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1 Introduction

The aim of this paper is to present and explore the use of a model designed to examine the entrants, exits and transitions of individuals among a wide range of benefit categories in New Zealand. It is suggested that an understanding of the factors affecting the number of individuals in receipt of various benefits requires information about movement from one benefit category to another, in addition to flows on and off the benefit system as a whole. The demographic accounting approach seems to be particularly well suited for modelling benefit flows.[1] The transition rates and flows, measured over discrete periods of three months, are estimated separately for a number of periods before the global financial crisis (GFC), which reflect relatively stable patterns of entry and movement, and periods following the crisis, which saw substantial changes, particularly in a number of inflow rates. The data were obtained from the Benefit Dynamics Dataset (BDD) maintained by the Ministry of Social Development (MSD).

The model can be used to make simulations of the number of individuals in the various benefit categories, using assumptions about the variation over time in the inflows to the benefit system and transition rates between benefits. Simulations are reported for several assumptions about economic conditions over the period February 2011 to November 2016.[2] The model is used to examine the implications for the stock of benefit recipients of several counterfactual scenarios which change the inflows and outflows from benefits.

The approach can thus be used to examine the following types of question. How important are the changes in stocks which result from an underlying set of inflow, transition and exit rates, in comparison with those affecting a particular benefit type and resulting from a policy change? How important are flows among benefit categories in understanding the potential effects of a policy reform that concentrates on a single category? How quickly might a change in the inflows to, or exit rates from, a particular benefit category or categories, arising from a policy change, affect the stocks of benefit recipients?[3] The inflows are taken as 'given' here, but of course in using the approach for practical analyses they could be modelled using other methods, including demographic projections.

Section 2 presents the basic framework used. It outlines the relationships between stocks and flows, the calculation of costs and the approach used to consider policy changes. The New Zealand flows data are described in Section 3. This section also defines the benefit categories and the construction of the transition matrices. Summary information regarding inflows and average durations, before and after the global financial crisis, are also briefly discussed. Section 4 reports simulations of benefit numbers up to November 2016 under several assumptions about the economic conditions over the period. Section 5 explores the potential implications of a reduction in inflows to Unemployment Benefits. Conclusions are in Section 6.

Notes

  • [1]For an extensive discussion of social accounting models, see Stone, J.R.N. (1973) Transition and admission models in social demography. Social Science Research, 2, pp. 185-230.
  • [2]Official Treasury and MSD forecasts of the number of benefit recipients are provided in the Budget Economic and Fiscal Update, and are based on estimated relationships between GDP and the number of benefit recipients. The purpose of the simulations presented here is to illustrate the impact of different counter-factual scenarios and illustrate the sensitivity of numbers to the underlying flows.
  • [3]One component of welfare reform has been to develop an investment approach, based on an actuarial valuation of the benefit system (http://www.msd.govt.nz/about-msd-and-our-work/newsroom/media-releases/2012/valuation-report.html). While the approach outlined in this paper uses a flows approach, rather than an actuarial approach, it can be used to inform actuarial assessments of the impact of welfare reform.
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