Assessing Developments and

Prospects in the Australian Welfare

State

Presentation to OECD,16 November, 2016

Peter Whiteford, Crawford School of Public Policy

https://socialpolicy.crawford.anu.edu.au/

peter.whiteford@anu.edu.au Twitter: @WhitefordPeter

Outline

• Background – Incomes, inequality and prosperity

– Social security and employment

• Assessing policy developments – Policy reviews

– Activation

– The investment approach

– The National Disability Insurance System (NDIS)

• Challenges and prospects

2

Incomes, inequality and prosperity

3

Trends in income inequality in Australia,

1981-82 to 2013-14

Gini coefficient

4

Trends in real mean and median

household incomes in Australia, early

1980s to 2013-14 (1981-82 and 1993-94 = 100)

5

Trends in real incomes at different decile

points, Australia, 1994-95 to 2011-12 Percentage change in real equivalent income unit income

6

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

P10 P20 P30 P40 P50 P60 P70 P80 P90

1994-95 to 2002-03 2002-03 to 2007-08 2007-08 TO 2009-10 2009-10 to 2011-12

Change (%) in real median equivalised household

disposable income, 1995 to 2012 (or nearest year) Source: Estimated from OECD Income Distribution database, http://stats.oecd.org/index.aspx?queryid=46022

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Social security and welfare – how

Australia compares

8

Social spending, OECD, 2014 or nearest year (%

of GDP)

Spending on cash benefits Spending on Health and Services

9

8.6

0 5 10 15 20 25

Mexico

Korea

Chile

Iceland

Turkey

Australia

Israel

Canada

United States

New Zealand

Estonia

United Kingdom

Switzerland

Slovak Republic

Norway

Sweden

Czech Republic

Netherlands

OECD

Japan

Ireland

Poland

Germany

Denmark

Luxembourg

Hungary

Slovenia

Greece

Spain

Finland

Portugal

France

Austria

Italy

Belgium

10.4

0 5 10 15 20

TurkeyMexico

ChileEstonia

KoreaIsrael

GreecePoland

PortugalSlovak Republic

SloveniaHungary

IrelandCanada

Czech RepublicSwitzerland

LuxembourgOECDSpain

ItalyAustria

United StatesIceland

AustraliaNorway

JapanNew Zealand

United KingdomBelgium

GermanyNetherlands

FinlandFrance

DenmarkSweden

Public spending on income-tested benefits, %

of GDP, OECD countries 2012

10

Net replacement rates for low paid workers in first

six months of unemployment, OECD countries, 2013

Australia’s social security system is more targeted

to the poor than any other OECD country Ratio of transfers received by poorest 20% to those received by richest 20% Source: Calculated from Table s 3 and 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

Welfare receipt in Australia % of working age households receiving income support payments by period

13

0

20

40

60

80

0-4

5-9

10

-14

15

-19

20

-24

25

-29

30

-34

35

-39

40

-44

45

-49

50

-54

55

-59

60

-64

65

-69

70

-74

75

-79

80

-84

85

-89

90

-94

95

-99

10

0+

Health

Age Pension

Other

Aged care

Education

Government spending per person 2012, $’000 per year per person

Employment, unemployment and

disadvantage

15

How does Australia’s employment

performance compare? • In 2015 Australian employment rates overall were the 12th highest in the OECD

(72.2%).

• In contrast, employment for youth (15 to 24 years), Australia is ranked 4th

highest among OECD countries.

• The level of part-time employment is the third highest in the OECD after the

Netherlands and Switzerland.

– Around 29 per cent of the workforce are employed part-time. Most part-time

workers are women — around 72 per cent. Around 46 per cent of female

employees and 15 per cent of male employees participate on a part-time

basis.

• Temporary employment – as defined by OECD – is among lowest.

• Involuntary part-time employment – 7.2% of the labour force and 30% of part-

time workers is the highest in the OECD (2.9% is OECD average and 17% of

PT workers).

• Employment rates among lone parents are among the lowest in the OECD.

• Total joblessness among families with children is among the highest in the

OECD – but may have improved in ranking terms.

16

Joblessness in Australia is highly concentrated

in households where no one is in paid work

Working age

population non-

employment rate

Share of working

age in jobless

households

Ratio of household

to individual

joblessness

UK 27.4 16.3 0.59

Germany 34.5 19.4 0.56

Norway 24.8 13.1 0.53

Australia 28.4 14.2 0.50

Denmark 24.5 9.2 0.38

Sweden 26.1 6.2 0.24

USA 28.5 6.3 0.22

Japan 30.7 5.1 0.17

Spain 35.7 5.8 0.16

Assessing policy developments

18

Trends in social security spending,

Australia, 1980 to 2012 Spending on cash transfers as % of GDP

19

The Australian welfare system has been

extensively reformed since the 1980s • Liberalisation of unemployment benefit income tests in the 1980s.

