Welfare
New Zealand's working-age welfare system provides support to those whose incomes are not sufficient to satisfy their basic needs. Usually, recipients are unable to work, or they are working but their incomes are relatively low. Most welfare is delivered via direct payments, although some significant benefits are delivered via tax credits (eg, Working for Families) or reduced rates for certain services (eg, state housing).
The discussion in this section draws on the Treasury (2013). The Future Costs of Working-Age Welfare. Background paper for the 2013 Statement on the Long-Term Fiscal Position. Available at www.treasury.govt.nz/government/longterm/fiscalposition/2013. Note that in this section we use the word "welfare" to exclude NZ Super.
New Zealand's welfare system has changed considerably over time. The period from the 1950s to the early 1970s is often referred to as the "golden age of welfare". There was a relatively generous Unemployment Benefit, but few took it up as unemployment was low. While not typically thought of as part of the formal "welfare" system, full employment was an implicit or explicit goal of almost every government. The family was the basic unit the welfare system recognised, via the Family Benefit. Family-friendly welfare policies coincided with the baby boom, a two-decade lift in the birth rate following World War II.
The late 1980s and early 1990s was a period of considerable reform across most areas of government services, welfare included. In 1991, many working-age benefits were reduced and the universal Family Benefit was abolished.
From the point of view of the Government's finances, the major change to the welfare system from the mid-1990s to the present was the introduction of Working for Families benefits in 2005.
When talking about New Zealand's current welfare system, we tend to divide benefits into three categories:
- Main benefits: eg, the Unemployment Benefit, Domestic Purposes Benefit, Sickness Benefit, Invalid's Benefit.
- Supplementary benefits: eg, Accommodation Supplement, Disability Allowance, Childcare Assistance, Working for Families tax credits (despite the "supplementary" name, this category is sizeable).
- Other benefits: a small category encompassing a range of benefits, eg, hardship assistance such as the Special Needs Grant and Temporary Additional Support, and other benefits received by relatively few people.
In 2010, welfare payments amounted to around 6.7% of GDP. Spending on the "main benefits" - the Unemployment Benefit, Domestic Purposes Benefit, Sickness Benefit, and Invalid's Benefit - accounts for less than half of total welfare expenditure. Working for Families, a "supplementary" benefit, is the biggest single benefit class.
Projections of how welfare costs will change over the next 40 years depend on what we think will happen to the value of each welfare payment and how many people will receive them.
New benefit categories
The Social Security (Benefit Categories and Work Focus) Amendment Bill was enacted on 16 April 2013. On 15 July 2013, certain benefit categories will be renamed and in some cases consolidated. At a high level:
- Unemployment Benefit becomes Jobseeker Support
- Sickness Benefit becomes Jobseeker Support
- Domestic Purposes Benefit becomes Sole Parent Support
- Invalid's Benefit becomes Supported Living Payment.[102]
We think the dollar amounts of the main benefits are likely to increase with price inflation. This is what has happened over the past 40 years, and inflation indexing is actually required by legislation. This will mean that their value relative to the average wage declines, as wages tend to grow faster than prices. One implication of this is that people who receive only one of the main benefits will see their incomes decline relative to average wages, leading to a likely increase in relative inequality.
The supplementary and "other" benefits, on the other hand, have tended to grow faster than the main benefits over recent years. Our projections in the "Resume Historic Cost Growth" scenario therefore assume that some of these benefits will grow in line with average wage growth - faster than inflation. Overall, we think benefit rates will grow at a rate that is somewhere between price inflation and wage growth. This means benefit rates would decline relative to average wages.
Future recipient numbers also affect projections. In general, we think the proportion of people claiming benefits will decrease slightly relative to the population as a whole. That is because the working-age population itself will be proportionally smaller. However, some individual benefits might show increased growth - for example the Invalid's Benefit - as the population ages.
Will we want to spend more on welfare in the future?
The shrinking of total welfare expenditure, as a percentage of GDP, is striking. It shrinks almost as much as spending on each of healthcare and NZ Super is projected to grow. This stark decline should prompt us to consider whether these projected numbers are realistic, or whether future governments will want to spend more on welfare. Here are some examples of areas where we could imagine governments wanting to spend more:
Spending directed at reducing child poverty
The 2012 Children's Commissioner's report Solutions to Child Poverty in New Zealand: Evidence for Action highlighted concerns about the living standards of some New Zealand children. It is possible that, in the future, governments will use the welfare system to address some of these concerns.
Spending related to elderly renters
Home ownership rates have been declining in New Zealand since the 1990s.[103] In the past, most people entering retirement owned their own mortgage-free home, so they had limited accommodation costs. But this is starting to change. It may be that elderly people will need more help with accommodation costs in the future if they are still renting or paying off mortgages.
The combination of a decline in recipient numbers as a proportion of the population and benefit rates that grow more slowly than the economy means that we project welfare spending to decline as a proportion of GDP. The projections in our "Resume Historic Cost Growth" scenario show welfare spending declining from around 6.7% of GDP in 2010 to only around 3.8% of GDP in 2060.[104] There is of course considerable uncertainty around these numbers: a future government could increase the rates of the main benefits, or add a new benefit category. And particularly good or bad economic performance is likely to affect benefit recipient numbers. But there's no way of accurately predicting such events.
Could we be wrong about what will happen to recipient numbers in the future?
Could current welfare reforms reduce welfare recipient numbers in the future?
The working-age welfare system is currently being reformed. The current reforms have two main parts, (1) increased work expectations associated with most benefit classes and (2) an "investment approach" to welfare spending.
The investment approach looks to identify welfare recipients who are most likely to benefit from being helped back into the workforce because they are at higher risk of remaining on a benefit in the long term. Once identified, those recipients receive more support.
These current reforms may mean that the future welfare recipient numbers decline more than we have assumed in our projections. But since these reforms are still new, and we have not really seen their results yet, we have not taken them into account in our projections.
Could welfare recipient numbers actually increase, like they have in the past?
Since the 1980s, the number of people claiming welfare benefits in New Zealand has tended to increase each year. This increase has been largely owing to more people receiving the Sickness and Invalid's Benefits. The proportion of the working-age population receiving these benefits increased from around 1% in 1980 to about 5% in 2009. This trend has tailed off and flattened in recent years. We think this flattening is likely to continue and have built that into our projections, but there is of course no way to be sure.
Notes
- [102]This is a simplification - for example, not every single current recipient of the Invalid's Benefit will go onto the Supported Living Payment. Some categories of recipient might go onto other new benefit categories, such as the Jobseeker Support. Also some minor benefit categories, such as the Widow's Benefit, are not mentioned here but have been consolidated into the new benefit classes.
- [103]Although widespread use of trusts means it is sometimes difficult to know exactly what current or past home ownership rates are.
- [104]These are "gross" numbers, ie, for direct income transfers, they do not take into account how much is paid back in taxes. Note also that the 6.7% of GDP number in 2010 is affected by the economic downturn at the time, meaning that more people than usual were taking the Unemployment Benefit.
