The new digital economy needs new ways of thinking about social protection

New technologies, from robotics to the automation of knowledge work and self-driving vehicles, are transforming the workplace, severely testing the traditional models of social protection against income loss through disability, redundancy or premature death.

A special report, Key Issues for Digital Transformation in the G20, prepared for a conference jointly hosted by the German G20 presidency and the OECD in January, 2017 warned: “As well as a catalyst for growth, digital technologies may be disruptive, with far-reaching effects on productivity, employment and well-being. While new technologies create opportunities for businesses (especially SMEs), workers and citizens to engage in economic activity, these technologies are also likely to displace workers doing specific tasks and may further increase existing gaps in access and use, resulting in new digital divides and greater inequality.”

This concern is already being reflected in working conditions in some developed markets. Employment statistics from Eurostat show that the percentage of the workforce in part-time employment within the EU-28 has risen from 14.9 percent in 2002 to 18.9 percent in 2016. In 2016, 14.2 percent of employees aged 15-74 in the region were employed under fixed-term contracts, with significant variation across countries. In Slovenia, 71 percent of employees had temporary contracts, as did more than a quarter of workers in Poland (27.5 percent) and Spain (26.3 percent), and more than a fifth in Croatia, Portugal (both 22.3 percent) and the Netherlands (20.8 percent.) Meanwhile in Romania that figure was just 1.4 percent.

In the United States, 15.8% of all Americans were employed in the sharing economy in 2015, up from 10.1 percent in 2005. The U.S. economy added 9.4 million temporary jobs over that decade and lost around 300,000 permanent roles.

Separately, ongoing research into the effects of automation by the McKinsey Global Institute suggests that while fewer than 5 percent of occupations could be fully automated given current technologies, “almost every occupation has partial automation potential”. McKinsey estimates that, “about half of all the activities people are paid to do in the world’s workforce could potentially be automated by adapting currently demonstrated technologies. That amounts to almost $15 trillion in wages.”

“A likely consequence of these changes is that most people will have much more varied careers in future, working in several jobs over the course of their lifetimes, potentially across multiple industries and jurisdictions, with significant periods spent reskilling to adjust to a changing world,” said Gary Shaughnessy, the CEO for Europe, Middle East & Africa at Zurich Insurance Group. “This presents a real challenge to society in respect of health, long term care, pensions and income safety nets, at a time when governments in developed nations are generally limiting spending on welfare benefits in response to the increasing cost of an ageing population. Chronic and long term health issues are an increasing problem with a sharp contrast between medical improvements supporting increased lifespans but meaning that greater numbers of people are living and working with some form of health issue."

Policy makers are already taking action to address these challenges. In a recent policy note, the European Commission’s European Political Strategy Centre (EPSC) observed that, “Supporting employability can no longer be a one-off action. It involves a series of measures and instruments that may be personalized at different stages of one’s working life. As workers are more likely to change employers, jobs, sectors and even countries, benefits and protection must be linked to the individual and not to jobs or unemployment, which disadvantages those with non-standard employment or risks unwillingly incentivizing informal work or inactivity.”

The EPSC proposed the creation of notional personal human capital accounts which would deduct a percentage of employees’ salaries and allow for contributions from employers and public entities that would be used to provide funding for re-skilling or up-skilling, periods of unemployment or, potentially be used towards pension contributions.

Such initiatives, however, face several basic challenges. It is unclear, for example, who would ultimately fund such protection. The Global Risks Report 2017, published by the World Economic Forum, notes that: “Severely underfunded state social systems are at a breaking point, employers are backing away from traditional employment models and social protection contributions, and individuals once again are shouldering a larger share of the risks.”

Separately, a 2016 survey of 11,000 in 11 countries on behalf of Zurich by the Smith School of Enterprise and the Environment at the University of Oxford found that six-in-10 people had little to no knowledge of how to protect their income and that most felt that they could not afford to pay for protection against lost income.

Given these shortcomings, governments as a major stakeholder have an important role to play in building awareness of the emerging risks posed by more volatile working conditions and to promote dialog between all stakeholders to find remedies to mitigate these risks.

Solutions need to focus on promoting financial literacy, so private individuals understand the risks they face, and developing consistent frameworks for saving against loss of income, funding retraining and setting aside pension provisions that are transportable across jurisdictions without significant tax effects or other regulatory challenges. This would include, for example, regulating approved income protection insurance products and offering fiscal incentives to encourage their use, promoting a registered default scheme to offer basic income protection, setting best practice in saving products while safeguarding price transparency, and facilitating the portability of income protection and pension products across jurisdictions.

More than anything, however, governments, businesses, the insurance industry and the public need to actively engage in dialog around the future of work and the implications for income protection.  Find out more about the exclusive recommendations for change in Zurich's new report Embracing the income protection challenges: options and solutions.