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NZCPR
Guest Forum
Opinion piece by Professor Peter Saunders & Phil Rennie
11 February 06
Welfare
Reform in Australia
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Australia
has been going through
an unprecedented and unbroken period of prosperity.
The economy is booming, employers are complaining of
labour shortages, and real incomes are higher than they have
ever been. Yet
rates of welfare dependency are still rising.
Forty
years ago, just one in thirty working-age Australians drew
their income wholly from welfare benefits.
Today, one in six working-age adults lives wholly off
welfare, yet real incomes are double what they were in the
1960s. Include
those receiving a partial payment and the dependency rate
rises to more than one in four.
And
this is just the tip of the welfare iceberg.
The great majority of Australian families are today
receiving government payments of one form or another.
Families earning over A$100,000 per year claim Family
Tax Benefit (Part A), and even millionaire families qualify
for Family Tax Benefit (Part B), which is paid to all families
with only one earner.
Nor
does it stop there. All
workers have a portion of their income compulsorily diverted
(via their employers) into personal superannuation funds which
are meant to provide an independent source of income in
retirement, But
despite this, the means-tested age pension is still claimed by
more than four in every five retired Australians (more than
half get a full pension, and over a quarter get a reduced one,
depending on how much other income they have coming in).
The
cost of supporting all these people is enormous.
In 2003-04, A$80 billion was spent on income support.
More than a quarter of this was soaked up by age
pensions. Family
payments took another A$15 billion.
And payments to working-age claimants included A$8
billion in disability support payments, A$6 billion to support
non-working parents (usually single parents), and A$5 billion
in unemployment allowances.
In
the same year, the total amount collected in personal income
tax was just over $90 billion.
In other words, almost all the money paid in income tax
by working Australians was used to finance government transfer
payments.
Much
of this money represents a transfer from those who are working
to those who are not. But
some of it finds its way back to the same people who cough up
the cash in the first place.
Many families, in particular, find the tax deducted
from their wages gets recycled into the various payments they
receive from the welfare bureaucracy.
The
government likes to claim that this ‘churning’ of money
between the tax and welfare systems means that low and middle
income families pay no tax, but this is misleading.
Like most other working Australians, they pay a lot of
tax, but unlike workers without dependent children, they then
receive a lot of it back.
One
of the big debates raging in
Australia
at the moment is whether this matters.
The Howard government likes to boast about how it has
helped families, and it is true that families with children
have been showered with cash in recent years.
Not only do they get the Family Tax Benefit, but
special payments of $600 per child got thrown at them in the
run-up to the last federal election, and the government has
also introduced child care allowances to go along with child
care benefits. What
ministers do not say, however, is that many families are
paying for their own benefits.
There
are two main reasons why this matters.
The first is that it pushes up marginal tax rates.
Even if people eventually get their tax back again in
one form or another, the size of the government budget needed
to finance all this activity necessitates dauntingly high
marginal rates of tax. This
creates significant work disincentives – every new dollar of
tax raised by the Howard government is now taking at least
$1.20 out of the economy because of the ‘deadweight
losses’ associated with reduced economic activity.
The
second reason why extensive tax-welfare churning matters is it
encourages people to think they cannot look after themselves
and that they must instead rely on the government.
Those Australian families paying hundreds of dollars of
tax each week and then claiming it back on benefits and
payments could get by perfectly well without any government
help, if only the government did not take so much tax off them
in the first place. A
dependency culture is not only created by extensive welfare
benefits – it is also generated by high taxes.
There
is little sign at present that the Howard government is
interested in reducing tax-welfare churning.
Handing out money is a tried and tested method for
politicians to win votes and get themselves re-elected, and
not many Australian voters realize that they are being bribed
with their own money. As
we move towards this year’s federal budget, all the
indications are that even more money will therefore be
‘given’ to families – the pressure to increase subsidies
for those using pre-school child care is particularly intense,
and the Treasurer is unlikely to have the desire or will to
resist it.
Nor
is there much sign of the government doing anything
significant to reduce dependency on the age pension.
Three years ago the government published its
“Intergenerational Report” which warned of falling
revenues and increasing expenditures as the population ages.