• Income-testing family allowances 1987, increases in income-tested family payments

and integration of in-work and out of work family payments between 1987 and 1993.

• Following the recession of the early 1990s, the benefit system for the unemployed

partially individualised and “dependency payments” – for spouses (usually wives) of

recipients started to be phased out. The pension age for women was gradually

increased from 60 to 65 years.

• The Coalition government from 1996 increased family assistance particularly for one-

earner families, and also increased assistance again after 2000 when the GST was

introduced.

• Activation policies for working-age welfare recipients were increased for the

unemployed after 1996 and extended to parents from 2006.

• Since 2007 the Labor government targeted more tightly a number of family payments.

• Age and disability and carer pensions were significantly increased in 2009 and the

withdrawal rate on payments was increased from 40 to 50%.

• The age pension age will be gradually increased from 65 to 67 years between 2017

and 2023

20

Trends in the number (000s) of unemployed

and unemployment benefit recipients, 1978 to

2012

21

0

100

200

300

400

500

600

700

800

900

1000

Unemployed Recipients

Trends in underemployment, 1978 to

2012

22

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Feb

-1978

De

c-1

978

Oct-

1979

Aug-1

980

Jun-1

981

Apr-

1982

Feb

-1983

De

c-1

983

Oct-

1984

Aug-1

985

Jun-1

986

Apr-

1987

Feb

-1988

De

c-1

988

Oct-

1989

Aug-1

990

Jun-1

991

Apr-

1992

Feb

-1993

De

c-1

993

Oct-

1994

Aug-1

995

Jun-1

996

Apr-

1997

Feb

-1998

De

c-1

998

Oct-

1999

Aug-2

000

Jun-2

001

Apr-

2002

Fe

b-2

003

De

c-2

003

Oct-

2004

Aug-2

005

Jun-2

006

Apr-

2007

Feb

-2008

De

c-2

008

Oct-

2009

Aug-2

010

Jun-2

011

Apr-

2012

Underemployment rate Males Underemployment rate Females

Underemployment rate Persons

Changes to “dependency” payments

• Access to Widow B Pension was limited in 1987, and then closed to new

entrants in 1997.

• Wife Pension was closed to new entrants in 1995.

• Partner Allowance and Mature Age Allowance were both closed to new

claimants in 2003, and by 2008 there were no longer any recipients of

Mature Age Allowance.

• Since 2005, new grants of Widow Allowance have been limited to women

born on or before 1 July 1955.

• In combination with the partial individualisation of benefit payments, this has

significantly reduced the effect of assuming dependency within the

household.

23

Change in number (000s) of working age

income support recipients, 1996 to 2014

24 PW

Per cent of working age population receiving

social security benefits, 1976 to 2014

25

Lone parents :policy developments • 1942 – Introduction of Class A Widows Pension.

• 1968 – States Grants Deserted Wives Act assisted deserted wives in first 6 months after desertion or birth.

• 1973 - Introduction of Supporting Mother’s Benefit providing assistance after six month waiting period.

• 1977 – Introduction of Supporting Parent’s Benefit covering fathers.

• 1980 – Six month waiting period for SPB abolished.

• 1989 - Sole Parent Pension replaced Class A Widows Pension and SPB.

• 1998 – Parenting Payment Single (PPS) replaced SPP.

• 2006 - Child eligibility age lowered from 16 to 8 years for new applicants for social security payments, with new applicants having participation requirements and claiming Newstart.

• 2011 – Amendment to “grandfathering” to restrict impact of new birth.

• 2013 – Remaining “grandfathered” recipients moved to Newstart.

Lone parents on PPS or equivalent as % of

working age population, 1974 to 2014

Trends in principal source of income for lone

parents, Australia, 1994-95 to 2011-12

Employment to population rate (%) among lone

parent families, 1980 to 2012

Lone parents and apparent outcomes

• Lone parents have enjoyed significant real increases in income since the 1990s

• Employment increases have been significant and reliance on social security has reduced

• Lone parents have moved from the lowest income quintile to the second lowest

• Income inequality among lone parent families has increased, and relative poverty rates have been stable

• Housing costs may have increased as lone parents are now more likely to be private renters

• Much of the improvement in the economic circumstances of lone parents appears to have started before policy changes.

