum incomes for certain groups, such as those unemployed or retired from work. 

The idea of providing a regular, guaranteed payment to citizens, regardless of need, has been around for centuries.  In 1516 Thomas More wrote “No penalty on earth will stop people from stealing, if it is their only way of getting food. It would be far more to the point to provide everyone with some means of livelihood”

Economic theory would often lead us to the conclusion that UBI would result in a disincentive to work. However, some would argue that could already be the case to some extent with the current welfare systems in many developed economies.  Supporters of UBI might point to individuals having a right to a basic level of income. 

Article 25 of the “Universal Declaration of Human Rights 1948”: “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control”.

The implication is that there should be a bare minimum income provided to those who are unable, due to circumstances beyond their control, to earn a living and UBI takes this one stage further by providing an income to everyone including those who are able to provide for themselves. Taxes would need to be reconfigured to generate the sizeable revenue required to pay for UBI.  A major challenge to UBI comes in the argument that marginal tax rates on earned income are likely to rise creating higher marginal resistance to further earnings for those who are able to earn additional income.

We therefore have a dilemma as to whether the right to a certain standard living outweighs the concern over whether it introduces a disincentive to work. Ironically the COVID-19 pandemic has presented conditions where governments have wanted to provide a disincentive to work for certain groups of workers (in order to reduce the spread of the virus) and therefore in such circumstances this strengthens the case for UBI, as the argument about disincentive to work is less compelling. 

Whilst the original concept was identified in the 16th Century it was developed over the following centuries. Some of the most significant contributions in the 20th Century are outlined below.

In 1918 British philosopher Bertrand Russell wrote: “A certain small income, sufficient for necessities, should be secured for all, whether they work or not. A larger income … should be given to those who are willing to engage in some work which the community recognizes as useful.”

1944 F. A. Hayek wrote “There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. [This is] no privilege but a legitimate object of desire … [that] can be provided for all outside of and supplementary to the market system.”

In 1963 Robert Theobald wrote “The need is clear: the principle of an economic floor under each individual must be established. This principle would apply equally to every member of society and carry with it no connotation of personal inadequacy or implication that an undeserving income was being received from an overgenerous government….We will need to adopt the concept of an absolute constitutional right to an income.”

Such a significant shift in state support for individuals is not unheard of. A similar historic moment took place in the UK in 1948 with a bold and pioneering plan to make healthcare accessible to everyone. The NHS was born. Is now the time to give all individuals the right to a basic level of income?

Whilst this may not appear as traditional work for actuaries, we are well placed to consider some of the issues around net present values, funding and implications for pensions. In the UK the introduction of UBI would no doubt necessitate a reduction in other state benefits such as Universal Credit and the State Pension (not exclusively). Whether UBI is fixed or varies by age or whether UBI would be introduced for new generations only alongside pension reform are example areas where actuaries can contribute to the debate.

On a personal level we introduced a family level pseudo UBI   unconditional pocket money for my children as we believe this should be their right and not based on a requirement to do chores, although we hope that it makes them more inclined to contribute to the family!

In the next blog we will look at the history of where UBI has been used and any insights into the experience. In a further blog post we will look at whether the current pandemic should alter our thinking on the future of this concept.

The IFoA Covid-19 Action Taskforce Social Security group comprises Laura Llewellyn-Jones, Stephen Moncrief, Alan Newton, Peter Tompkins, Dave Williams, Chris Sutton and Tawanda Chituku.