Investing for our Future Welfare

Peter Whiteford, ANU

Investing for our future welfare

Presentation to Jobs Australia National Conference, Canberra, 20

October 2016

Peter Whiteford, Crawford School of Public Policy

https://socialpolicy.crawford.anu.edu.au/

peter.whiteford@anu.edu.au Twitter: @WhitefordPeter

Outline

• Background

– Incomes, inequality and prosperity

– Social security and employment

• The investment approach

• Challenges and prospects

3

Incomes, inequality and prosperity

4

Trends in real mean and median

household incomes in Australia, early

1980s to 2013-14 (1981-82 = 100)

5

Median household disposable income, US$ (PPP

adjusted), 2012 or nearest year Source: Estimated from OECD Income Distribution database, http://stats.oecd.org/index.aspx?queryid=46022

0

5000

10000

15000

20000

25000

30000

35000

40000

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Po

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Gre

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Po

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licC

zech

Re

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Isra

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Spain

Slo

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Ja

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Denm

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Au

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ustr

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Change (%) in real median equivalised household disposable

income, 1995 to 2012 (or nearest year) Source: Estimated from OECD Income Distribution database, http://stats.oecd.org/index.aspx?queryid=46022

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Level of inequality, OECD countries, 2011-12 Gini coefficient

8

Social security

9

Social spending, OECD, 2014 or nearest year (%

of GDP)

Spending on cash benefits Spending on Health and Services

10

8.6

0 5 10 15 20 25

Mexico

Korea

Chile

Iceland

Turkey

Australia

Israel

Canada

United States

New Zealand

Estonia

United Kingdom

Switzerland

Slovak Republic

Norway

Sweden

Czech Republic

Netherlands

OECD

Japan

Ireland

Poland

Germany

Denmark

Luxembourg

Hungary

Slovenia

Greece

Spain

Finland

Portugal

France

Austria

Italy

Belgium

10.4

0 5 10 15 20

TurkeyMexico

ChileEstonia

KoreaIsrael

GreecePoland

PortugalSlovak Republic

SloveniaHungary

IrelandCanada

Czech RepublicSwitzerland

LuxembourgOECDSpain

ItalyAustria

United StatesIceland

AustraliaNorway

JapanNew Zealand

United KingdomBelgium

GermanyNetherlands

FinlandFrance

DenmarkSweden

Public spending on income-tested benefits, % of GDP, OECD

countries 2012

11

Australia’s social security system is more targeted

to the poor than any other OECD country Ratio of transfers received by poorest 20% to those received by richest 20% Source: Calculated from Table s 3 and 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

0

20

40

60

80

0-4

5-9

10

-14

15

-19

20

-24

25

-29

30

-34

35

-39

40

-44

45

-49

50

-54

55

-59

60

-64

65

-69

70

-74

75

-79

80

-84

85

-89

90

-94

95

-99

10

0+

Health

Age Pension

Other

Aged care

Education

Government spending per person 2012, $’000 per year per person

Per cent of working age population receiving

social security benefits, 1976 to 2014

14

Welfare receipt in Australia % of working age households receiving income support payments by period

15

Welfare receipt for those initially aged under 25 years % of individuals receiving income support payments by period, 2001-2011

16

Employment, unemployment and

disadvantage

17

How does Australia’s employment

performance compare? • In 2015 Australian employment rates overall were the 12th highest in the OECD

(72.2%).

• In contrast, employment for youth (15 to 24 years), Australia is ranked 4th

highest among OECD countries.

• The level of part-time employment is the third highest in the OECD after the

Netherlands and Switzerland.

– Around 29 per cent of the workforce are employed part-time. Most part-time

workers are women — around 72 per cent. Around 46 per cent of female

employees and 15 per cent of male employees participate on a part-time

basis.

• Temporary employment – as defined by OECD – is among lowest.

• Involuntary part-time employment – 7.2% of the labour force and 30% of part-

time workers is the highest in the OECD (2.9% is OECD average and 17% of

PT workers).

• Employment rates among lone parents are among the lowest in the OECD.

• Total joblessness among families with children is among the highest in the

OECD – but may have improved in ranking terms.