• Some of the changes appear to reflect changes in demographic composition of the lone parent population.

The National Disability Insurance

Scheme

31

The National Disability Insurance

Scheme • The NDIS is being introduced progressively around Australia from 1 July

2016.

• To become an NDIS participant a person must: Have a permanent disability

that significantly affects their ability to take part in everyday activities; Be

aged less than 65 when they first enter the NDIS; Be an Australian citizen or

hold a permanent visa or a Protected Special Category visa; and live in

Australia .

• By 2019, the NDIS will provide about 460,000 Australians under the age of

65 with a permanent and significant disability with the reasonable and

necessary supports they need to live an ordinary life.

• The NDIS takes a lifetime approach, investing in people with disability early

to improve their outcomes later in life.

• Individuals can self-manage their plan or members of their family can.

• The scheme is not income or means-tested.

• The Scheme is funded by an increase in the Medicare Levy plus savings

from previous State Government programmes.

32

The National Disability Insurance

Scheme • Self-managed participants can select a preferred service provider

and claim the expense through the Scheme. There are three options

for self-managed participants to pay providers:

– Option 1: Self-managed participants can negotiate with providers to pay invoices

within seven to 30 days as part of their service agreements.

– Option 2: Self-managed participants can submit a payment request prior (within

one week) of receiving the support if the participants have an established service

agreement and the provider requires payment on day of service.

– Option 3: A self-managing participant can choose to pay a service provider

upfront and claim the expense back through the Scheme.

• The NDIS will typically pay claims, once received, within two to four

days.

• https://www.ndis.gov.au/people-disability/fact-sheets-and-

publications.html

33

The National Disability Insurance

Scheme • The NDIS Outcomes Framework has been developed to measure

goal attainment for individual participants and overall performance of

the Scheme. There are 8 Outcome Domains (‘Domains’) in the

framework.

– Daily Living

– Home

– Health and Well-being

– Lifelong Learning

– Work

– Social and Community Participation

– Relationships

– Choice and Control

34

The National Disability Insurance

Scheme • In the NDIS payment system, supports for participants fall into three

Support Purpose categories:

– CORE – A support that enables a participant to complete activities of daily living

and enables them to work towards their goals and meet their objectives.

– CAPITAL – An investment, such as assistive technologies, equipment and home

or vehicle modifications, funding for capital costs (e.g. to pay for Specialist

Disability Accommodation).

– CAPACITY BUILDING - A support that enables a participant to build their

independence and skills.

• Most supports are priced per hour of service; Support packages for

independent living for people with high needs can be up to $4,800

per week.

• Differing levels of support depending on levels of need.

35

The investment approach

36

The investment approach • The development of an investment approach was one of the

recommendations of the McClure review of Australia’s welfare system.

• The New Zealand government originally developed the investment

approach in response to a review on welfare dependency, which was

specifically asked to look at the insurance industry for ideas on reform. The

government has subsequently commissioned four actuarial valuations – in

2011, 2012, 2013 and 2014.

• The Baseline Evaluation report released in September 2016 was an

initiative of the 2015-16 budget, when the government allocated A$33.7

million to establish an Australian Priority Investment Approach to Welfare

based on actuarial analysis of social security data.

• Groups identified by the approach will receive support from current

programs and from new and innovative policy responses to be developed

through the A$96.1 million Try, Test and Learn Fund, which was announced

in the 2016-17 budget.

37

The Baseline Valuation Report, 2016

• https://www.dss.gov.au/sites/default/files/d

ocuments/09_2016/baseline_valuation_re

sults_report_accessible_version_12_july_

2016_2pwc._2.pdf

• The report estimates the “lifetime” costs of

the social security system as close to $4.8

trillion.

38

How do we get to $4.8 trillion • The report takes the population of Australia in 2015. Then, on the basis of past

patterns of receipt of payments, it projects the amount of money the population

will be paid over the rest of their lives and converts this into the present value of

this lifetime spending, with a discount rate of 6% – reflecting the fact a dollar is

worth more today than in the future given the capacity to earn interest.

• The population modelled in the report includes:

– around 5.7 million people currently receiving various income support payments (of whom 2.5

million are age pensioners);

– 2.3 million people not receiving income support payments but who receive other payments

(mainly families receiving the Family Tax Benefit);

– around 3.9 million who were previously receiving payments; and

– just under 12 million people who are not receiving any payments currently or have not in the

past.

