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REFORMING ~~W ~~A~A~~ WELFARE INTERNATIONAL PE R S PEe T I V E S Policy Monographs 37 REFORMING ~~W ~~A~A~~ ELF RE INTERNATIONAL PERSPECTIVES 1997 Published June 1997 by The Centre for Independent Studies Limited. Views expressed in the publications of The Centre for Independent Studies are those of the authors and do not necessarily reflect the views of the Centre's staff, Advisers, Directors or officers. National Library of Australia Cataloguing-in-Publication Data: Jones, M.A. (Michael Anthony). Reforming New Zealand welfare: international perspectives. Includes index. ISBN 1 86432 024 9 1. Welfare state. 2. Social service - New Zealand. 3. Public welfare - New Zealand. I. Centre for Independ ent Studies (Australia). II. Title. (Series : CIS policy monographs ; 37). 361.993 © 1997 The Centre for Independent Studies. Book cover and design by Daryl-Anne Le Roux Printed by Merino Lithographics, Moorooka, Queensland. Typeset in Garamond lOpt. Contents List of Tables vii List of Figures viii Key Points ix Foreword xi About the Author xiii 1 Introduction 1 2 Alternative Welfare System Designs 12 Welfare systems reliant mainly on the family 12 Communitarian welfare systems 13 Social insurance welfare systems 15 Occupational welfare systems 17 Tax expenditure welfare systems 19 Universal program welfare systems 20 Means tested welfare systems 21 The employment-workfare state 23 Trends 25 3 The Unique New Zealand Welfare System 30 The beginnings of a welfare system for the aged 30 Would social insurance have been better? 35 The Utopia of 1938 36 Conclusion 48 4 The Theory of the Welfare State 51 The durability of welfare states 52 The need for transparency 54 Market failure and the revival of private insurance 58 The trade-off between efficiency and equity 64 Human and social capital 67 Marketisation 70 A welfare safety net as a form of 'social control' 73 5 Poverty 79 Measuring poverty 81 Benefit levels and poverty 86 Michael Jones 6 Inequality 95 Inequality in New Zealand 96 Explanations of increasing inequality in western countries 104 (a) Globalisation 104 (b) Technology and downsizing 115 (c) The service-based economy 118 (d) Immigration 119 (e) Underclass dynamics 120 (f) Transitional problems 123 7 An Ageing Society 130 The demographic crisis 131 Fertility rates 140 Policy options for an ageing population 145 1 Increase age of eligibility for retirement benefits 145 2 Reducing the value of New Zealand Superannuation and/or means testing 150 3 Adopt a social insurance scheme 152 Conclusion 157 8 The New Option: Fully Funded Retirement? 161 Funded, defined contributions superannuation 162 The new Australian model for funded retirement 167 Tax concessions on superannuation 171 Compulsion 173 Costs, benefits, and risks of privatised retirement 175 9 Conclusion 183 Single parents 184 Human capital 185 The aged 186 Conclusion 187 Index 189 vi Tables 3.1 Main welfare benefits in New Zealand 1898-1936 37 3.2 Main features of the Social Security Act, 1938, New Zealand 39 3.3 Trends in social security expenditures in selected countries 1949-1966 42 3.4 Numbers on benefit and pensions, New Zealand, 30 June 1996 47 4.1 Indicators of the quality of labour, 1992 68 5.1 Trends in the incidence of poverty, New Zealand 1984-93 81 5.2 Proportion of families defined as poor according to different measures 87 5.3 Social welfare cash benefits, weekly rates, 1 April 1996 90 6.1 Inequality in industrial and high income developing countries circa 1960-1990 98 6.2 Main factors believed to be responsible for increasing inequality in western countries 106 7.1 Aged dependency ratios in OEeD countries 1980-2040 132 7.2 Population projections New Zealand 1994-2031 133 7.3 Population projections for New Zealand 1994-2150 134 7.4 Expectation of life at age 65, New Zealand, selected years 135 7.5 Numbers surviving until specified ages at each 100,000 of the population, New Zealand, selected years 136 7.6 Unisex life expectancy at retirement, United States 1940-2070 139 7.7 New Zealand fertility rates in comparison with selected countries, c1995 141 7.8 Invalidity benefits, all schemes, proportion of population 1990 148 7.9 Net present value of social security payments: percentage of 1994 GDP 153 7.10 Social security and total taxes as a percentage of GDP selected years 154 8.1 Household savings in New Zealand 1985/6 to 1994/5, savings as per cent of household disposable income 166 8.2 Main details of compulsory superannuation in Australia 169 8.3 Taxation of funded pension schemes in selected advanced countries 173 vii Michael Jones Figures 3.1 Terms of trade index-ratio of export prices to import prices, New Zealand 1926-1995 41 3.2 SummaI)' measure of benefit entitlements 1961-1995 43 3.3 Labour productivity growth and initial income, selected countries, 1960-1990 44 3.4 Output per working-age person and per employed worker 1980-1995: average annual growth rates 45 3.5 Numbers of people on major benefits (non-aged) New Zealand 