Investment approach to welfare

Budget Review 2015–16 Index

Don Arthur

The Budget provides $33.7 million over four years to develop a new ‘investment approach’ to welfare reform and to fund longitudinal surveys to provide data to support the approach.[1]

The measure has two components. The Government will provide $20.7 million over four years to develop an annual actuarial valuation of the lifetime liability of Australia's welfare system from 2015. This valuation will identify groups of people most at risk of long-term reliance on income support.

The Government will also provide $13.0 million over two years to support data collection needed for actuarial assessments. This funding will be used to maintain four longitudinal surveys (the Household, Income and Labour Dynamics in Australia data collection, the Longitudinal Study of Australian Children, the Longitudinal Study of Indigenous Children and the Longitudinal Study of Humanitarian Migrants) and to undertake a review of future longitudinal data needs.

The development of an investment approach was one of the recommendations of the review of Australia’s welfare system, A New System for Better Employment and Social Outcomes (the McClure Review).[2]

The investment approach to reform was originally developed by the New Zealand Government in response to a review on welfare dependency conducted by the Welfare Working Group, an independent group appointed by the New Zealand Government. The Government specifically asked the Working Group to look at the insurance industry for ideas on reform.[3]

What is an investment approach to welfare reform?

The investment approach is designed to rein in future spending on working age income support payments by:

  • identifying recipients most likely to remain on income support for long periods of time and
  • intervening early with these recipients to prevent long-term dependence on income support.[4]

The first step in the approach is an actuarial valuation that estimates the ‘future liability’ associated with current income support claims. Policymakers then identify interventions to reduce the future liability and prioritise these interventions by their expected return on investment (the amount they save relative to their cost). Policymakers can use periodic valuations of the future liability to measure progress.

The idea of using actuarial assessment to estimate a government’s future liability (or ‘forward liability’) comes from the insurance industry.[5]

The New Zealand experience

The New Zealand Government has commissioned four actuarial valuations (in 2011, 2012, 2013 and 2014) from Australian actuarial consultants Taylor Fry. The valuations attempt to isolate the changes in liability that result from factors that are under the program managers’ control and report significant progress as a result of the Government’s recent welfare reforms.[6]

Taylor Fry’s most recent valuation reports particularly strong results for two groups targeted by government—single parents and youth. The greatest impact on the future liability has come from single parents. The valuation report suggests that active case management enhanced the impact of new part-time work obligations for single parents with school-aged children.[7]

Concerns about the investment approach

In a recent report on social services, the New Zealand Productivity Commission notes that ‘Slavish application of an investment approach might lead to perverse outcomes.’[8] For example, if people who are obese die earlier, increased rates of obesity could reduce future health costs.[9] If health policymakers relied on an investment approach designed around reducing future health costs they might decide to do little or nothing to discourage obesity.[10]

There is some risk that an investment model could have perverse effects if implemented in Australia. For example, some highly successful interventions could be ruled out by the investment approach because the benefits they provide flow to program participants and the broader community rather than to the Treasury.[11] Others could be ruled out because cost savings accrue to other Australian Government portfolios or to state or territory governments (for example, savings due to reductions in homelessness or crime).[12] Based on the New Zealand experience, the largest returns on investment are likely to come from applying work requirements to groups who have not been subject to activity tests in the past. International evaluations suggest that the interventions most likely to produce a positive return on investment are ‘work first’ interventions rather than those that attempt to invest in recipients’ human capital and improve their earning ability.[13]

In New Zealand, the feasibility study by Taylor Fry warned that the investment approach would only deliver the economic and social benefits that policymakers intended if savings were achieved by moving people into work. Simply reducing eligibility for benefits could result in higher levels of homelessness and other socially costly problems.[14]

There are also concerns that an investment approach could exacerbate the problem of ‘parking’ in the employment services system.[15] The Australian Council of Social Service (ACOSS) argues that the approach is biased towards investments in young people and could lead to less assistance being provided to older jobseekers.[16]

