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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
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, [email protected] 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, [email protected] 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, [email protected] 37
Trends in income inequality in Australia,
1981-82 to 2011-12
Gini coefficient
Peter Whiteford, Crawford School of Public Policy, [email protected] 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, [email protected] 44