Ideas for Australia: Welfare reform needs to be about improving well-being, not punishing the poor

The Conversation has asked 20 academics to examine the big ideas facing Australia for the 2016 federal election and beyond. The 20-piece series will examine, among others, the state of democracy, health, education, environment, equality, freedom of speech, federation and economic reform.

Over the past two decades, Australia’s social welfare system has been subject to major reforms and many small-scale adjustments. This is sometimes designed to increase payment levels and expand eligibility for assistance. At other times, the aim is to scale back spending and restrict eligibility.

At its peak in 1996, nearly 25% of the working-age population (16 to 64 years) was receiving basic income support benefits. These are payments like Newstart and Youth Allowance for the unemployed, the Disability Support Pension, Parenting Payment Single for lone parents, and the Carers Payment.

By 2014, this figure was 16.8%.

This dramatic drop is the result of a wide range of factors, including:

• population growth and an ageing population – which could be expected to push up numbers on welfare;

• changes in unemployment and the labour market more generally;

• changes in family composition; and

• changes in government policies.

Protecting or penalising?

The main policy agenda in Australia – and many other OECD countries – for working-age people receiving social security payments is usually described as “activation”.

The objective of an effective activation policy is to increase the efforts of the unemployed to find work and bring more people into the labour force by requiring them to actively look for work.

The theory is that the greater a person’s efforts in actually looking for work, the greater their chances of finding it. This is based on the idea that unemployment is primarily an issue of deficient labour supply, rather than insufficient demand.

In Australia, this has involved a number of specific strategies. For people on unemployment payments who have always been required to actively look for work, these include:

Evidence on the effectiveness of these approaches is mixed. A study on work for the dole’s pilot phase found participants in the program were no more likely to move off welfare payments in the 12 months than a comparable group of payment recipients who did not participate. The explanation for this finding includes the observation that for people to move off welfare, new jobs need to be available.

In contrast, the OECD’s 2013 Employment Outlook argued that all countries with well-developed systems of income support for the unemployed also need a strong activation system:

… backed up where necessary, and certainly after six months or a year of unemployment, by mandatory referrals, enforced by benefit sanctions, to employment and training programs.

The OECD report suggests the job-search requirements in Australia are more onerous than those in the other countries studied. In 2007, a jobseeker in Australia could be required to report between eight and 20 job-search activities each month, compared to four to ten each month in Switzerland, ten in the UK and only two in Japan.

The OECD also notes that since 2000 there have been “vast swings” in sanction rates (penalties for non-compliance), with sanctions ranging in this period from 25,000 a year to 300,000. The Australian Council of Social Service has pointed out that despite changes to compliance arrangements and penalties over this period, the proportion of appointments missed at some stage has remained relatively stable at 35% to 45%.

The 2014 federal budget proposed what might be viewed as the strongest form of activation ever envisaged in any rich country – unemployed young people under the age of 30 would have to wait up to six months to receive Newstart payments. While unemployed people under 30 receive less than 1% of total Commonwealth budget spending, they would have contributed close to 10% of total budget savings had these proposals been implemented.

The government’s rationale for this was to stop young people becoming “entrenched on welfare”. But data shows that roughly three in every 1,000 young people who ever received welfare benefits between 2001 and 2011 remained reliant on benefits for the whole period.

Extending activation

Activation has been extended to groups other than the unemployed. This has been achieved mainly by restricting access to non-activity-tested payments and either directly or indirectly transferring them to Newstart.

In 1995, the Wife Pension was closed to new entrants, and the Age Pension age for women started to be raised from 60 to 65. In 2003, Mature Age Allowance and Partner Allowance were closed to new entrants. In 2005, new grants of Widow Allowance were restricted.

Cumulatively, these changes were associated with large reductions in the numbers of recipients of many benefits. There were marked reductions in numbers of women receiving Age Pensions and particularly those receiving “dependency payments” as wives or widows.

The Howard government’s “welfare to work“ reforms of 2006 and 2007 lowered the age of child eligibility of Parenting Payment Single to eight years and Parenting Payment Partnered to six years. New claims for Disability Support Pension were restricted to those having an assessed work capacity of less than 15 hours per week (down from 30 hours).

Parenting Payment Single recipients who had been receiving payments before 2006 were protected from these changes. New claimants were required to move to Newstart rather than the Parenting Payment once their youngest child turned eight.

The Gillard government’s 2010–11 budget included revised access procedures for some Disability Support Pension claimants, starting January 1, 2012, and new participation requirements from July 1, 2012. This affected recipients under the age of 35 assessed as having a work capacity of eight hours or more a week.

And, in January 2013, the Gillard government moved the “protected” Parenting Payment Single recipients onto Newstart.

Has activation worked?

Another 2013 OECD report concludes the reforms reduced the number of new benefit claims for Parenting Payment Single for those with a youngest child over eight years and Parenting Payment Partnered for those with a youngest child over six years by 51% and 55% respectively.

New claims for those affected by the Disability Support Pension changes were reduced by 38%.

Large reductions in the number of new Parenting Payment and Disability Support claimants still on benefits 50 weeks later suggested the measures had also increased exits from benefits.

The reforms, however, had very little impact on those not directly affected – for example, parents with younger children.

Surveys of household income show that between the mid-1990s and 2013-14, the proportion of lone parent households whose principal source of income was government payments fell from around 60% to 40%. By 2011, a higher proportion of lone parents were mainly reliant on employment income than on welfare.

“Deep reliance” (that is, where 90% or more income comes from welfare) fell from 40% to 20%. Since 2000, the average incomes of lone parents have increased by around 49% in real terms compared to around 44% for the population generally.

These trends appear to suggest that welfare-to-work reforms have been successful. But, it is necessary to look in greater detail at the trends and their context to assess the role of policy changes.

Clearly, 120,000 lone parents on Newstart are worse off and further below the relative poverty line than they would be on Parenting Payment Single.

Between 1996 and the onset of the global financial crisis in 2008, Australia’s general unemployment rate fell from more than 8% to close to 4%. Some of this may have been due to the impact of the benefit activation reforms, but it was also due to Australia’s experience of uninterrupted economic growth. And that is a prerequisite for successful activation strategies.

You can read other articles in the series here.