1940-1995 (excluding family benefit) 46 3.6 Total real government expenditure on major benefits (non-aged) New Zealand 1940-1994 46 4.1 Main forms of social transfers 56 6.1 The evolution of real disposable income: full time wage and salal)' earners, New Zealand 1980-93 99 6.2 The evolution of real disposable income: full time wage and salal)' earners, New Zealand 1980-93: ratio of the higher to the lower quintile 99 6.3 Gross National Product per head in selected OECD countries 101 6.4 New Zealand unemployment rate 1960-1996 102 6.5 Incidence of low pay and earnings inequality selected OECD countries, 1993-5 103 6.6 Trends in earnings dispersion: incomes of the top decile divided by the bottom decile 1970 - circa 1995 105 6.7 Unemployment and participation rates by ethnic group 122 7.1 Live births and fertility rates, New Zealand, total population, 1921-1995 140 7.2 Numbers of persons claiming selected benefits, New Zealand 1980-1995 144 /liii Key Points • there is intense worldwide debate about the future of welfare states • the debate is driven by concern about rising costs and the social consequences of long term dependency • welfare systems develop incrementally in response to particular problems • reform also tends to be incremental, with major reforms being rare in any country • market ideas are less influential in welfare policy because of problems in their application and the opposition of strong vested interests • there has been a shift to governments wanting to be 'developmental states' rather than 'welfare' states, with an emphasis on equipping people for self-sufficiency • New Zealand has not given enough consideration to long-term welfare issues • New Zealand's welfare system has been generous by world standards • it has given the aged particular preference by not linking retirement income to work history and by paying them more than other welfare recipients • poverty is a concept with many meanings • how living standards are assessed, whether absolute or relative standards are used and where poverty lines are drawn significantly affect the proportion of the population classified as being in poverty ix Michael Jones • perceptions of inequality are an obstacle to economic change • rising inequality is a worldwide phenomenon • explanations include downsizing and unemployment, globalisation, technological change, the shift to a service economy, immigration and family break-up • income inequality in New Zealand rose in the late 1980s, probably due mostly to unemployment • wage inequality also rose, though it has been declining for female workers since the early 1990s • New Zealand, in common with other western countries, has an ageing population • the aged in the population as a proportion of those in the workforce is projected to more than double between 1980 and 2040 • the number of very elderly people requiring expensive care is increasing • costs could be reduced by increasing the age of retirement and more means testing • a more fundamental way of dealing with financing the aged is to privatise retirement • each individual provides for his or her own retirement through an individual retirement account, as in current superannuation schemes • solutions to the problems of non-aged dependency are less clear • there is an increasing tendency to put time limits on receiving benefits • improving the skills possessed by those on welfare is important x Foreword round the world there is deep dissatisfaction with the welfare state. This dissatisfaction has several sources. There is worry A that for many of the worst-off life is not improving; that to the contrary the rise of an underclass is evidence that the worst-off are falling further behind. There is concern at the rising costs of social security systems, and especially the long-term implications of a large class of people - especially single parents, the unemployed, and the elderly - heavily reliant on public sector income support for extended time periods. There are fears that issues of intergenerational justice will create divisions between the generations, with younger people being taxed so heavily to assist the elderly that they will be unable to provide adequately for themselves and their families. These dissatisfactions are present in New Zealand, but less diScussed than in other parts of the world. While New Zealand has been an international leader in economic reform, it has not moved so quickly on welfare issues. As Michael jones' Reforming New Zealand Welfare demonstrates, New Zealand, in common with other western countries, faces major problems financing its elderly. He suggests that New Zealand moves to a system of self-funded retirement, with each individual contributing to a personal retirement account over their working lives. While on libertarian grounds a voluntary system is clearly preferable, jones argues that a compulsory scheme, up to a certain proportion of annual income, is necessary to minimise the number of people who will have to rely on tax-supported state pensions.