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Opinion: Now is a great time to reform the benefit system

It would be a great time to reform the benefit system, according to former Deputy Chief Economic Advisor at the Treasury, Tony Burton. He argues the complexity of current benefit system means that it’s failing to achieve its difficult three core objectives, which form an “iron triangle”.

Source: Breakfast

New Zealand’s benefit system is remarkably unpopular. It was set up in 1938 to “safeguard the People of New Zealand from Disabilities arising from Age, Sickness, Widowhood, Orphanhood, Unemployment, or other Exceptional Conditions”, yet since then has been the subject of repeated reviews. A time of kindness, and fiscal pressures, might be a good time to find a more permanent fix.

There is broad agreement that after eighty years the social security act is not safeguarding New Zealanders. Thus the National lead government’s Welfare Working Group reported in 2011 that “there are major deficiencies in New Zealand’s welfare system ...

Addressing these issues requires fundamental change to the welfare system rather than further piecemeal change”, which is remarkably similar to the call of its Labour/Green equivalent in 2019 that proposed “[a new] approach based on mutual expectations and responsibilities governing interactions between the state and welfare recipients”.

The diversity of potential recipients suggests why this is all harder than it looks. An unemployed couple from Invercargill with five children, a healthy superannuatant who owns an apartment in Auckland, and a person with chronic diabetes in Wellington all qualify, but have very different needs.

Then there is the “poverty trap”. Many in that list can only get work that pays so little they are better off receiving social security payments. Who should receive these indefinitely, and could we make work be made financially worthwhile for others?

Thus began the small industry to understand Effective Marginal Tax Rates (EMTRs) and the “iron triangle”. The latter is not a plot device for a Dan Brown novel but a rule of thumb for understanding the political pressures on the benefit system.

In New Zealand the first corner of the triangle was reached in the early-90s when increased reliance on the benefit system increased its costs, and that led to cuts in benefit levels. Of course these cuts meant more people could not afford to cover their needs, so by the mid-90s the second corner of the triangle was approached and politicians on both sides encouraged an explosion in the number and type of payments. The resulting increase in income put more people in the poverty trap so by 2002 the Clark government rounded the third corner of the triangle with a costly expansion of in-work payments called Working for Families.

You have probably guessed what happened next. When newly elected, the National-led government took us back to the cost control corner. By 2015 worries about poverty drove them to increase benefits, a policy the Labour-led government has continued. That of course damages incentives to work, and sure enough we have just had yet another billion dollar attempt to make work pay…

There is something of the crank inventor unveiling a perpetual motion machine in the way politicians reinvent, rearrange and relabel payments to prove they have overcome the iron triangle. Its logic requires high school maths to understand. Lack of a Minister for Social Development with this level of numeracy has seen the welfare system become so complex it spends more than $1bn administering itself and employs more people than our health service has GPs.

People minded to vote for the Greens or TOP probably interpret the previous paragraphs as an argument for a basic income (UBI). This is a payment made to everyone that is taxed away as more money is earned from work. Economic analysis shows the UBI is the most efficient compromise between the three corners of the iron triangle.

But a more basic question needs to be answered first. Should the welfare system have all three objectives? By definition it should provide adequate income to safeguard the vulnerable while unaffordable policies are simply fantasies. There is room for political disagreement about what adequate and affordable mean, but neither can be ignored. It is the third corner, providing incentives to work, that was brought in later. Was that a mistake?

If the answer is no, then there is a case for a basic income approach. Unfortunately the UBI is not as simple as it looks. Anyone who has taken the idea seriously as an approach to poverty (such as Max Rashbrooke) has come to the conclusion that a benefit system of sorts would need to be retained to protect the most vulnerable. That implies all the paraphernalia of tests and their administrative costs. A UBI also means higher taxes for everyone, including those on low income. It is an improvement for some, but not like the textbooks, and the bureaucracy is just as costly.

Alternatively, we could operate the system more effectively so it can be more financially generous, like New Zealand Superannuation (NZS) or the insurance based ACC. Both have higher payments but much stringent eligibility criteria. For instance, an NZS approach could see sole parents receive considerably higher incomes, but payments would need to be time limited. The advantage of these approaches is exemplified by how little age poverty there is in New Zealand compared to other countries.

Politicians of both right and left in New Zealand have not had the courage to escape the iron triangle, preferring instead to heap complexity on those it is intended to help. At a time when we are interested in kindness it would be good to see them try.

This opinion piece was first published by Victoria University’s The Democracy Project and is republished with permission.