1  Introduction

1.1  Purpose and Structure of the Paper

This paper is a stock take of the financial incentives to work present in New Zealand’s social assistance system. The purpose of this paper is to provide a basis for research on problems facing the social assistance system and dilemmas that would be likely to arise when considering potential initiatives to address such problems.

Income support provided through the social assistance system can be categorised as first-tier, second-tier, and third-tier assistance. First tier assistance (main benefits) is intended to provide basic income support. Second-tier assistance (supplementary assistance) is intended to provide additional assistance to cover circumstances in which needs are considered to be higher than those covered by main benefits alone. Third-tier assistance (discretionary assistance) is intended to provide further and discretionary assistance for a limited set of circumstances.

Social assistance programmes are often designed to pursue a broad range of outcomes. Publicly funded income support may, for example, seek to achieve outcomes as diverse as increasing the reward from working for low-income people, controlling the fiscal burden of programmes on taxpayers, ensuring that families have adequate incomes, controlling the costs facing recipients and their employers of complying with programmes, reducing the costs to the government of administering programmes, redistributing income throughout recipients’ lifecycles, supporting parenting and strengthening families, and supporting the operation of private charitable organisations. It is seldom possible to develop initiatives that simultaneously improve all desired outcomes, however. Reform to the social assistance system requires trade-offs to be made, trade-offs which should be considered in the light of a broad social and economic agenda, such as developing a more inclusive and growing economy [Treasury, 2001].

One outcome of social assistance programmes – the reward from working for low-income people – is the focus of this paper. This should not be seen as reducing the importance of other desired outcomes, particularly as outcomes are not independent of each other. When people are, for instance, discouraged from participating in and advancing within the labour market their opportunities to participate and belong in society are reduced. Improving the financial reward from working for low-income people is thus one strategy for reducing social exclusion.[1]

The structure of this paper is as follows. In order to set the scene for later discussion, the remainder of section 1 briefly describes the evolution of New Zealand‘s social assistance system. Section 2 then moves on to discuss the financial return from social assistance programmes and the distribution of the financial disincentives to work present in the current social assistance system. A number of further considerations are then discussed in section 3, particularly accommodation and childcare costs and the length of time that people tend to spend on social welfare benefits. Section 4 considers the need for trade-offs between policy outcomes when developing policy initiatives to improve financial incentives to work. Section 5 summarises the main findings of the paper. Appendixes to the paper describe the programmes that make up New Zealand’s three-tier social assistance system, key features of the personal income tax scale, a method for calculating Effective Marginal Tax Rates (EMTRs), and TaxMod and the Household Economic Survey (HES).

1.2  Setting the Scene

Before discussing the current performance of New Zealand’s social assistance system this paper first briefly discusses how the social assistance system has evolved over time.

The origins of New Zealand’s system of income support were in an economic and social environment of low and generally short-term unemployment and where couples with children and principal male breadwinners were the most common family type. Early income support programmes were developed alongside policies that aimed to attain full-employment and to ensure adequate market incomes for breadwinners in families. In efforts to achieve full-employment governments engaged in public work schemes and policies that aimed to protect and develop manufacturing. In efforts to ensure adequate market wages for breadwinners minimum wages were set at a level deemed adequate for a breadwinner with two children through the industrial conciliation and arbitration system [Castles, 1985, p. 15; Condliffe, 1959, pp. 118-119; Reeves, 1923, pp. 85, 216-242].

The presence of these other policies meant that the role of income support was generally restricted to dealing with residual pockets of hardship due to temporary spells of unemployment or incapacity [Stephens et al, 2001, pp. 77-78]. Because of this largely residual role there was an extensive use of means testing for the main forms of income support (excluding pensions) [Boston et al (eds.), 1999, p. 8]. Further, supplementary assistance was provided in order to address the variations in needs that were unable to be addressed by the main forms of income support (or that could only be addressed by main forms assistance at high fiscal costs to the government). Payments of this supplementary assistance were means-tested and, at times, subject to administrative discretion [McClure, 1998, p. 134, 140].