The biggest problem will be health care costs, but
there will also be many more retired people than there are
today. Recent
forecasts predict that three-quarters of them will still be
claiming a full or part pension in the year 2050.
The
real problem is that, having made personal superannuation
saving compulsory, the government cannot resist the temptation
to tax it (super taxes now provide 3% of all government
revenues).
Australia
is the only country in the western world that taxes
superannuation three times: when it is paid into a fund, when
the fund makes profits, and when income is withdrawn on
retirement. The
result is that savings grow more slowly than they should and
workers lose out on the advantages of compound interest.
Pressure is building on the Treasurer to scrap the 15%
tax on contributions, but nobody is holding their breath.
Where
the government has been active, however, is in attempting to
reduce the scale of dependency on benefits for working-age
people who do not work. As
in
New Zealand
, there are three main categories of such claimants – single
parents, the unemployed and those claiming to be
incapacitated.
Changes
in the conditions governing unemployment benefits began under
the last Labor government, but reform was intensified under
Howard. Now,
anybody under the age of 50 who has been claiming unemployment
benefits for six months must undertake a ‘mutual
obligation’ activity (normally for 2 days per week).
This could involve retraining, or community activity,
or so-called ‘Work for the Dole.’
This policy was highly controversial when it first came
in, but it is now widely accepted, although critics sometimes
complain that Work for the Dole schemes do not adequately
prepare people for proper employment.
The
continuing problem in the unemployment benefits system is the
persistence of ‘long-term unemployment’ (defined as people
out of work for a year or more).
Half the people who become unemployed find another job
within eight weeks – for them, welfare is a transitory
experience. But
18% of the unemployed (almost 100,000 people) are long-term,
and many of them appear to have become habituated to
joblessness. They
go through their six month stint of mutual obligation, then go
back into the system for six months, and then do another round
of mutual obligation, by which time the whole process has
become a meaningless ritual.
The only way to stop this is by introducing time
limits, but the government has shown no inclination to take
such a step.
For
many of the long-term unemployed, unemployment ends by getting
reclassified as ‘disabled’ and going onto the Disability
Support Pension (DSP). As
in
New Zealand
, the numbers of people claiming welfare on grounds of
incapacity has mushroomed in
Australia
, even though the population is fitter and healthier than ever
before. The two
biggest categories of disability are ‘musculo-skeletal’
and ‘psychiatric-psychological’ conditions, both of which
are so broad as to cover the whole range from full incapacity
to minor ailments.
If
you are unemployed, there are several advantages to getting
yourself reclassified as ‘disabled.’
One is that people on the disability pension do not
have to undertake any mutual obligation activity.
Another is that the rate of payment is higher.
Once on the DSP, very few ever return to active labour
force participation.
The
New Zealand
government hopes to reduce the drift into ‘disability’ by
abolishing different categories of payments and herding all
claimants into the same umbrella benefit.
This will have the advantage of greater flexibility –
instead of having to classify people as either capable or
incapable of working, claimants will be assessed on a case by
case basis and expectations will be amended accordingly.
The downside of this solution, however, is that it will
hugely increase bureaucratic discretion, and the system will
lose clarity. At
the moment it is clear what the expectations are when a
claimant enters the system (unemployed people, for example,
know that their claim is temporary and they are expected to
return to work). Moving
to a single payment means this categorical clarity will be
lost.
Australia
has taken a different
tack. Instead of
abolishing the categories, it is trying to sharpen the
criteria that distinguish them.
It is, however, notoriously difficult to do this.
Even
though it is widely known that many – perhaps most –
existing disability claimants could work, governments
encounter huge opposition when they try to take effective
action to reduce spurious claims.
When the Blair government tried to tighten up the rules
in 1997, for example, the UK Parliament was besieged by
wheelchair demonstrators, even though many of the
demonstrators would have benefited from the changes (for if
payments are limited to those who are genuinely incapacitated,
there is more money to go round).
Similarly in Australia, the Howard government met with
strong resistance when it suggested tightening the definition
of disability, but when the Liberal-National Coalition
unexpectedly won control of the upper house as well as the
lower in the 2004 federal elections, it was able to push the
changes through.
