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.
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).
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.
What is an investment approach to
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.
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.
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.
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.
Concerns about the investment
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.’ For example, if people
who are obese die earlier, increased rates of obesity could reduce future
health costs. 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.
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. 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). 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.
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.
There are also concerns that an investment approach could
exacerbate the problem of ‘parking’ in the employment services system.
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.
New Zealand researcher Simon Chapple argues that the welfare
system has multiple goals that include equity objectives as well as cost savings.
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
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.
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.
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.
Institute for Governance and Policy Studies, Victoria University of
Wellington (IGPS), ‘Welfare
Working Group (New Zealand)’, IGPS website.
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;
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.
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.
Ibid., p. 6.
New Zealand Productivity Commission, op. cit., p. 190.
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.
New Zealand Productivity Commission, op. cit., pp. 190–1.
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,
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.
D Greenberg, V Deitch and G Hamilton, Welfare-to-work
program benefits and costs: a synthesis of research, MDRC, February
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.
‘Parking’ occurs when a person is referred to an employment services
provider but receives little or no assistance.
Australian Council of Social Service, Submission
to Review of Australia’s Welfare System, August 2014, p. 74.
S Chapple, ‘Forward liability
and welfare reform in New Zealand’, Policy Quarterly, 9(2), May
S Chapple, Ibid., p. 61.
New Zealand Productivity Commission, op. cit., pp. 288–190.
All online articles accessed May 2015.
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