Friday, January 24, 2014

Andrews' Phantom Welfare Spending Crisis

Advance Summary

1. An "unsustainable" level of welfare spending has been asserted by Human Services Minister, Kevin Andrews, in flagging a review of the system.

2. However, the number of people on welfare has not increased over the past decade when it is measured on a per capita basis rather than in raw-number terms.

3. Furthermore, when the age pension is excluded the proportion of people receiving welfare payments was consistently lower under Labor than in most of the second half of the Howard Coalition government.

4. Recent increases in the number of people receiving Newstart are explained largely by classification changes through the forcing of parents off parenting benefits, and increased unemployment.

5. While it would be more productive to investigate other areas of the welfare system, unemployment and disability benefits are a more politically convenient target.

6. Any investigation of whether "perverse incentives" are encouraging potential jobseekers to apply for disability support instead should consider whether the conditions under which Newstart allowance is made available, rather than just the disparity in payment amounts, might contribute to the problem (if it even exists.)



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Firstly, my deepest thanks to those who have responded to my call for financial support for this site.  The money raised so far (several hundred dollars) isn't enough for me to think about cancelling any upcoming remote fieldwork assignments during the state election campaign (shudder) but it is enough that I will be able to put some money into upgrading my remote internet access so that I will be online more or less every night.  More such support is welcome and the more I get the more time I can spend working on my coverage of elections (including my state election guide below and many other pieces to come) rather than pulling 914 Hypogastrura purpurascens out of a pitfall trap.  That said, today's piece isn't about elections at all - at least, not directly ...

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Every now and then this site covers policy matters as opposed to its usual fodder of elections and polling.  A policy issue that I haven't covered in depth before cropped up this week when Human Services minister Kevin Andrews announced a review of welfare spending.  His key claims: the increase in welfare spending is unsustainable, there are possibly too many people on disability support pensions (DSP), and there may be perverse incentives for people to go onto DSP.

I've put together some graphs on this.  The first is based on The Australian's graph for 2002-2012.


Note that "Newstart" here does not include all those "on the dole" as those aged 16-21 and unemployed are on Youth Allowance and fall under "other", together with students, carers and various minor benefits.  Over the period from 2002 to 2012, there is a slight decline in the total number of Centrelink customers, bottoming out in 2007 and rising sharply from 2009. 

There are a number of things we can do to make these figures tell a truer story.  Firstly, Kevin Andrews has explicitly stated that the age pension (which is granted to an increasing number of applicants as post-war baby boomers reach retirement age) is not going to be part of the review.  So let's look at the trend for those aspects of Centrelink support that might be reviewed, and see if there's a crisis in those aspects:


Suddenly the story is very different!  If we look at the number of Centrelink recipients who are not age pensioners, the highest levels in the sample were in the middle of the Howard government's rule.  The highest level under Labor was lower than in any year in the period 2002-5.

And there is another way in which the data should be re-examined: it's completely absurd to look at a raw increase in welfare recipient numbers as if any increase is automatically a problem.  After all, even assuming the proportion of people seeking assistance is static, the total number of people receiving support will grow naturally as a result of Australia's population increase.  So here's the Australian's graph redone to show the proportion of Australia's population on welfare:



In the period 2002-2012 there is a net decrease in the proportion on welfare from over 25% to the low 22s.  A lower proportion of the population was on welfare every year of Labor's rule than in five of these six years under the Coalition.

Now let's combine the two objections and produce a graph that shows the proportion of Australia's population who are on welfare but who are not on the age pension (the steady increase of which can be seen in the chart above):


The proportion of the population receiving Centrelink support, excluding the age pension, fell dramatically through this period.  On average during the Labor years (counting 2007 as a Coalition year) the proportion of people receiving such support shrank by 14%.  Newstart allowance receipt shrank by 3%, parenting payment by 29%, "other" by 22% and only disability support crept up, by a modest 3% (3.47% of population to 3.58% on average, in 2011 reaching 3.65%). 

