The nature of Australia’s social

expenditure

Presentation for Conference on “The Future of Welfare”,

Melbourne, 30 October 2014

Peter Whiteford, Crawford School of Public Policy

peter.whiteford@anu.edu.au

Outline • Background: What do welfare states deal with?

• Levels of spending and the distribution of

spending across time and countries

• Welfare state architecture – targeting,

progressivity and redistribution

• Taking account of non-cash benefits and indirect

taxes

• The welfare myth of them and us

• Australian trends and challenges

2

What do welfare states deal with?

• The life course

• Individual risks and income changes

• Macroeconomic change – recessions and

labour market changes

• Redistribution, inequality and poverty

3

Defining and measuring spending

4

Defining social expenditure

• Social welfare – direct government spending on social

security cash benefits (pensions, benefits, family

payments), health care and community services (child

care, care for frail elderly etc.)

• Fiscal welfare – support through tax system similar to

direct spending.

– Tax expenditures equivalent to increased spending; tax

clawbacks reduce spending.

• Occupational welfare – support provided by employers.

– Mandatory or voluntary.

• Private welfare – charities, NGOs, families and friends.

5

Public social expenditure, OECD

countries 2013 % of GDP

6

0

5

10

15

20

25

30

35

What explains differences in spending

levels in Australia? Difference from OECD mean as % of GDP, 2009

Peter Whiteford, Crawford School of Public Policy, peter.whiteford@anu.edu.au 7

Trends in public social spending Social spending as % of GDP, 1980 to 2013

8

9

Direct taxes on public transfers % of public social benefits paid in direct taxes

10

Indirect taxes on public transfers Implicit average indirect tax rate (%)

In most OECD countries total net social

spending is around 20–25% of GDP From gross public to total net social spending, in % of GDP at market prices, 2009

Peter Whiteford, Crawford School of Public Policy, peter.whiteford@anu.edu.au 11

Welfare state architecture: how is

spending distributed?

12

The Australian system of social protection • The Australian social security system differs from those in most other

countries

• In Europe, the United States and Japan, most government benefits are

financed by contributions from employers and insured employees, and

benefits are often related to past earnings, so that higher income workers

receive higher absolute levels of benefits if they become unemployed or

incapacitated or when they retire.

• In contrast, in Australia (and New Zealand), most government benefits are

flat-rate entitlements financed from general government revenue, and there

are no explicit social security taxes.

• In addition, in both countries – but more so in Australia – most benefits are

income-tested or asset-tested, so that entitlements reduce as resources

increase.

• Because the Australian system is not contributory, eligibility is based on

residence and coverage of the population is broad.

• Duration of payment receipt is not time limited, with income support

payments being paid indefinitely subject to the continued meeting of

eligibility criteria.

13

Types of redistribution in welfare states

• The design features of social protection differ in important respects - two of the most

important features relate to the funding – i.e. the different ways in which programmes

are financed – and structure of benefits – i.e. the relationship between benefits received

and the past or current income of beneficiaries.

• Redistribution can be between rich and poor (Robin Hood) or across the life course (the

piggy bank)

– Insurance (against unemployment, disability, sickness etc.)

– Savings (for retirement)

• All welfare states are a mix of the two, but the mix varies. Australia is closer to the

“Robin Hood” end of the spectrum than any other country.

• Private provision also redistributes across the life course.

• The time horizon over which spending and taxing are analysed is crucially

important.

– Point in time, static analysis treats all measured redistribution as if it were between rich and

poor.

– Taking account of redistribution across the life course, the level of redistribution between rich

and poor is less than it appears, but is still strongly associated with progressivity of benefit

structure.

14

Why cutting social security hurts the poor Social security benefits as % of household disposable income of poorest quintile, 2010 or nearest year Source: Calculated from Table 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

0

10

20

30

40

50

60

70

80

90

100

Socia

l secu

rity

as %

of

dis

posab

le in

com

e o

f p

oore

st

20

%

Why cutting social security in Australia doesn’t

hurt the rich Social security benefits as % of household disposable income of richest quintile, 2010 or nearest year Source: Calculated from Table 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

0

5

10

15

20

25

30

35

Australia’s social security system is more targeted

to the poor than any other OECD country Ratio of transfers received by poorest 20% to those received by richest 20% Source: Calculated from Table s 3 and 5, OECD , 2014, http://www.oecd-ilibrary.org/economics/economic-growth-from-the-household-

perspective_5jz5m89dh0nt-en

0.1 0.2 0.3 0.4 0.6 0.6 0.7 0.7 0.8 0.8 0.9 1.0 1.1 1.1 1.1 1.1 1.2 1.3 1.3 1.5 1.6 2.0 2.1

