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Dr Muriel Newman

Understanding Welfare Dependency

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WWGThe big news in last week’s budget was the announcement that the country is on track for a surplus next year. From a large deficit as a result of the recession, the global financial crisis, and the Christchurch earthquakes, the turnaround by National has been a significant achievement – part of which they attribute to the success of welfare reform.[1]

According to the Finance Minister, Bill English, a $1 billion drop in welfare spending, from an expected $11.5 billion this year to $10.5 billion, enabled the $372 million surplus. The savings were primarily due to changes in welfare policy, and to a lesser extent, the effects of faster economic growth.

Reforming the country’s failing welfare system has been a priority for John Key’s Government. It was clear there was a serious problem with welfare when, during the boom years of 2004-07, 15 percent of employers found it difficult to fill basic jobs in labouring, production and transport, despite 10 percent of the working age population being on a benefit. Instead of providing a helping hand into employment, the welfare system was effectively trapping beneficiaries in dependency.

National’s focus on welfare reform began in 2010, with the establishment of a Welfare Working Group under the leadership of the former Commerce Commission Chairman, Paula Rebstock. The group was tasked with examining the problem of long‐term welfare dependency and developing some practical options for reform.

Facts and figures were provided to highlight the problem.[2]

  • In April 2010, 356,000 people aged 18-64 years were on a benefit – that’s one in eight of the working age population.
  • Around 80 percent of all beneficiaries were not work tested.
  • Over 170,000 beneficiaries had spent five or more out of the last 10 years on a benefit.
  • Half of all sole mothers and a third of all partnered mothers with dependent children were on a benefit – that meant one in five (222,000) New Zealand children under the age of 18 were living in welfare-reliant households.
  • Over 27 percent of working-age Maori were on a benefit.
  • The proportion of the working-age population receiving a Sickness or Invalid’s Benefit had risen from 1 percent in the 1970’s to 5 percent by 2008.
  • Almost half of the people who entered the benefit system before their 18th birthday spent five or more of the next 10 years on a benefit. If that trend continued, it was estimated that 16 percent of the working age population could be on a benefit by 2050.

These figures were an indictment of the Labour Government’s welfare system. The fact that there was no work expectation at all for almost 80 percent of welfare recipients meant that instead of incentivising able-bodied beneficiaries to get a job, the system was paying them to do nothing. Without work requirements, many beneficiaries who could and should have been working, ended up ensconced in long term welfare dependency.

The Welfare Working Group proposed a complete overhaul of the welfare system to significantly extend work requirements – introducing annual benefit reviews, drug testing, and allocating supervisors to the most vulnerable. They took an actuarial approach to identify the true cost of welfare to the country.

A report by Taylor Fry estimated that the average total life-time cost of everyone who had received welfare in the year to June 30, 2011, was a staggering $78 billion! This was largely made up of benefit payments, along with the accommodation supplement, employment interventions, and Ministry of Social Development expenses.[3]

The average life-time cost of someone on the Unemployment Benefit was estimated at $59,000, the Sickness Benefit $96,000, the Domestic Purposes Benefit $123,000, and the Invalid’s Benefit $136,000.

The length of time a person stayed on a benefit was significant – those who had been on welfare for at least five years had an average liability 60 percent higher than those in their first year.

The duration of time off a benefit was also important – former beneficiaries had a 33 percent chance of returning onto a benefit within a year of leaving welfare, half of that the next year, with just a 5 percent chance of returning once they had been off welfare for five years or more.

Age also had a huge impact on the future cost of welfare – 16 and 17 year olds entering the benefit system were found to have the highest individual lifetime costs of $250,000!

Of the total liability of welfare, two thirds came from people who had first received a benefit under the age of 20. If they were a young woman with a child, their average length of time on welfare was 20 years.

This staggering insight reveals how critical it is to prevent young people from going onto welfare in the first place – young solo mothers in particular. To address this National’s welfare reforms assigned supervising adults to 4,600 young women under the age of 20 with a child. As a result, the numbers have reduced by 40 percent to 2,600, saving taxpayers hundreds of millions of dollars.

For those capable of working, the expectation that underpins the new welfare system is that they will find employment. All beneficiaries on the main Job Seeker Support are work tested – they are expected to look for a job and if one is offered, take it, or risk losing their benefits. They are also required to pass a drug test – if one is required by a potential employer – or risk losing their benefit.