2013: What About That Soaring Newstart Rate?

2013 wasn't included in the graphs in the Australian, but was covered in the charts in the SMH and deserves to be discussed separately.  A number of the figure categories are not directly comparable. But these are the key figures according to the data published by SMH:

* Age pension increased from 2.28 million to 2.35 million.  Adjusted for population growth it was up by around 1.6%.

* Disability support pension dropped from 827,460 to 821,738.  Adjusted for population growth it was back to the levels of 2004-6.

* Youth Allowance rose from 355,276 to 361,496, an increase that is negligible once adjusted for population growth.

* Carers Allowance rose from 205,565 to 221,954, about a 6.5% increase on a population-adjusted basis.

* And the big two: Newstart Allowance rose from 549,773 to 660,673, about an 18.5% increase on a population basis.  But the gain in Newstart recipients of around 111K was offset by a fall in those on parenting payment of around 75K (433,924 to 358,908, an 18.5% decrease once adjusted for population.)

If we add Parenting and Newstart together and adjust for population, there is an increase in the two combined, but adjusted for population it is very modest (up 2.2% on the previous level, or an extra 0.1% of Australia's population moving onto one of these allowances.)

While it may seem odd to add such different benefits together, there is a reason for it: the Gillard Government tightened eligibility for parenting payments, forcing many non-working parents onto Newstart.  This is the main cause of the 2013 blowout in Newstart allowance - it is a reclassification issue.  The other cause is that unemployment went up. When unemployment goes up, more people seek unemployment benefits.  Funny, that.

If this is a welfare-spending crisis then the Howard government was a welfare-spending catastrophe, and if Labor's recent level of welfare support has been unsustainable then it's a wonder the Howard government's didn't force us back into the stone age. 

Of course, there are other factors at play.  Official unemployment was higher in 2002-3 than during Labor's term, and it looks like the average official unemployment rate under Labor was actually slightly lower in the period covered by the Australian's graph.  (The official rate, is an undermeasure anyway, but that's another story.)  But there is very little in the above to indicate a crisis of unsustainability in levels of welfare receipt.  Furthermore, to use increases in welfare spending that result from temporarily rising unemployment to argue that the system needs tightening is silly.  It should be expected that when unemployment is high welfare spending will increase. Any government that tries to hold it at the same level in such circumstances will inevitably do so by being harsher on those on it, holding them to blame for the failures of government in managing the unemployment rate.

That's not to say the system shouldn't be reviewed.  Welfare is an expensive system and it is well worth reviewing all aspects of it to see if there are people on it who are getting paid money they are not near actually needing.  If the income gap between Newstart and the DSP has blown out because of different indexation rates rather than valid differences then that is something worth fixing.  But when the rate of DSP receipt has actually only barely increased relative to population, the scale of the problem is nothing like what is being implied.

Sceptics of the Andrews push have already pointed to the way in which problems in the treatment of people with genuine disabilities are squeezing them out of the workforce.  It may also be that some conditions not previously considered as disabilities are increasingly being recognised as such, or that the ageing of the potential workforce is contributing to the proportion of people of working age who have disabilities.  But let's suppose, for the sake of argument, that none of that applies and that the modest recent increase in DSP receipt is driven by people who could go on Newstart or perhaps even get jobs managing to have themselves classified as having a disability.

If there is really a perverse incentive of that kind then I suggest that it goes far beyond the disparity of payment levels.  It is not just that the payment level of Newstart is comparatively low, it is that receiving Newstart is conditional upon meeting "activity test" requirements that can be tedious, unpleasant and demeaning.  In particular, recipients can be required to frequently apply for jobs they have no chance whatsoever of getting, simply if they would be capable of doing the work involved if given it.  They can also be required to make employer contacts to seek work irrespective of whether an employer would be remotely likely to employ them.

