When Fair Enough IsnÕt Good Enough
Reviewed by Lucy Sullivan
Click here for PDF version

Towards Personal Independence and Prosperity:
Income support for persons of working age in New Zealand
by James Cox
New Zealand Business Roundtable,Wellington, New Zealand, 1998, Ê143 pp, NZ$24.95,
ISBN 1 877148 33 4.

Most developed nations are now aware that there is a problem with welfare, both in its fiscal cost and in its effect on character ø the former, in its unacceptable reaches, deriving from the latter. New Zealand was, and remains, one of the most generous of welfare states, but whereas formerly this was a matter of pride it is now one of substantial concern. Attempts to reduce welfare dependency have met with little success and the welfare bureaucracy, once in place, appears to have become self-generative. A reduction of standard benefits in the mid-80s, as an accompaniment to more general economic reform, was quickly defused by the bureaucracyÕs introduction of a range of supplementary assistance, which serves as an effective defensive strategy to disguise the real levels of benefits and the extent to which they are able to outstrip earned income.

Neither new reforms in 1995 nor an improved economy have stemmed the flow to welfare dependency. There has been a rapid growth of income-tested supplements (income support payments) since the mid-90s, despite a rapid growth in employment. The introduction of a rental benefit, to offset a reduction in public housing, brought many who were already renting privately onto the welfare list. The introduction of food banks was not offset by reduced cash benefits. The costs of a huge list of goods and services, ranging from bedding, washing machines and fridges, to car repairs and vasectomies, travel for stranded persons and to obtain an abortion, are redeemable as benefits. Special payments for accident and crime victims, introduced in the Õ90s, became high growth areas. Collateral benefits are also appearing in that New Zealand welfare advances money for trips, moves, and the like, interest free, to be paid back by deduction from future benefit entitlements. These supplementary benefits are bureaucratically ÔdiscretionaryÕ, and are costly both in administration and recipiency.

This information, set out by Cox, sets the scene for his analysis of why New Zealand welfare has grown into a monster, and what measures have some hope of putting it back into the bottle; for Cox, unlike prominent analysts in the US and the UK, does not want to slay the monster, only control it. The body of the book provides the data and argument which support his recommendations for changes to the existing framework rather than fundamental reform or excision. Comparative analysis is a staple of CoxÕs method, particularly of the effects of differing conditions of stringency or generosity across benefits on their levels of uptake. The Australian welfare system, due to both its similarities and its differences, provides a useful cross-reference.

New Zealand suffered a great leap in welfare spending between 1975 and 1980, by a factor of four ø from $NZ112 million to $NZ416 million. The Domestic Purposes Benefit (DPB), the equivalent of AustraliaÕs Sole Parent Pension (SPB) and, like it, an innovation of the Õ70s, had risen to four times the cost of the Unemployment Benefit (UB) by 1980, and has continued to be of particular concern in New Zealand, as in the US. In 1995/6 there were over 300,000 non-aged beneficiaries ø on UB, DPB, sickness benefits (SB), and invalid benefits (IB). Of the New Zealand population of working age, 17.5 per cent were on benefits in 1997, and 30Ê per cent of children (aged under 15) were in families receiving income support or benefits. The DPB was still the highest unit of welfare expenditure (the Old Age Pension excepted), and there were almost as many recipients of DPB as of UB. Nearly 50 per cent of the working-age population had been on benefits at some time in the previous four and a half years; and although 70 per cent left within twelve months, many returned. IB and DPB beneficiaries stayed the longest and returned most.

New ZealandÕs welfare system is more expensive than AustraliaÕs. New Zealand spent 5.7 per cent of GDP on the main benefits in 1995/6, while Australia spent 4.2 per cent. Fifteen percent of Australian adults received benefits, against New ZealandÕs
17 per cent, despite higher unemployment in Australia.

New Zealand has more sole parents in proportion to population than Australia ø in 1991 they were 26 per cent of all families, compared with 19 per cent in Australia. Sole parents in New Zealand are on average younger, and less likely to work, than in Australia. The DPB is much higher in relation to earnings than is AustraliaÕs Sole Parent Pension, while UB rates are lower. Additionally, Australia requires a return to part-time work when the youngest child reaches 14, and the Pension terminates when the youngest is 16. The proportion of sole parents aged under 60 receiving benefits in New Zealand in 1991 was 74 per cent, compared with 58 per cent in Australia.