New Zealand researcher Simon Chapple argues that the welfare system has multiple goals that include equity objectives as well as cost savings.[17] Chapple argues that while a more conventional approach to evaluation, such as cost-benefit analysis, would capture a broad range of benefits, the investment approach ‘fails to value employment and social impacts of interventions in a rational fashion.’[18]

The New Zealand Productivity Commission argues that while future welfare liability could lead to perverse effects in some cases, it is a reasonable proxy for the broader set of goals the community cares about.[19]

[1]. The information in this article has been taken from the following document unless otherwise sourced: Australian Government, Budget paper no. 2: budget measures 2015–16.

[2]. Reference Group on Welfare Reform, A new system for better employment and social outcomes: report of the Reference Group on Welfare Reform to the Minister for Social Services, Commonwealth of Australia, February 2015, p. 27.

[3]. Institute for Governance and Policy Studies, Victoria University of Wellington (IGPS), ‘Welfare Working Group (New Zealand)’, IGPS website.

[4]. This description of the investment approach draws on: Ministry of Social Development, ‘Investment approach refocuses entire welfare system’, MSD website; Taylor Fry, Actuarial advice of feasibility: a long-term investment approach to improving employment, social and financial outcomes from welfare benefits and services, advice to the Ministry of Social Development and The Treasury, 27 October 2011; New Zealand Productivity Commission, More effective social services: draft report, April 2015, pp. 186–94;

[5]. B English and P Bennett, Paper 1: Reforming the benefit system — an investment approach, cabinet paper (New Zealand), Office of the Minister of Finance and Office of the Minister for Social Development and Employment, 27 July 2011, p. 5.

[6]. Taylor Fry, Valuation of the benefit system for working-age adults as at 30 June 2014, report for the Ministry of Social Development (new Zealand), Taylor Fry, Sydney, 2014.

[7]. Ibid., p. 6.

[8]. New Zealand Productivity Commission, op. cit., p. 190.

[9]. P van Baal, J Polder, G de Wit, R Hoogenveen, T Feenstra, H Boshuizen, P Engelfriet and W Brouwer, ‘Lifetime medical costs of obesity: Prevention no cure for increasing health expenditure’, PLoS Medicine, 5(2), 2008.

[10]. New Zealand Productivity Commission, op. cit., pp. 190–1.

[11]. For example, It is often argued that intervening in early childhood is a most cost-effective way to prevent adult disadvantage. The US High/Scope Perry Preschool Program is widely regarded as one of the most effective early childhood interventions ever evaluated. However, only a fraction of the program’s benefits came in the form of income support savings—not enough to offset the substantial cost of the program. L Schweinhart, J Montie, Z Xiang, W Barnett, C Belfield and M Nores, The High/Scope Perry Preschool study through age 40: summary, conclusions, and frequently asked questions, High/Scope Educational Research Foundation, 2005.

[12]. For example, the largest savings and benefits to government from the US High/Scope Perry Preschool were associated with the justice system and increased taxes on earnings. G Parks, The High/Scope Perry Preschool Project, Juvenile Justice Bulletin, US Department of Justice, October 2000.

[13]. D Greenberg, V Deitch and G Hamilton, Welfare-to-work program benefits and costs: a synthesis of research, MDRC, February 2009.

[14]. Taylor Fry, Actuarial advice of feasibility: a long-term investment approach to improving employment, social and financial outcomes from welfare benefits and services, report for the Ministry of Social Development and The Treasury (New Zealand), 27 October 2011, p. 12.

[15]. ‘Parking’ occurs when a person is referred to an employment services provider but receives little or no assistance.

[16]. Australian Council of Social Service, Submission to Review of Australia’s Welfare System, August 2014, p. 74.

[17]. S Chapple, ‘Forward liability and welfare reform in New Zealand’, Policy Quarterly, 9(2), May 2013.

[18]. S Chapple, Ibid., p. 61.

[19]. New Zealand Productivity Commission, op. cit., pp. 288–190.


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