I agree with the idea (in general) that people on unemployment benefits should be required to accept suitable jobs, but I think that compelling someone to apply for jobs they're not going to get (thus requiring them to make a fool of themselves in the eyes of the company they're applying to) is absurd, demeaning and wrong, and a waste of the time of all concerned. The hoop-jumping involved in qualifying for Newstart is bad enough for someone who is "only" having to deal with the psychological and financial stresses of being unemployed in the first place; if they are additionally dealing with a serious physical or mental condition then it would be very tempting for them to seek classification as permanently disabled just to attempt to get away from this sort of bureaucracy.  They would be thus tempted even if the payment amounts were the same and possibly even if the payment rate for DSP was slightly less. 

A particularly strange problem with the current system is that it tests suitability to perform the "activity test" not by whether a person is medically competent to perform the activity test, but by whether a person is fit to work.  The current Centrelink system does not explicitly recognise the possibility of a person being able to work (given suitable work in an appropriate setting) but being unable to cope psychologically at a given time with the requirements of the Centrelink activity test.  (Indeed, a person might have deep-seated problems with being required to look for work in the way specified by Centrelink even without having any medical or psychological problems affecting their capacity to work.  )

And That's The Way It's Meant To Be?

To broaden into a more general rant on the subject, welfare politics is a persistently ugly area of Australian political debate.  It is dominated by the stereotype of the "dole-bludger"; a person who prefers to be unemployed and working the system, refusing all offers of work, to taking any job available.  There is great fear that no matter what governments do to keep these animals at bay they will always find a way to milk the system. There is great pressure on governments to avoid being seen to pander to such creatures and hence there is a bipartisan consensus on making the system strict and if necessary erring on the side of subtle unpleasantness.  It also helps governments that any money saved by being insidiously nasty to dole recipients becomes available to spend on other priorities or to the government's bottom line.  So long as there is public perception that support is available for those who need it, it doesn't matter to politicians if there are actually a few people falling through the cracks or having an extremely difficult time dealing with the system's requirements.  Indeed, if people find that being on the dole is nastier than it really ought to be, and do everything they can to avoid it (including working in effective sweatshop conditions for well below the minimum wage) then, hey, result.

My impression is that while Labor made virtually no progress in making the Centrelink system more humane, it did wind back the zeal in enforcement of the Howard years and make the system slightly more flexible and bearable.  The system remained unbearable for many of those on it, but it was less a purposefully hostile unbearableness, and more a case of a bureaucracy struggling under its own weight.  The analogy I often use for Centrelink under Labor is that of a drift-net, which continues floating through the ocean with no hostile purpose but now and then catches things anyway.

Experts of various stripes are already lining up to say the Coalition, if it wants to effectively rein in welfare spending, should start by addressing the age pension and middle-class or business welfare.  But the recipients of the age pension and middle-class welfare are powerful political forces and won't put up with it.  Furthermore, there is a general belief that when people reach retirement age they have earned the right to live in a state that's more than bare Newstart-style survivability.  On the other hand, the bipartisan disinterest in making the dole humane and liveable means the Coalition can target those on Newstart and the DSP as much as they like.  To the extent that these people vote at all, they won't vote Coalition anyway, and moreover their problems do not seem to swing the votes of others the way some other "bleeding-heart" issues do.  Many of the affluent lefties and Liberal moderates who continually emote about Australia's treatment of asylum seekers seem to have a blind spot in their conscience on this issue.  Newstart recipients make perfect political scapegoats because no matter how hard you kick them, they don't fight back, and no-one else fights for them.  Even the advocacy of the Greens on welfare issues, while better than that of the majors, has generally struck me as timid and mostly concerned with the rate of Newstart payments and punishments for breaching conditions, rather than the conditions of such payments themselves.

Doubtless, long-term welfare dependency is a terrible thing and we do need to provide those who are without work for a long time with skills to help them to get back into the workforce.  But I am not in favour of the paternalistic/coercive approach to this embodied from the Howard Government's "Mutual Obligation" catchphrase on, that says that even if someone does not want to look for work in a particular way, you force them to do so, even if they know and you know that it won't be successful.  I believe that we should increase the flexibility in how people on allowances go about looking for work, and orient the system more towards providing them with the assistance they want, rather than the assistance that Centrelink thinks they need.  If the cost of this is a few more "dole-bludgers" exploiting the net, then as a (low-level) taxpayer I couldn't care less, and I think anyone wealthy enough to really feel the difference to their own taxes is in a very poor position to harshly judge those who are receiving the allowances in question.