18

Educational attainment and employment are

strongly related Likelihood (%) of employment compared to person with postgraduate degree, Australia 2003

Educational attainment and mean equivalised

household income, 2005

20

1,181

1,046

853

729

523 482

754 686

562

751

0

200

400

600

800

1,000

1,200

1,400

Grad. Dip./Grad.

Cert. orabove

Bach.Deg.

Adv. Dip./Dip.

Cert. III/IV Cert. I/II Cert. n.f.d. Year 12 Year 11 Year 10 orbelow

Total

Joblessness in Australia is highly concentrated

in households where no one is in paid work

Working age

population non-

employment rate

Share of working

age in jobless

households

Ratio of household

to individual

joblessness

UK 27.4 16.3 0.59

Germany 34.5 19.4 0.56

Norway 24.8 13.1 0.53

Australia 28.4 14.2 0.50

Denmark 24.5 9.2 0.38

Sweden 26.1 6.2 0.24

USA 28.5 6.3 0.22

Japan 30.7 5.1 0.17

Spain 35.7 5.8 0.16

Household joblessness is a major source of

inequality in Australia

• In 1983, a full-time worker at the 90th percentile

earned 2.0 times as much as a worker at the

10th percentile- this disparity increased to 2.3 in

1996, 2.5 in 2004, and 2.8 in 2009-10.

• In 1982 a working-age family at the 90th

percentile earned 112 times as much as a family

at the 10th percentile – this disparity reduced to

56 times as much in 1996 and 49 times as much

in 2009-10.

22

Who are the most disadvantaged? Per cent of group experiencing deep and persistent disadvantage, 2001 to 2010

23

NEET are much more affected than other youth by health

problems Share of individuals with poor health status in % of total population among NEETs and all youth, 2012

24

Spending on cash benefits for unemployed, OECD countries,

2011 % of GDP

Net replacement rates for low paid workers in first six months

of unemployment, OECD countries, 2013

Net replacement rates for low paid workers in sixtieth month of

unemployment, OECD countries, 2013

27

Spending on active labour market

programmes, OECD countries, 2011 % of

GDP

28

Participants (% of labour force) in ALMPS and income support

for the unemployed, selected countries, 2013

Social

insurance

Social

assistance Other ALMPs

Australia - 6.71 1.85

Denmark 1.79 3.41 0.94 6.08

Finland 3.99 4.63 1.13 4.41

France 8 1.58 0.07 5.11

Germany 2.14 4.45 - 3.07

Italy 4.41 - 2.4 4.65

Netherlands 4.91 4.68 - 4.08

New Zealand - 2.18 - 2.33

Sweden 2.51 - 1.93 5.34

United Kingdom

(2009) - 5.04 - 0.23 29

Trends in the number of lone parents and those incapacitated or without

participation requirements on Newstart/Youth allowance (other), 2007 to

2015

Year Temporary ill

or

incapacitated

No

participation

requirement

or in

Disability

Management

Services

Lone parents Total Number

on Newstart

or Youth

Allowance

(other)

2007 39,008 - 12,559 486,491

2013 71,162 59,787 111,288 800.039

2015 72,362 64,218 119,869 (2014) 849,164

The investment approach

31

The investment approach • The development of an investment approach was one of the

recommendations of the McClure review of Australia’s welfare system.

• The New Zealand government originally developed the investment

approach in response to a review on welfare dependency, which was

specifically asked to look at the insurance industry for ideas on reform. The

government has subsequently commissioned four actuarial valuations – in

2011, 2012, 2013 and 2014.

• The Baseline Evaluation report released in September 2016 was an

initiative of the 2015-16 budget, when the government allocated A$33.7

million to establish an Australian Priority Investment Approach to Welfare

based on actuarial analysis of social security data.

• Groups identified by the approach will receive support from current

programs and from new and innovative policy responses to be developed

through the A$96.1 million Try, Test and Learn Fund, which was announced

in the 2016-17 budget.

32

The Baseline Valuation Report, 2016

• https://www.dss.gov.au/sites/default/files/documents/09_2

016/baseline_valuation_results_report_accessible_versio

n_12_july_2016_2pwc._2.pdf

• The report estimates the “lifetime” costs of the social

security system as close to $4.8 trillion.