• The lifetime valuation is about 44 times the total amount of payments in 2014-15

(A$109 billion). But it also includes people’s future age pension entitlements.

Given the average age of the total population is 39 and that on average

Australians can expect to live into their 80s, it is not surprising the estimated

lifetime cost is more than 40 times the current level of spending on cash

benefits.

39

What does $4.8 trillion mean • More than half the total estimated lifetime spending will be on age pensions.

The average lifetime cost per current client is made up of A$150,000 in age

pensions and A$115,000 in all other benefits.

• For previous clients, the corresponding figures are A$114,000 in age

pensions and A$60,000 in other payments. For the balance of the

Australian population it is A$88,000 in age pensions and A$77,000 in all

other benefits.

• For people of working age who are currently receiving benefits it is these

other payments that figure larger than age pensions. This is particularly the

case for people receiving parenting payments, where the age pension is

only around one-quarter of their total lifetime costs.

• New Zealand’s actuarial model does not include family payments. And nor

does it include national superannuation – their equivalent to the age

pension – as it is provided free of any income test to people aged 65 and

over.

• By including both age pensions and family payments, the Australian report

produces significantly higher lifetime costs relative to the size of the

economy.

40

Groups with poor outcomes and

high costs • The report highlights three groups of people who are expected to

have very-high average lifetime costs and poor lifetime outcomes:

– For 11,000 young carers, it is expected, on average, they will access

income support in 43 years over their future lifetime;

– for 4,370 young parents it is expected, on average, they will access

income support in 45 years over their future lifetime; and

– for 6,600 young students it is expected, on average, they will access

income support in 37 years over their future lifetime.

• These projected future histories will involve lifetime costs for these three

groups of between A$2 billion and A$4 billion. In all of these cases,

however, a substantial part of their estimated costs relates to years to be

spent on the age pension.

41

Assessing the investment approach

• Very early days!

• The principle of early intervention is admirable

• Focus should be on sustainable improvements in

outcomes

• Rigorous evaluation is essential and government seems

to have committed to this, but there are complexities …

• Who has responsibility to intervene – possible cost

shifting and blame

42

Future challenges • A significant proportion of the working age population continue to rely mainly on benefits

for their incomes – it is desirable for equity reasons and sustainability to reduce this, but

we should also be concerned that further reforms really do improve equity in outcomes.

• Australia escaped a major economic downturn from the “Great Recession”. This is a

very major advantage in facing future challenges. But real wage growth since 2013 has

been minimal and most employment growth has been part-time,

• Population ageing will soon start to have a much more significant impact on the costs of

the system.

• The Grattan Institute (2013) estimates that on current trends there would be a deficit of

4% of GDP by 2023 (2.5% at the Federal level).

• There are significant needs – with reforms to introduce greater support for disability

services, for aged care and nursing homes, for dental care and to improve equity in the

education system. These reforms need to be properly funded.

• Indexation provisions for unemployment payments are inadequate as are benefit levels.

Similar risks to future family payments. We are residualising the poor – are we

introducing the concept of “deserving” and “undeserving”?

• Because the Australian system is the most targeted to the poor of any rich country,

cutting social security benefits would increase inequality more than any other OECD

country.

• All proposals involve complex trade-offs and genuinely difficult choices, which will

require detailed public discussions and consultation and (hopefully) consensus.

43

Additional material

44

Spending on cash benefits for unemployed,

OECD countries, 2011 % of GDP

Spending on active labour market

programmes, OECD countries, 2011 % of

GDP

46

Participants (% of labour force) in ALMPS and

income support for the unemployed, selected

countries, 2013 Social

insurance

Social

assistance Other ALMPs

Australia - 6.71 1.85

Denmark 1.79 3.41 0.94 6.08

Finland 3.99 4.63 1.13 4.41

France 8 1.58 0.07 5.11

Germany 2.14 4.45 - 3.07

Italy 4.41 - 2.4 4.65

Netherlands 4.91 4.68 - 4.08

New Zealand - 2.18 - 2.33

Sweden 2.51 - 1.93 5.34

United Kingdom

(2009) - 5.04 - 0.23 47

Trends in the number of lone parents and those

incapacitated or without participation requirements on

Newstart/Youth allowance (other), 2007 to 2015

Year Temporary ill

or

incapacitated

No

participation

requirement

or in

Disability

Management

Services

Lone parents Total Number

on Newstart

or Youth

Allowance

(other)

2007 39,008 - 12,559 486,491

2013 71,162 59,787 111,288 800.039

2015 72,362 64,218 119,869 (2014) 849,164