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Lindsay Mitchell

If social security had been contained, how much better off would New Zealanders be today?

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Most of today’s benefits were created at the point of passing the Social Security Act 1938. During the post-war years benefit levels were reasonably stable despite population growth. For instance between 1940 and 1975 the population grew by 92 percent but receipt of Unemployment, Sickness and Invalid benefits grew by only 9 percent. As a percentage of working-age people, reliance on these benefits actually dropped.

Compare this to the next almost 35 year period – 1975 to 2009 – and the picture is vastly different. Reliance on the same three benefits grew by 903 percent or 9 times. The population grew by a mere 38 percent over the same period. The following graph illustrates the growth of these three benefits versus the growth in population;

But what if benefit dependence had stayed at 1975 levels?

Using estimates based purely on total population growth the numbers would now look something like this;

– Unemployment benefit 3,964

– Sickness benefit 10,727

– Invalid’s benefit 12,897

Add in the DPB created in 1973;

– DPB 23,606

That’s a total of 51,194.

However, the actual total today is 309,717.1 The difference in terms of expenditure is about $5.17 billion.2

That represents an average of $2,400 per employed person (2.154 million individuals).

Of course averages conceal a great deal given the wide spread of incomes from wages and salaries. Many low income workers effectively pay no tax and high earners carry a strongly disproportionate load. It is clear to see, nevertheless, that if resorting to benefits had occurred with a similar frequency that it did during the first 35 years that followed the inception of social security, New Zealanders would be more prosperous – substantially.

Consider too that $2,400 per employed person only covers the difference in cash transfers. Part of the growth in beneficiary numbers is the result in people staying on benefits for longer and longer periods of time. For instance, during 1971 only 3 percent of sickness beneficiaries received a payment for more than one year. At September 2009 47.9 percent of sickness beneficiaries had been receiving their benefit continuously for more than one year.

Long-term reliance on welfare has negative effects which incur additional costs. Remaining on welfare rather than working can lead to depression and alcohol and drug abuse. Today the fastest growing incapacities leading to reliance on an invalid’s or sickness benefit are psychological and psychiatric conditions. These conditions incur additional costs in the health system. Yet most people feel intuitively that work, leading to independence and self-esteem, is therapeutic. Indulging an entitlement mentality is not.

Children raised in families entrenched in inter-generational dependency disproportionately suffer from chronic illnesses. They will over their lifetimes absorb a range of health and social services. Some dysfunctional families can have seven or eight agencies working with them, most requiring paid employees. Despite this some will eventually land in trouble with the law, creating costs in the justice system.

Because benefit eligibility is often contingent on the presence of dependent children, sadly, some families will feud over custody also incurring costs in the family court system courtesy of legal aid.

As well, if one in five children is reliant on a benefit, somebody else also has to subsidise their education.

So clearly the costs of benefit dependence go well beyond the annual welfare budget.

In broad terms, what needs to change?

Unlike purist libertarians I do not advocate wholesale dismantling of the welfare state, although I understand why they do. Tax-payer funded entitlements create incentives and change values over time. Thus far the process of change seems unavoidable and is evident across welfare states. A recent UK study showed that people in a number of different countries had become progressively less honest since the creation of the welfare state.3 Each generation featured a higher percentage of people who thought it was OK to claim a benefit they were not legally entitled to.

However, in practical terms alone, abolition of the welfare state is too unrealistic a proposition to advance the cause of welfare reform.

What is needed is a return to respect for both benefits and taxpayers; an avoidance of moral hazard through education; and levels of reliance that reflect real incapacity or emergency rather than lifestyle choice. In practical terms, time-limits and much tighter eligibility are required. And for those genuinely without any other source of support or ability to be self-supporting, better care and regard.

Such a state of affairs would see all New Zealanders much, much better off.

  1. Benefit Factsheets, September 2009
  2. Each beneficiary consumes an average of around $20,000 per annum comprising basic benefit payment and supplementary assistance eg accommodation supplement, family tax credits, childcare subsidies, disability allowances, etc 
  3. European unemployment: how significant was the declining work ethic, Jean-Baptiste Michau, October 2009