2.6 2.8 3.2

5.2

7.0

12.6

0

2

4

6

8

10

12

14

Ratio

of tr

ansfe

rs t

o p

oo

rest 20%

over

transfe

rs t

o r

ichest

20%

The progressivity of direct taxes is highest in the English

speaking countries and lowest in the Nordic countries Concentration coefficient for direct taxes around 2005

Australia is the most efficient country in the

OECD in reducing poverty Point change in mean poverty gap per unit of transfer spending

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

19

20

Net redistribution to the poor Net transfers received by poorest quintile as % of household disposable

income, mid-2000s

0

1

2

3

4

5

6

7

Taking account of non-cash benefits

and indirect taxes

21

Who gets what? All benefits ($pw) received by quintiles of equivalised private income, Australia, 2009-10

22

Who gets what? Benefits received ($pw) by age of reference person, Australia, 2009-10

23

Direct and indirect taxes as per cent of income

by quintiles of equivalised disposable income,

Australia, 2009-10

24

Direct and indirect taxes as per cent of income

by age of household reference person,

Australia, 2009-10

25

The welfare myth of them and us

26

Risks and income changes

• Around 3% of the Australian population are fired or made redundant each

year and 10% over four years;

• Around 8-9% of the population experience a serious personal injury or

illness each year and 26% over four years. Between 15 and 17% of the

population experience serious injury or illness to a close relative or family

member each year and nearly 50% over a four year period. Around 10%

experience the same each year for a close friend;

• Around 1% experience the death of a spouse or child each year, and 3%

over four years. Around 11% experience the death of another close relative

or family member per year, and 40% over four years;

• Around 3-4% of the population separate each year and more than 10% of

women and men separated from spouse or long-term partner between 2004

and 2008. Separation or divorce is by far the most important cause of lone

parenthood. Between 1% and 1.5% of the population change each year

from being a couple with children to a lone parent and 4.1% over nine

years.

27

Risks and income changes

• Between 2001 and 2008 between 40 and 50 per cent of Australians

experienced a drop in income and roughly 10 per cent fell more than

20 percentiles in the income distribution.

• Over the whole period, 44 per cent of the population moved (up or

down) more than 20 percentiles.

• Around half of those in the richest income quintile in 2001 were still

in that income group in 2008, but the other half were in lower income

groups.

• Only 30 per cent of those in the middle income group in 2001 were

in the same group in 2008, with 30 per cent being worse off and

around 36 per cent being better off.

28

Welfare dynamics in Australia

• The proportion of working age people receiving income support at some time in the year fell from 37.1% in 2001 to 29.5% in 2008, rising to 32.8% in 2009.

• 65.7% of working age people lived in a household where someone received welfare at some time between 2001 and 2009, with 11.4% receiving welfare payments for all 9 years.

• Those receiving 50% or more of their income from welfare fell from 12.4 to 10.5% between 2001 and 2009. Around 23% received more than half their income from welfare at some stage, but 6.8% for 5 to 8 years and 3% for all 9 years.

• For those receiving more than 90% of their income from welfare, annual receipt fell from 7.2 to 5.2%, with 15% of the population being welfare reliant at some stage in the period and 1.2% reliant for all 9 years.

Most of us are lifters and leaners Welfare receipt over time % of working age households receiving income support payments by period

Australian trends and challenges

31

Trends in social spending, Australia,

1980 to 2009 Spending as % of GDP

32

Recipients (000s) of selected social

security payments, Australia, 2012

33

The Australian welfare system has been

extensively reformed since the 1980s • Liberalisation of unemployment benefit income tests in the 1980s.

• Following the recession of the early 1990s, the benefit system for the

unemployed was partially individualised and “dependency payments” – for

spouses (usually wives) of recipients started to be phased out.

• The pension age for women was gradually increased from 60 to 65 years.

• The Coalition government from 1996 increased family assistance particularly for

single-earner families, and also increased assistance again after 2000 when the

GST was introduced.

• Activation policies for working-age welfare recipients were increased for the

unemployed after 1996 and extended to parents from 2006.

• Since 2007 the Labor government targeted more tightly a number of family

payments.

• Age and disability and carer pensions were significantly increased in 2009 and

the withdrawal rate on payments was increased from 40 to 50%.

