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Working paper

New Zealand's Social Assistance System: Financial Incentives to Work (WP 03/18)

Issue date: 
Monday, 1 September 2003
Status: 
Current
View point: 
Publication category: 
JEL classification: 
H55 - Social Security and Public Pensions
I38 - Welfare, Well-Being, and Poverty: Government Programs; Provision and Effects of Welfare Programs

Formats and related files

This paper is a stock take of the financial incentives to work present in New Zealand's social assistance system.

Abstract

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.

The current financial incentives to work contained in the social assistance system reflect efforts to tailor different financial incentives to different groups in the population. No single structure of financial incentives is appropriate for all people and at all times. It is therefore necessary from time to time to consider whether existing financial incentives continue to meet government objectives, such as encouraging work among different groups in the population. Improving the structure of financial incentives, however, defies simple solutions and requires trade-offs between competing and conflicting objectives to be made.

In order to set the scene for later discussion, this paper begins with a brief description of the evolution of New Zealand’s social assistance system. This paper then moves on to discuss the financial returns 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, particularly accommodation and childcare costs and the length of time that people tend to spend on social welfare benefits. This paper then considers the need for trade-offs between policy outcomes when developing policy initiatives to improve financial incentives to work before presenting a summary of its main findings. Appendixes to this 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).

Acknowledgements

Valuable input to and advice on this paper were received from Ivan Tuckwell and John Creedy of the Treasury. Valuable input to this paper was also received from Sandra Watson of the Inland Revenue Department, Bob Stephens of Victoria University, and Rienk Asscher, Roger Hurnard, Veronica Jacobsen, Nargis Bharucha, Tim Roper, and other members of the Future Directions team at Treasury. All errors and omissions remain the responsibility of the author.

Disclaimer

The views expressed in this Working Paper are those of the author and do not necessarily reflect the views of the New Zealand Treasury. The paper is presented not as policy, but with a view to inform and stimulate wider debate.

Last updated: 
Wednesday, 24 October 2007