My Draft Proposal: New Right Welfare Socialism!

That may all sound a bit lefty and idealistic by my standards, but I throw the right a bone as well.  That is that I believe the minimum wage in Australia is actually somewhat higher than it needs to be.  There are people who are capable of working for less than the current minimum wage, and would choose to do so, but who are constrained from so doing because employers are not technically allowed to offer jobs at such pay levels.  (I have worked below the minimum wage, by the way; when I edited Togatus for two years I kept a log of hours and on average I earned $9 per hour.)

But if life on the dole was not such a demeaning pittance, and indeed if we allowed employers to offer lower-wage jobs subject to the condition that jobseekers were not forced to accept jobs that paid below a stated level, then we would not have to worry so much about people being forced to work in poverty.  The alternative of accepting dole payments would outcompete any job that was so low-paying it deserved to be illegal.  Nor, if we had a more supportive unemployment system, would we need to worry so much about restrictions on the rights of employers to sack people.  Much of the regulation of the Australian labor market appears to exist to protect people from becoming unemployed because it is so horrible.  But if we made it less horrible and actually more bearable, much of the justification for the level of regulation would disappear, allowing for great cuts in business costs and enabling business to hire more people.  So the increased tax costs for business of paying for a less stingy welfare sector would be offset by cost reductions for business in other areas.

I point out that the minimum-wage system is already to some extent a failure, because Centrelink's activity requirements are already coercing so many jobseekers into doing voluntary work in order to get the dole, allowing government departments, charities and so on to circumvent minimum wage law by getting "volunteers" to work for them.

It is true, of course, that what I propose would weight outcomes at the low-income end of the workforce in favour of those who are thrifty and with few commitments, and harshly against those who financially overcommit or overbreed.  Such changes would have to be managed carefully over a long period for these reasons.  But on the whole, I think such a re-alignment would eventually be a good thing.

Bring on the calls of "stick to psephology!"

Update Jan 28: Welfare Polling

And since this is mainly a psephology site, it would be remiss of me to note that as little as it stands up to scrutiny like the above, the voters have largely given the Andrews push the predictable thumbs up.

ReachTEL, in a poll that has returned the worst yet result for the Abbott government (47-53), find 59.2% supporting a full review of the welfare system to 16.9% against.  Support is across the board by age groups but with young voters less likely to agree and older voters more likely to be neutral as opposed to disagreeing.  The question is somewhat ambiguous because some may support a full review of welfare while having the belief that it should find something very different to what Kevin Andrews wants to.

Essential has found 41% of respondents think welfare payments are too low, 24% think too high, 27% about right.  Limited breakdown information is provided (and largely predictable).  For all the concern about the levels of the DSP getting out of whack with Newstart, only 8% think the DSP is too high (compared with 2% for the aged pension, 27% for unemployment and 31% for parenting payment.) Half the sample was informed of the payment levels, which made those commenting on the aged pension level slightly less likely to think it was too low, but more likely to think that of unemployed and parenting payments.  There is strong support for making unemployment (65%) and parenting support payments (55%) more difficult to get, probably coming almost entirely from voters who have never attempted to receive either.  Older voters supported making parenting support payments hard to get, opposing the same for the aged pension.


14 comments:

  1. Kevin, a very concise rebuttal of K Andrews arguments for examining the "unsustainable" level of welfare spending.

    Regarding the age pension you say there are some LNP supporters who suggest the "Coalition, if it wants to effectively rein in welfare spending, should start by addressing the age pension..."

    Andrews has said this won't happen. However the LNP are cunning on methods available for taking money from overpaid age pensioners.