The
basic change is that incapacity will now be defined as in
inability to work 15 hours per week (3 hours per day).
Previously it was 30 hours.
Anybody claiming benefits who is deemed capable of
working 15 hours per week will from now on be treated as
‘unemployed’ rather than ‘disabled,’ which means they
will be subject to mutual obligation requirements and will
receive a lower level of payment (this change does not apply
to those who are already on the DSP).
The result should be to reduce the flow of new
claimants into DSP (probably at the expense of increasing the
official unemployment rate, at least at the outset).
Critics
of this measure have accused the government of being
‘uncaring,’ but an even bolder change has been made to the
eligibility rules for Parenting Payment (
Australia
’s equivalent to the Domestic Purposes Benefit).
As in New Zealand (but in contrast with almost every
other western country), single parents have hitherto been
entitled to stay out of work and claim welfare support right
up until their youngest child reaches the school-leaving age.
This is not only absurdly generous by international
standards (in most European countries, single parents are
expected to return to work, at least part-time, by the time
their youngest child starts school or even pre-school); it is
also hugely counter-productive, for it encourages the sort of
long-term welfare dependency that destroys skills, undermines
self-confidence and guarantees poverty.
One Australian study has found that single parents
living on Parenting Payment spend an average of twelve years
on benefits, by which time they have become almost
unemployable.
The
government’s preferred answer was to require new Parenting
Payment claimants to work part-time once their youngest child
turned six years of age (as with the DSP changes, the new
rules would not apply retrospectively to existing claimants).
However, this proposal met with predictable uproar with
single parent groups, welfare groups and opposition parties
all howling about the unfairness of expecting single parents
to work part-time while their children are in school.
Opponents focused on the financial implications for
jobless single parents with older children who would in future
receive unemployment benefits rather than the more generous
Parenting Payment. It
apparently did not occur to these critics that the point of
the change was to get these parents off benefits and into
jobs, in which case their incomes would rise, not fall.
Buckling
under the political pressure, the Howard government backed off
slightly, announcing that some parents (e.g. those with large
families or living in remote areas where jobs are scarce) will
be exempt from the new work requirement, and that the age of
the youngest child at which the parental work requirement will
begin would be raised from six to eight.
This means parents with children under eight years will
still be entitled to stay at home all day on welfare benefits,
even though their children are in school.
Notwithstanding these concessions, however, an
important principle has been established: from now on, you
will be expected to contribute to your own upkeep if you are
no longer caring full-time for dependent children.
Summing
up the Australian welfare changes, it is clear that while
reforms are under way, this is no revolution.
The government will continue to spend huge sums on
income support well into the future, and millions of
Australians who are quite capable of looking after themselves
will continue to be cared for by the taxpayer.
Taxes levied on people’s incomes will continue to be
onerous and the interaction of the tax and benefits systems
will continue to generate all sorts of perverse incentives.
We
have to acknowledge, however, that welfare reform is
inherently difficult. Precisely
because so many people now benefit from hand-outs, it is
politically hard to scale the system back.
All western countries have seen disability payments
blow out, for example, and none has yet found a solution.
Many also have a problem with long-term unemployment.
Can
New Zealand
learn anything from the Australian experience?
Certainly it can take heart from the reform of support
for single parents which is popular, sensible and fair, and
which in time should raise rates of workforce participation
among this group of claimants.
It must be a matter of regret that the work-testing of
the Domestic Purposes Benefit in 1999 was reversed by the
incoming Labour government.
Longer
term, New Zealand might also revisit the issue of personal
superannuation, for with an ageing population, an open-ended
commitment to pay a non-contributory age pension to anyone who
has failed to save for their own retirement looks little short
of reckless. True,
the NZ Superannuation Fund is
putting aside $2 billion a year to save for the cost of future
pensions, but at its peak this will only cover about 14% of
the cost. More
importantly, government savings initiatives like this
discourage personal savings and undermine personal
responsibility by reinforcing the message that you don’t
need to worry about saving, the government has it all under
control. This is
no substitute for encouraging or even requiring
workers to put aside a portion of their earnings to help fund
their own old age.
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