The $1 billion in savings from welfare reform, identified by the Minister of Finance, is just a start. Once the system is properly bedded in, the savings should be significant.

But there is a challenge. A lack of work goals and aspirations for a better future means that all over the country, people who are quite capable of working, have become comfortable on welfare. While the money is not great, in association with allowances and income from casual work, it’s enough to get by. In some cases, if a family has a large number of children, benefit incomes can be substantial.

In researching welfare reform in the nineties, I came into contact with the Governor of the US State of Wisconsin, Tommy Thompson. He was running a remarkably successful welfare programme that eventually resulted in the State’s sole parent beneficiary caseload reducing from 96,000 to 4,000. The programme was adopted by President Bill Clinton to reform welfare throughout the USA.

In 2004 I asked Tommy Thompson, then US Secretary of Health and Human Services, to share his approach at a Welfare Symposium I had organised in Parliament: “The most important thing we did was to change the message that we sent. Instead of saying ‘You are not able, we must take care of you for ever’, we said ‘We believe in you – we believe you share the same values, hopes and dreams that all of us have and we believe that you are able to support yourself; we believe that no matter what troubles you have, what difficulties you face, you can overcome those problems and difficulties and you can succeed. We as the government are here to help – as your partner.’ Wisconsin Works built the expectation of work and personal responsibility into the welfare system, investing in childcare, transportation, and job skills training to make it not only easier for mothers to go to work, but to keep that employment.”[4]

The incentives underpinning the success of the Wisconsin programme were simple. Support was provided up front to help beneficiaries organise their lives so they could turn up each working day at a job centre. Once there, they engaged in a full-time programme of activities designed to give them the skills and habits of the workplace. That meant the step up to a real job was no longer insurmountable. With additional support such as drug and alcohol counselling, even those who had been entrenched in dependency for years, were able to successfully make the move into work.

The NZCPR has long advocated for these ideas to be incorporated into our welfare system. The key is to require the long term unemployed to turn up each day to a job centre to participate in activities designed to lead them into employment.

Earlier this month, when one of our readers sent through an article that mentioned that in the UK beneficiaries were now being required to turn up daily at job centres, I contacted the author, Alex Wild, a policy analyst at the London based Taxpayers’ Alliance, to invite him to become this week’s NZCPR Guest Commentator. In sharing his insight into British welfare reform, Alex explains that the new scheme requires the long term unemployed to visit a Job Centre daily in return for their benefits:

“Those who have been on the existing Work Programme, but who have not found a job after two years, will have to accept a work placement in the community, visit a Job Centre every day or take part in further training. Those who fail to do so will lose a month’s worth of benefits, with penalties increasing for repeat offenders. For the system to have any positive impact, the threat of sanctions is imperative.

“The success of these schemes has depended on their implementation, and how they’ve reflected local demands. The government must avoid an overly-centralised system. Local administration, with the programme tailored for each claimant, will maximise the chances of them finding work.”

While much more still needs to be done to turn around New Zealand’s welfare problem, the National Party deserves credit for tackling this challenging public policy area in such a way that identifies where the long term costs of welfare dependency lie. With each young person who enters the welfare system potentially costing the country up to a quarter of a million dollars, it is clear that more effort is needed to ensure that young people leaving school can look forward to a promising future. That means parents should be more accountable for making sure their children attend school, so they can get a good education and have good job prospects. It means teachers too need to be more accountable for ensuring that all children in their school achieve their potential in education. And it means providing decent support for parents and teachers struggling with very difficult children.

Young women too need to understand that if they become pregnant and have a baby on their own, they will be expected to work. The days of teen parents being able to rely on unconditional welfare for up to 20 years have gone.

We are fortunate to live in a country where inspirational stories, of people who have fallen on hard times lifting themselves up to achieve remarkable successes, are not uncommon. Over time, welfare reform will liberate hundreds of thousand of New Zealanders from the trap of dependency, so they too can make a better life for themselves and achieve the sort of hopes and dreams that would be impossible if they remained on welfare. In public policy terms, it’s hard to think of a better contribution to the future.



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1. Business Day, Forecast surplus of $1b from drop in welfare
2. Welfare Working Group, Statistics around welfare in New Zealand
3. Taylor Fry, Baseline Valuation – Key Findings and Background Facts
4. Tommy Thompson, Welfare Reform