    The recently suggested increase in the cost of scripts for welfare recipients is one easy way to get money back. A huge majority of age pensioners need regular scripts. Increase the cost to $10 per script and it's not hard to imagine the government pulling $25 per week from the average pensioner.

    There are, of course, many other ways the LNP may use to scrape from the lowest income earners. I have little doubt their "financial advisers" are busily at work!

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    1. According to my mother (a pensioner) the script increase has already occurred. And without a breath of publicity

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  2. Very interesting analysis as always and I for one like it when you do policy. However, I’m wary about your last section re cutting the minimum wage to lift employment. I’m not an economist but as I understand it there is no consensus that modest changes in minimum wages have any significant effects on employment levels. Empirical studies in the US where minimum wages vary (creating natural experiments when one area increases its minimum and a nearby one doesn’t) have often shown either non-existent or very small effects. Where they find small effects, they tend to be among teenagers who in Australia (but not the US) already have lower minimum wages than adults anyway (eg the Oz minimum for a 15 year old is $6.03). I once read that one of the theories for why employment markets don’t seem to behave as intuition would suggest is that workers who are paid more feel better about their work and themselves and consequently lift their productivity.

    So, the outcome of your proposal might be to create a whole new class of working poor, with all the social problems that creates, in return for a non-existent to very small employment increase that may be concentrated largely among teenagers who, if they can’t find work, can usually study or sponge off their parents anyway. Not worth it by a long shot. Also, I don’t think you can compare being happy to work for $9 an hour while you’re young and single and doing something interesting and stimulating like editing a student magazine with the vast majority of minimum wage jobs which are crap.

    But please keep it up. And there are obviously economists in your camp too, just not as many anymore since the new empirical work was done.

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    1. I am surprised that more people have not raised that reservation (there's been a few but not as many as I thought) and interested that the article has had plenty of currency in the social-media left despite that bit of heresy, probably because of the strength of the evidence it provides against the Andrews claim. (I must say I was quite surprised by the outcome of my calculations- which probably says something for the ALP's failure to sell its own message on the issue.)

      There is a difference between my scenario and the US, which is that in the US the welfare safety net is awful. Business can, given the freedom to do so, create appalling McJobs at whatever rates it likes, and people will do them at a level barely above subsistence because they have no choice. In my scenario the dole would be raised slightly and the conditions for accessing it made far less unpleasant, and it would provide a competitive barrier to indefinite lowering. Some people would choose to work for well below the current minimum wage levels, but the jobs most likely to be accepted at those levels would be those that were interesting or that boosted future employment prospects. Work at these levels might also be taken temporarily by people who worked intermittently at a range of different income levels.

      The primary focus there is not whether or not it would increase total employment, but rather how to defuse the argument that if you make the welfare system less nasty, more people will bludge off it and the burden on taxpayers go through the roof. In my view the system as it is is so hideous that making it less demeaning is not negotiable and a way must be found to bear the cost increase, even if it means propping up the odd "bludger". I accept that that in isolation would be seen as unaffordable and would have no chance of adoption outside the idealistic left. That being the case, I propose to offset welfare spending increases necessary to humanise the dole, by cutting business costs. It could be in the areas I've mentioned, or it could be in completely different areas like environmental regulation. But wherever it is, probably someone on the left's not going to like it.

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  3. A great article which deserves a wide audience. You should submit it to "The Drum".

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    1. Does anyone know if they pay for articles? Not clear from their site if they do or not.

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  4. I'm surprised to find you writing such an agreeable article... with one exception: "what I propose would weight outcomes ... harshly against those who ... overbreed"! Sounding a bit fanatical and bigoted there. What about the innocent children who are born to "overbreeders" - tough luck, KB finds your mother irresponsible so you have to suffer? Punative welfare measures are an inhumane way to reduce the cost to taxpayers of "overbreeders".