In Australia, Invalid Pensioners require a medical certificate conforming to definite guidelines; and to draw SB, the beneficiary must have a job to return to and must transfer to UB after one year; and two years residence is required to qualify for benefits. New Zealand imposes no equivalent restrictions.

UB and SB beneficiary rates are higher in Australia, while DPB and IB are higher in New Zealand: thus it appears that both within and between countries, there are higher incidences of beneficiaries where benefits are more generous. (Nevertheless, although the value of benefits fell in real terms by 10-20 per cent between 1981 and 1997, dependency increased.) Using such data, and also evidence from other countries, Cox demonstrates the motivating effects of differing characteristics of welfare provision as seen in the behaviour of beneficiaries, who can be understood to be both responding to disincentives and optimising outcomes.

There is, he says, abundant overseas evidence, as well as local, of work disincentive effects of social welfare programmes. Firstly, there is evidence that non-availability of welfare can result in greater work effort ø that the level of unemployment does not necessarily represent the absolute in availability of work. For example, in New Zealand, when the age of eligibility for the OAP was raised from 60 to 65, the numbers working in the 60-65 age group rose; the number of 16-17 year oldsÊ in education rose when the minimum age for UB was raised to 18; and fewer new DPB beneficiaries were added to the system in the period when it was less generous.

Further, there has been a large growth in income-support payments (welfare which tops up earned incomes, called income-tested payments in New Zealand) since the mid-90s, despite rapid growth in employment, suggesting less work effort when income will remain the same regardless, as has been found in the US (although he admits this could also be an effect of deregulation of wages ø a real fall requiring a top up from welfare). This form of welfare serves to detach low-earning men from their families, which do just as well on DPB or its equivalent, as shown by the work of Kristol in the US and Birrell and Rapson in Australia. The rise of ex-nuptial births in English-speaking countries since the 1960s cannot be dissociated from the introduction of DPB and its various equivalents.

Cox also exposes the strategies adopted by welfare dependants to maximise their benefits. The way in which different patterns of benefit attachment in Australia and New Zealand relate to different degrees of generosity in the benefits concerned has already been described, and the tendency for beneficiaries to ÔmigrateÕ to the most generous benefit available to them was seen in the movement from UB to IB in New Zealand in response to changed conditions. The fewer the obligations attached to a benefit, the more attractive it becomes.

Cox then marshalls his data and observations to test the various overseas theories of reform, and the indigenous opposition to them, in order to decide on strategies which are likely to be both effective and acceptable in New Zealand, to combat the perverse motivational effects of welfare for which he has established evidence.

In Australia and New Zealand the welfare bureaucracy, both public and private, continues to support the view that all dependency is systemic in character and that the victims should be treated with generosity and respect to compensate for their ÔexclusionÕ. The poor condition of many welfare-dependent families is not seriously in doubt. The absence of fathers, the often haphazard relationships of mothers, the modelling of dependency, all spell problems for welfare-dependent children both in the present and the future. But while welfare ideology would have it that this shows the need for more welfare, US analysts in particular reverse the causal situation. Novak, for example, argues that Ôget toughÕ policies are now justified more on the terms that welfare is bad for people ø that a guaranteed income regardless of work and foresight is bad both for morale and morals, than on purely economic grounds.

Mead in the US has stressed the balancing of obligations (primarily, to work) against rights, and Cox makes mention, in addition to ÔworkfareÕ, of obligations to care for children properly, not to waste money on drugs and gambling, and so on, a view also taken by a Maori critic of welfare, Alan Duff. Murray in the US argues that benefits should simply be withdrawn as the only way of deterring people from habits of dependency, and Green in the UK promotes the use of private associations to provide security, in the manner of the Friendly Societies which preceded the welfare state, in place of the governmentÕs responsibility for this role.

Both MurrayÕs and MeadÕs ideas have influenced policy in the US. Clinton introduced a policy that the states must get 50 per cent of recipients into some work, that all must work after two years, and that payments should cease after five years. The greatest obstacle to proceeding according to MurrayÕs programme, or even towards greater stringency, in New Zealand, (and in Australia) is public concern at resulting hardship. Neither Cox not the public are convinced that there is not a sizeable residue of systemic unemployment for which provision must be made, nor that genuine incompetence does not exclude some individuals from available employment. Nevertheless, and despite the bureaucrats, in both countries it is generally accepted by government that there is not unlimited claim to unconditional assistance. In Australia it is to some extent accepted that efforts should be made to prevent abuse of the system.