• The age pension age will be gradually increased from 65 to 67 years between

2017 and 2023

34

Per cent of working age population receiving

social security benefits, 1976 to 2012

35

Change in working age income support

recipients, 1996-97 to 2011-12 % of households with benefits as main income source by age group

36

Trends in relative and “anchored”

poverty, Australia, 1982 to 2009-10

Peter Whiteford, Crawford School of Public Policy, peter.whiteford@anu.edu.au 37

Trends in income inequality in Australia,

1981-82 to 2011-12

Gini coefficient

Peter Whiteford, Crawford School of Public Policy, peter.whiteford@anu.edu.au 38

Reduction in inequality among income units of

working age, Australia, 1982 to 2007-08 Point difference in Gini coefficient

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

1982 1990 1994-95 1995-96 1996-97 2000-01 2002-03 2003-04 2005-06 2007-08

Transfers Taxes

Summing up: The peculiarities of the

Australian social protection system • Australia has the most targeted public social security system in the OECD –

we have less “middle class welfare” in terms of government cash benefits

and lower “churning” of taxes and transfers than any other country, and we

have the most target efficient benefit system in the OECD – for each dollar

of spending we reduce inequality and poverty by about 50% more than the

next nearest country (although we spend fewer dollars).

• But what we call “middle class welfare”, Europeans call social insurance

and Americans call social security.

• In targeting and focusing on poverty alleviation, we do less in public

spending for the middle than most other countries – is this desirable or not?

• Mandatory private social spending (superannuation and sick pay) are

among the highest in the OECD.

• Private spending on health and education are also among highest in OECD.

• Tax clawbacks – direct and indirect - are among the lowest.

• Tax expenditures for superannuation are the highest in the OECD.

Additional observations • Australian benefits for the short-term unemployed are now the lowest in the

OECD in terms of replacement rates relative to average wages. – Not the lowest in terms of purchasing power, or for the low paid, or for the long-term

unemployed – but still towards the lower end.

• Australian family payments for social security recipients and the low-paid

have been the highest in the OECD, but have recently been slipping down

the OECD ranking.

• The employment to population ratio in Australia is one of the highest in the

OECD, but due to high rates of employment among youth and high rates of

part-time employment. Underemployment is high.

• Prior to the Great Recession, Australia had one of the highest

concentrations of joblessness in households where no one works, with 50%

of the jobless living in completely jobless households, compared to 22% in

the USA and Sweden, 20-30% in much of Europe, and under 20% in

Southern Europe. Only Germany, Norway and the UK are higher.

– The concentration of joblessness is part of the reason why our social security system is more

progressive than other countries, where transfer recipients are more likely to live in the same

households as wage earners. But correspondingly, more inequality will be “hidden” within

the household in other countries.

Net transfers ($pw) by age of household reference person

and share of households by age, Australia 2009-10

Net transfers ($pw) Share of households (%)

42

Future challenges • A significant proportion of the working age population continue to rely mainly on benefits

for their incomes – it is desirable for equity reasons and sustainability to reduce this, but

we should also be concerned that further reforms really do improve equity in outcomes.

• Australia – so far – seems to have escaped a major economic downturn from the “Great

Recession”. This is a very major advantage in facing future challenges.

• Population ageing will soon start to have a much more significant impact on the costs of

the system.

• The Grattan Institute (2013) estimates that on current trends there would be a deficit of

4% of GDP by 2023 (2.5% at the Federal level).

• There are significant needs – with reforms to introduce greater support for disability

services, for aged care and nursing homes, for dental care and to improve equity in the

education system. These reforms need to be properly funded.

• Indexation provisions for unemployment payments are inadequate as are benefit levels.

Similar risks to future family payments. We are residualising the poor – are we

introducing the concept of “deserving” and “undeserving”?

• Because the Australian system is the most targeted to the poor of any rich country,

cutting social security benefits would increase inequality more than any other OECD

country.

• All proposals involve complex trade-offs and genuinely difficult choices, which will

require detailed public discussions and consultation and (hopefully) consensus.

43

Sources: OECD work on social policy

• Social policies and data - http://www.oecd.org/els/soc/

• Social expenditure database - http://www.oecd.org/els/soc/socialexpendituredatabasesocx.htm

• Families and children - http://www.oecd.org/els/family/

• Online database on families - http://www.oecd.org/document/4/0,2340,en_2649_34819_37836996_1_1_1_1,00.html

• Income distribution and poverty - http://www.oecd.org/social/inequality.htm

• Benefits and wages - http://www.oecd.org/els/soc/benefitsandwagesoecdindicators.htm

• Work on intergenerational transmission of advantage and disadvantage – http://www.oecd.org/dataoecd/27/28/38335410.pdf

• The life course and social policy - http://www.oecd.org/document/26/0,2340,en_2649_33933_38613594_1_1_1_1,00.html

• Child poverty –trends, causes and policy responses - http://www.oecd.org/dataoecd/30/44/38227981.pdf

Peter Whiteford, Crawford School of Public Policy, peter.whiteford@anu.edu.au 44