    Your comments RE the minimum wage are very similar to a comment I had published in The Mercury - http://prelive.themercury.com.au/article/2013/04/07/376294_tasmania-news.html: "I think the best value for money, broadest & fairest job creating strategies would be 1. Tax the rich & use the money to pay for a subsidy for the low paid & a massive reduction in the rate at which Centrelink benefits are taken away when people start earning money, while simultaneously lowering the minimum wage. & 2. More direct employment by government targeting the long-term unemployed & those likely to suffer long-term unemployed without intervention, rather than doing everything by tender."

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    1. The above poster has a grudge against me from student politics days and this is not the first time this evening I've caught him interpreting my comments uncharitably, I suspect on account of that. Comments of the standard of the opening paragraph wouldn't get through moderation here if they targeted anyone other than me.

      To be clear on the "overbreeders" matter I believe that anyone who wants to have children at above population replacement level should pay for it themselves as much as possible. Wage protections based on a one-size-fits-all approach shouldn't block someone from accepting a lower wage they can live on comfortably just because someone with a lot of kids to support could not live on the same amount. I am not promoting any "punitive welfare measures" there and indeed given an adequate welfare net the "so you have to suffer" wouldn't carry as much stick as you might think. The harshness I refer to is simply that under my overall proposal it would become more difficult for a couple with lots of children but no capacity to get an even middling-paying job to support them at an above-welfare level. The reason for this is that they would be outcompeted for the same job by someone with less commitments and willing to do it for a lower total salary but effectively the same or more disposable income. Can't make an omelette (etc). This is a societal change that could not be imposed immediately but would need to be phased in slowly and carefully over decades.

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  5. Grudge! LOL, you'd have to do a lot more than have a different take on politics to me before I'd hold a grudge! For 15 years! Glad you're not advocating "punitive welfare measures" even for "overbreeders", but I'm not sure what you are advocating then - an increase in the rate at which Family Tax Benefit, Large Family Supplement and Child Care Benefit and Rebate are taken away from large families on high incomes perhaps? There may be some room to move, but you could easily destroy incentives for both parents to work full-time, and entry of women into the workforce is probably the single biggest factor restraining birth rates!

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    1. Pretty sure I did do a lot more than have a different take on politics, probably after being asked to buy 946 copies of a certain alleged newspaper too many although I clearly wasn't interested, or something like that. Anyway, my point was simply that those who have large families would find it much harder to compete if there was greater flexibility to offer and accept work at lower wages, which was what I was offering as a trade-off for the increased costs of a less nasty unemployment system. That does however bring up the side-issue of whether taxpayers should be required to fund so-called middle-class welfare for those who decide to have large families; I'd say ideally not but it is of course important to avoid any self-defeating measures. Really my whole aim with the minimum-wage thing is to cut through the objection about the burden on higher-income taxpayers of a better unemployment welfare system being so unbearable, and saying to those making that complaint: well, suppose there are changes made that cancel some of the increased costs out.

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    2. 946 times, more like twice. How ever do you cope walking past the volunteers who try to hand out how to vote brochures on polling day!

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    3. 946 was an exaggeration for effect, but it was a lot more than twice. I also remember that at the time there were a number of GLW paper-sellers who refused to stop trying to sell me the paper even when I specifically asked them that they desist from disturbing me with entreaties to buy it. Some even did it with clear deliberate intent to annoy. Any party volunteer who handed out brochures in such a way as late-90s/early-00s GLW paper-sellers pushed their product would lose votes for their party. I guess that some movements, having virtually no votes to lose, don't have this problem.

      Oh and I do like it that in many Tasmanian elections HTV cards at polling booths are banned, and I will be proposing significant tightening of allowable HTV card content to JSCOM. I don't think they should be banned entirely for federal elections, but I do think it should be mandatory for HTV cards to include a prominent statement that the card is a recommendation only and that a vote will still count as formal if ordered differently. I'm tempted to add that the things should be available only behind counters and in plain packaging. :)

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    4. Well I certainly didn't sick the comrades on you :)

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  6. Your discussion is far too sane and rational to be Right Wing... What a shame you're not an LNP policy maker.

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