Don Arthur, Social
The 2014 review into welfare reform recommended moving to a simpler system of working age payments. The Government has yet to formally respond to the review’s recommendations.
Welfare reform was high on the agenda at the start
of the 44th Parliament. In December 2013, then Minister for Social Services, Kevin
Andrews, commissioned a review of the welfare system. Reporting in February
2015, the Reference Group on Welfare Reform (McClure Review) called for a major
redesign of the income support system to make it simpler, more coherent and
more sustainable. More than a year after the report’s release, the Government
has not formally responded to the review’s recommendations.
The reform process began with an earlier Reference
Group on Welfare Reform in the late 1990s. This reference group proposed a more
radical simplification of the income support system. The Government did not act
on this proposal.
As well as the McClure Review, two other reviews
included recommendations about the income support system. These were the National Commission of Audit
(NCOA) and the Indigenous
Jobs and Training Review (Forrest Review).
In 1999 the Howard Government commissioned a review of
Australia’s income support system. Chaired by Patrick McClure of Mission
Australia, the Reference Group on Welfare Reform consulted widely before
releasing its final report
in July 2000. The reference group called for a radically simpler income support
system with a single payment for recipients of working age and add-ons to take
account of particular circumstances such as disability or the cost of raising
The reference group acknowledged that moving to a
streamlined system would be costly. There were two reasons for this. Firstly,
pensions such as the Disability Support Pension are paid at a higher rate than
allowances such as Newstart Allowance and have more generous income tests.
Placing both groups on a single base rate of payment without reducing payments
for current pension recipients would mean lifting payments for allowance
Secondly, under a needs-based system with a single
working age payment, a larger proportion of the low-income population would be
eligible for payment. If the new system used the income test applied to
pensions, some full-time employees and self-employed workers would be eligible
While these changes would be costly, the report
argued that removing the pension/allowance divide would remove unintended
incentive and disincentive effects in the current system. The report stressed
that ‘changes to the payment structure should not be undertaken for the purpose
of reducing expenditure on income support (except in so far as the new system
helps people replace income support with employment income).’
The report also argued that a streamlined system
would allow support to be better tailored to recipients’ individual
While the government adopted some of the report’s
recommendations (for example, reviewing the work capacity criterion for people
with a disability and introducing participation requirements for parents with
school-aged children), it decided to pursue reform within the existing payment
structure rather than opting for simplification.
The second McClure review
In 2013 the new Coalition Government commissioned a
further review of the welfare system, focused on working age payments, chaired
again by Patrick McClure.
The reference group again called for
recommended a less radical approach than the earlier report. Rather than
replacing all working age payments with a single base rate of payment with
add-ons, the report recommended a tiered working age payment for people with
some work capacity (now or in the future), and a Supported Living Pension for
people whose capacity to work is permanently and severely limited. There would
also be a separate payment for carers and a simpler structure for family
According to the report, creating this new payment
structure would require a new information technology (IT) system.
In its interim
report, the reference group explained that one reason a single working age
payment was no longer feasible was that the gap between payment rates for
pensions and allowances had grown since the 2000 report. Creating a single base
rate of payment would mean closing the gap by lifting the level of payment for
those on allowances and/or reducing the rate for those on pensions. The size of
the gap was already a problem in the early 2000s with then Minister for
Social Security, Amanda Vanstone, making it clear that the Government could
not afford to lift all payments to the rate of the pension.
The abandonment of the single working age payment
idea may reflect the second review’s greater emphasis on reducing growth in the
cost of the income support system. To address this concern, the report also
recommended an ‘investment
approach’ to welfare reform modelled after an initiative in New Zealand.
The key aspect of this approach is an actuarial valuation that estimates the
lifetime cost of the system and the costs associated with various groups. This helps
identify those groups most likely to spend long periods of time on income
support and can be used to target welfare to work interventions and prevention
programs. Changes in actuarial valuations over time can be used to measure the
success of the interventions and programs.
The National Commission of Audit
In its 2014 report, the NCOA stated
that the IT system that managed income support payments was ageing and should
be replaced. The NCOA suggested that simplifying the income support system
could reduce the cost and complexity of the new IT system. However it also
noted this could make it more difficult to tightly target assistance.
The Forrest review
In October 2013, then Prime Minister, Tony
Abbott, announced a Review of Indigenous Training and Employment headed by Fortescue
Metals Group chairman Andrew Forrest. Forrest’s review went beyond its original
terms of reference, making recommendations about early childhood education, housing,
and income support.
Forrest’s most controversial recommendation was the
Welfare Card’, a cashless debit card for income support recipients designed
to prevent spending on alcohol, drugs, and gambling.
Progress so far
Since the release of the second McClure report, successive
ministers have acknowledged the advantages of the report’s simpler payment
model. However, the Government is yet to announce any plans to implement the
The Government has taken up the McClure Review’s
recommendation on the ‘investment approach’. It has commissioned PricewaterhouseCoopers
to undertake an actuarial analysis and has announced a Try,
Test and Learn Fund to develop innovative policy interventions.
The Government has also acted on the Forrest
Review’s recommendation on a cashless
welfare card. Trials
of the card are currently underway in Ceduna in South Australia and in Kununurra
and Wyndham in the East Kimberley.
Simplifying the structure of the income support
system is a more challenging reform. In late 2014, ahead of the McClure
Review’s final report, then Social Services Minister, Kevin Andrews explained
the department would need to replace its IT system to complete the reforms and as
a result, some changes would
not be possible before 2017 or 2018.
The Department of Human Services is currently
working towards an IT upgrade. The Government announced the first stage of its Welfare
Payment Infrastructure Transformation (WPIT) program in
the 2015–16 Budget.
Where to now?
Radically simplifying the income support system by
introducing a single working age payment with add-ons is probably now off the
agenda. The Government has made it clear it is looking
for savings on income support and a radically simpler system is likely to
cost more rather than less.
One of the principles behind the first McClure
review was that there should be no reduction in pensions or allowances. But if
reforms have to be budget neutral or produce savings, simplification of the
income support system would need to reduce payments to people with disabilities
so that they were closer to those for people on Newstart and Youth Allowance.
The same principles apply to the changes
recommended in the second McClure review. If the changes have to be budget
neutral or produce savings, some groups of recipients will be made worse off.
When explaining the need to make savings on income
support payments, ministers
have pointed to the large increases in projected spending on social
security and welfare. While these increases are largely driven by spending in
areas such as aged care and the National Disability Insurance Scheme, ministers
have suggested that any increased spending needs to be met by savings from
within the social services portfolio (see: ‘Welfare —what does it cost?’).
Reform of the income support system is easier
during periods of strong economic growth when unemployment is low and tax
revenue is high. Strong demand for labour reduces the flow of people into the
income support system and increases the flow into work and out of the payments
system. A strong budget position makes it easier for Government to protect
recipients from being made worse off by changes to the income support system (for
example, by grandfathering payments).
In a more challenging economic environment, the risk is that
future governments will continue to look for savings through incremental
changes to the welfare system. This means many of the problems with work
incentives will continue and the system will become even more complex and
difficult to administer.
D Arthur, ‘Investment approach to welfare’, Budget review 2016–17, Research paper series,Parliamentary Library, Canberra, 2016.
L Buckmaster, ‘What’s happening with the McClure welfare review?’, FlagPost, Parliamentary Library blog, 19 March 2014.
Reference Group on Welfare Reform, A new system for better employment and social outcomes: final report of the Reference Group on Welfare Reform to the Minister for Social Services
, (McClure Report), Commonwealth of Australia, 2015.
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