The growing divergence between the numbers officially unemployed and those getting a benefit are highlighted in Mike Treen’s blog Billions of Dollars Stolen From The Unemployed . Worryingly the evidence around us suggests that a high price is being paid by those who have been excluded from or pushed out of the benefit system, but are not finding work.
When National embarked on a programme of ‘welfare reform’ in 2008 it justified it by raising alarm about the future cost of welfare. It decided to evaluate the success of these reforms, not by whether people’s lives were better, but by contracting a private actuarial firm at great expense to produce actuarial estimates of the future lifetime costs of the welfare system. Success is trumpeted by the Minister because these lifetime costs are apparently falling.
But what a totally bizarre way to measure success. Logically, if no one was on benefits the net lifetime costs would be zero. Utopia for the Minister perhaps but disaster for a humane society.
There are so many things wrong with the actuarial approach. An earlier report in 2010 had calculated the total future liability of welfare at $ $57 billion. A figure of $47 billion was used by the Welfare Working Group in its 2011 Final Report. Now a different methodology puts future liability at about $71 billion. Clearly calculating future liability is not an exact science, even for the experts.
The latest Taylor and Fry report heralded by Social Development Minister Paula Bennett as proof of the success of welfare reform is 225 pages long without the appendices. While claiming the reduction to $71 billion in 2013 from the 2012 figure of $81 billion was ‘significant’ she also acknowledges that $6 billion of the $10 billion reduction is because of various actuarial and measurement factors – that is, they are not savings at all.
So apparently the remaining $4 billion can be attributed to the success of welfare reform. This might seem like an impressive outcome, but we don’t have any context to assess this figure. It is not an annual figure, but is the total expected to be spent over today’s beneficiaries lifetimes. While the government is happy to single out the future liability of working-age beneficiaries, it does not calculate that of other forms of state spending such as for superannuation, or education or health care.
New Zealand Superannuation costs $12 billion per year and dwarfs other welfare payments, and the actuarial cost of NZ Super is a truly frightening number. Even without demographic change, the net present value of a future annual $12 billion a year at a real rate of 2% is around $600 billion in today’s dollars. A growing aged population and ever -increasing longevity blow the figures off the radar screen.
The headline figure of a reduction of $10 billion depends critically on numerous assumptions about future inflation, investment rates, unemployment and state of economy.
Small changes can have a big impact on the final figure. For example, a 1% increase in the unemployment rate increases total future liability by almost 6% or about $5 billion, while a 1% increase in inflation increases total calculated liability by $8 billion. The total liability is also highly sensitive to the discount rate used to bring future costs to today dollars. Here’s another kicker- the total liability is before tax so the so-called saving to the taxpayer from welfare reform is already overstated on that score.
Conceptually the exercise seems to be asking: what difference does the welfare reform programme itself make, at a cost of half a billion dollars, to the outcomes that would have been achieved any way, given the state of the economy? But just how are the effects of welfare reform to be separated from the recovery of the economy? What happens when or if the economy slumps again? Economic downturns are famously unpredictable. How much further does the Minister want her $71 billion lifetime costs to fall to prove her punitive policies are justified?
New Zealand’s use of actuarial costing in welfare is unique, but not in a good way. While such calculations may be of benefit for private insurance policies they have no place in assessing the success of social policies. In the two years to November 2012 over 16,000 beneficiaries with children had benefits halved or cut altogether for not complying with work test requirements. This may save money in the short run but what do we know of the long-term consequences for the children whose meagre support is reduced still further?
The Taylor Fry report admits that the number of beneficiaries depends heavily on the state of the economy. Despite this, there is little serious debate about the need to invest in ensuring that decent work is available for those who want it, or in programmes to assist sole parents and others get a better job through supporting re-training and higher education. Instead, the welfare reforms, and their so-called future cost have focused on blaming individuals for their own plight .
Perhaps the government needs to do an actuarial costing on the value of full employment and the benefits of providing the same sort of support to local manufacturing as it provides so willingly to overseas movie producers or yacht races.
Calculating future welfare costs without looking at the overall picture of government spending suggests the reforms and their imputed savings are more about politics than economics. There needs to be a much broader debate around welfare, well-being, the state of the labour market and how we can better plan for our ageing population. The thousands of individuals and families caught in the cross currents of the present shallow discussion deserve better.