Welfare—where to for reform?

Don Arthur, Social Policy

Key Issue
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).

Background

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 children.

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 recipients.

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 for payment.

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 circumstances.

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 simplification, but 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 payments.

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 ‘Healthy 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 review’s recommendation.

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.