Exceptions to this residual role of income support occurred where governments aimed to achieve objectives other than solely reducing hardship. For example, the provision of the universal Family Benefit from 1945 to 1991 was not only influenced by concerns regarding families’ financial needs but was also influenced by concerns regarding birth rates and desires to reinforce women’s maternal roles in society [Beaglehole, 1993, p. ix].

Overall the origins of New Zealand’s system of income support therefore reflected an emphasis upon residual and right-based principles (as opposed to insurance-based and contributory principles) [Boston et al (eds.), 1999, p. 8].[2] Residual principles emphasise self-reliance and individual responsibility. Right-based principles base entitlement on people’s status as citizens. Insurance or contributory principles base entitlement on previous financial contributions. New Zealand’s system of income support could thus be classified as a social assistance, as opposed to a social insurance, regime [Atkinson et al, 1991, pp. 1692-1693].

By the early 1980s New Zealand, which had experience a period of relative economic decline since the 1950s, faced a combination of declining economic growth, high inflation and interest rates, increasing costs of state intervention, increasing costs of financing large fiscal deficits, and high unemployment [Mascarenhas, 1996, p. 104; Silverstone et al, 1996]. Significant changes in society had also become increasingly apparent. The increasing take-up of Domestic Purposes Benefits and Unemployment Benefits led to anxiety that these benefits were encouraging what were seen as negative social changes, particularly a decline in the traditional two-parent basic family unit [McClure, 1988, pp. 179, 185]. Increasing numbers of sole parent households, along with increasing numbers of dual income households, indicated that the traditional ‘breadwinner model’ of the family unit was becoming less relevant. Changes in New Zealand society also began to reflect the growing awareness of the relative disadvantage facing Maori and other ethnic groups and of the constitutional role of the Treaty of Waitangi [Palmer et al, 1997, pp. 278, 287-289].

After 1984 in New Zealand there was a shift towards a more residual and targeted social assistance system, with an increased emphasis on redesigning the system to constrain fiscal costs, reduce scope for moral hazard, and encourage labour supply and human capital acquisition. The nature of employment in New Zealand also underwent dramatic change, with the corporatisation and privatisation of a number of state trading enterprises and a shift towards an industrial relations framework that emphasised increasing wage flexibility [Brosnan et al, 1995, p. 17]. Alongside these policy changes were trends in the labour market such as increasing part-time and casual work, variations in weekly hours of work, variations in wage rates, and participation rates of women [Callister, 2000, pp. 6 –16].

Increases in income inequality during the 1980s and 1990s were particularly dramatic in New Zealand [Hyslop et al, 2001, p. 1], where the rate of increasing inequality was among the highest in the world (albeit from a base of a relatively equal income distribution). After the early 1980s there was also an increase in the measured incidence of poverty in New Zealand, particularly among households with children, various ethnic groups, and low-income workers [Stephens et al, 2001, pp. 90-99].[3] This increasing measured incidence of poverty was, in turn, reflected in increased demand for supplementary and discretionary assistance and the services of private charitable organisations.

Total expenditure on the social assistance system as a proportion of GDP increased from the early 1980s until the early 1990s but then fell due to reductions in the costs of pensions.[4] After the early 1980s there were notable increases in expenditure on income-tested assistance for the working aged (particularly Unemployment Benefits, Domestic Purposes Benefits, and Sickness and Invalids’ Benefits) both as a proportion of GDP and as a proportion of social assistance expenditure.

These changes occurred in a context of an improved economic performance in New Zealand, particularly improved rates of economic growth and rates of employment. Yet some difficulties remained in placing young people and the long-term unemployed in employment. Concern had also been expressed regarding the rates of employment of sole parents in New Zealand, which had been estimated as being one of the lowest in the OECD [Green, 2001, pp. 48, 60], although in recent years sole parents’ rates of employment had started to increase.