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Incentivising Welfare
Luke Malpass
7 June 2009

The Key government campaigned on reforming welfare, but as the recession bites deeper we shall see if John Key and Paula Bennett are serious or not. This government campaigned on the welfare state helping people, not trapping them in poverty. If this is to become a reality in New Zealand, international experience suggests that the government has its work cut out.

Welfare policy is important at all stages of the economic cycle. When the economy is growing steadily the aim of welfare policy should be to get every person who is able into the labour force. And, when the economy is in recession it is even more vital that welfare policy is designed to encourage able people into the workforce.

To this end welfare policy is a hugely important area in which to legislate. The rules around conditionality are important and the incentives they create crucial. For example, let’s look at the case of Lauren Kaney (caught out via facebook): Lauren has a two year old child and lives in a committed relationship with her boyfriend, the father of her son. The child has two committed parents living together and it sounds all above board - so far so good. Unfortunately it turns out that Lauren had been claiming the Domestic Purposes Benefit (DPB) for being a solo mum, and as such she has defrauded her fellow taxpayers to the tune of $480 a week, or $17,000 odd in total.

That she has broken the rules and defrauded the taxpayer of a substantial amount of money to which she was not entitled is not in doubt. But what is the incentive for the couple here? The way that this payment is structured makes it more economical for her and her partner to live apart, regardless of whether this is best for the child. Or it encourages them to break up, or it simply encourages them to lie, as they did, to WINZ. Although one cannot condone any fraud, it is understandable. They have a child, they want to be together, they know this is best for their child; yet the state pays more money if they remain apart. Why not lie?

It demonstrates a central problem with the modern welfare state—unintended consequences arising from poorly thought through incentives. When the DBP was introduced in 1973, it was meant to help women escape from abusive relationships or to be able to live if they had an unreliable partner who took off. It has undoubtedly helped many women in this situation. Its architects probably didn’t foresee a rise in illegitimacy at the time, this has of course happened. There is not as strong a reason for couples with children to stay together, and for a sad minority of desperate women, state funded child rearing has become a career path. A change to conditionality of DPB would transform this. People respond to incentives and that they should continue to do so, should not surprise anyone. Lauren Kaney is just the most recent public example of this.

Another example is the Invalids Benefit (IB). There are two main ways onto an IB: from another benefit, or from ACC. The IB pays more than the dole, you can stay on it for longer, with fewer reciprocal obligations. Is it any surprise then, that in the year ten years to December numbers on the Unemployment Benefit dropped from112,523 to 30,508 while number on the IB rose from 49,115 to 83, 501? Although the IB is certainly needed, in times of economic growth you would expect that number to fall as people see opportunities in the world of work that are more attractive and lucrative than the benefit. This has not occurred, again because of the incentives.

Internationally, New Zealand is behind best practice. In Scandinavian countries, the United States and Germany, welfare has been reformed with remarkable results. Numbers on welfare rolls have been reduced dramatically with the tightening of conditionality and reciprocal obligations. Workfare schemes, time-limiting of benefits, and compelling single parents back into part time work once their youngest goes to school have all been shown to be effective and have positive benefits for peoples’ job prospects. Yet in New Zealand this is still characterised as cruel and uncaring.

In the decades of unemployment in the 1980s and ‘90s, New Zealand like other countries, allowed people to fall into long lapses of unemployment, losing skills and confidence in a rapidly changing labour market. In the UK this has created great tranches of intergenerational welfare dependency, joblessness and the sense of disempowerment that arises from this, despite a decade of economic growth. In New Zealand we can see the beginning of this trend, so now is the time to reform and prevent it from happening here.

As New Zealand heads deeper into recession it is more important than ever that the government’s welfare policy gets it right. Reform is important, because allowing people to become lost on welfare rolls and out of touch with the world of work is a failure of government, and by extension, a failure of society.

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