33

How do we get to $4.8 trillion • The report takes the population of Australia in 2015. Then, on the basis of past

patterns of receipt of payments, it projects the amount of money the population

will be paid over the rest of their lives and converts this into the present value of

this lifetime spending, with a discount rate of 6% – reflecting the fact a dollar is

worth more today than in the future given the capacity to earn interest.

• The population modelled in the report includes:

– around 5.7 million people currently receiving various income support payments (of whom 2.5

million are age pensioners);

– 2.3 million people not receiving income support payments but who receive other payments

(mainly families receiving the Family Tax Benefit);

– around 3.9 million who were previously receiving payments; and

– just under 12 million people who are not receiving any payments currently or have not in the

past.

• The lifetime valuation is about 44 times the total amount of payments in 2014-15

(A$109 billion). But it also includes people’s future age pension entitlements.

Given the average age of the total population is 39 and that on average

Australians can expect to live into their 80s, it is not surprising the estimated

lifetime cost is more than 40 times the current level of spending on cash

benefits.

34

What does $4.8 trillion mean • More than half the total estimated lifetime spending will be on age pensions.

The average lifetime cost per current client is made up of A$150,000 in age

pensions and A$115,000 in all other benefits.

• For previous clients, the corresponding figures are A$114,000 in age

pensions and A$60,000 in other payments. For the balance of the

Australian population it is A$88,000 in age pensions and A$77,000 in all

other benefits.

• For people of working age who are currently receiving benefits it is these

other payments that figure larger than age pensions. This is particularly the

case for people receiving parenting payments, where the age pension is

only around one-quarter of their total lifetime costs.

• New Zealand’s actuarial model does not include family payments. And nor

does it include national superannuation – their equivalent to the age

pension – as it is provided free of any income test to people aged 65 and

over.

• By including both age pensions and family payments, the Australian report

produces significantly higher lifetime costs relative to the size of the

economy.

35

Groups with poor outcomes and high costs

• The report highlights three groups of people who are expected to have very-high average

lifetime costs and poor lifetime outcomes:

– For 11,000 young carers, it is expected, on average, they will access income support in 43 years

over their future lifetime;

– for 4,370 young parents it is expected, on average, they will access income support in 45 years

over their future lifetime; and

– for 6,600 young students it is expected, on average, they will access income support in 37 years

over their future lifetime.

• These projected future histories will involve lifetime costs for these three groups of between A$2 billion

and A$4 billion. In all of these cases, however, a substantial part of their estimated costs relates to

years to be spent on the age pension.

36

Assessing the investment approach

• Very early days!

• The principle of early intervention is admirable

• Focus should be on sustainable improvements in outcomes

• Rigorous evaluation is essential and government seems to have committed

to this, but there are complexities …

• Who has responsibility to intervene – possible cost shifting and blame

37

Future challenges • A significant proportion of the working age population continue to rely mainly on benefits

for their incomes – it is desirable for equity reasons and sustainability to reduce this, but

we should also be concerned that further reforms really do improve equity in outcomes.

• Australia escaped a major economic downturn from the “Great Recession”. This is a

very major advantage in facing future challenges. But real wage growth since 2013 has

been minimal.

• Population ageing will soon start to have a much more significant impact on the costs of

the system.

• The Grattan Institute (2013) estimates that on current trends there would be a deficit of

4% of GDP by 2023 (2.5% at the Federal level).

• There are significant needs – with reforms to introduce greater support for disability

services, for aged care and nursing homes, for dental care and to improve equity in the

education system. These reforms need to be properly funded.

• Indexation provisions for unemployment payments are inadequate as are benefit levels.

Similar risks to future family payments. We are residualising the poor – are we

introducing the concept of “deserving” and “undeserving”?

• Because the Australian system is the most targeted to the poor of any rich country,

cutting social security benefits would increase inequality more than any other OECD

country.

• All proposals involve complex trade-offs and genuinely difficult choices, which will

require detailed public discussions and consultation and (hopefully) consensus.

38