At a more pragmatic level, Cox examines some of the changes already introduced in anticipation that they would encourage recipients to abandon complete dependency. Prominent among them are higher thresholds for loss of welfare and less stringent abatement rates (tapering). Incentives of this kind have tended to be ineffective in New Zealand, and in the US too. Mead says that this is because welfare recipients are too incompetent to respond to incentives, but Cox points out that this is evidently not so in New Zealand, as shown by their ability to ÔmigrateÕ to maximise benefits.

A higher percentage of welfare recipients in employment is not evidence of success using these measures, because higher thresholds and slower tapering automatically bring higher levels of earnings into the benefit range. Further, a study in the US found that increased income support (there called negative income tax ø NIT) resulted in higher rates of family breakdown due to superfluity of bread-winners, and hence greater dependency. The problem with generous abatement is thus that it makes staying on benefit profitable for a larger percentage of the population. Increased incentive to work will come only from the reverse policy ø low thresholds for loss of benefit and high abatement rates. Income support is bound to reduce work effort, since the same income becomes available for less work.

Equally, the self-interested competence of beneficiaries seems to mean that decreasing eligibility in some areas by introducing stricter definitions merely results in a reshuffling of the categories under which people lodge themselves. The same applies to reducing benefits in only some (apparently less worthy) categories. The imposition of training requirements has also proven ineffectual, and there is even evidence that it attracts people who were not in the labour force onto benefits (job search asistance appears to produce a better return for outlays).

In contrast to these measures, workfare or work for the dole can be expected to result in a lowering of dependency, since some of those involved, faced with this contingency, will prefer real jobs. Less generosity in the level of benefits will also result in a greater preference for jobs. For example, in New Zealand the DPB represents 75 per cent of average female earnings and attracts 74 per cent recipiency among female sole parents; in the US the corresponding figures are 50 per cent and 42 per cent. In Australia, where it is also less generous than in New Zealand, recipiency is 58 per cent.

In summary, Cox notes that these ÔpersuasiveÕ and ÔhelpfulÕ approaches have already been put in place in New Zealand, without notable success, and that talk of obligations remains largely rhetorical.

There are, Cox says, two aspects to welfare provision ø the insurance it provides against random misfortune, which should be resolvable and is therefore of a short-term nature (unemployment, sickness); and Ôlast resortÕ provision, where independence is not regainable (permanent invalidity, old age). As Green has shown, neither type is necessarily provided by the state. But the presence of Ôlast resortÕ need makes MurrayÕs programme dangerous, and it is not likely to be acceptable to the electorate. Reform should occur within the context of the present system, but to be successful it must focus on sticks rather than carrots.

Apart from the need for a change in community values which would make reliance on welfare less acceptable, what is needed is a change in the part of the benefit system aimed at random misfortune, which would make episodic reliance on benefits less easy and attractive than at present, and this should be achievable via a more stringent benefits system and a movement towards other resources of support for such episodes.

Based on the arguments of the body of the book, Cox recommends the following (with consideration of the details of application to the various benefits and their current workings, which is not reported here):

*Ê lower the higher rates of benefits and reduce supplementary assistance (as in Australia)

*Ê regulate eligibility conditions so that they are less open to bureaucratic interpretation (as in Australia)

*Ê tighten income tests and assets tests (as in Australia)

*Ê apply time limits, in a manner which prevents their circumvention by moving between benefits

*Ê maintain the obligations of job search and work, but not education and training

*Ê move away from income support schemes

*Ê as a first move away from government monopoly, encourage voluntary organisations to manage emergency assistance (as in Australia).

CoxÕs arguments and reasoning appear sound, and given that many of his recommendations already apply in Australia, which shows a lower rate of welfare dependency than New Zealand, there is good reason to expect them to be effective, so far as they go. But for this same reason, the book offers little to Australia as to the way forward, for those not altogether happy with our high levels of welfare and dependency by the standards of a few decades ago. It provides evidence that we are on the right track, so far as halting the galloping welfare consumption of the latter half of this century goes, but offers no real glimmer of the parameters of cure if, in Australia as in New Zealand (both nations which have traditionally looked to government as the regulator of community aid), MurrayÕs prescription of treatment by cauterisation is provisionally unacceptable.

Nevertheless, for its documentation and construal of the practical logic that has stymied most attempts to reform welfare while maintaining its founding structure and philosophy, it is an important book. CoxÕs findings and his methods will give good service in assessing the likelihood of success of future programmes of reform.

About the Author
Lucy Sullivan is a Research Fellow at the Centre for Independent Studies.

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