Transcript Welfare Working Group - June 2010 Forum

Welfare state design: Architecture
and outcomes - the New Zealand
benefit system in comparative
perspective
Welfare Working Group Forum, Victoria University of
Wellington, 9-10 June 2010
Peter Whiteford, Social Policy Research Centre,
University of New South Wales
[email protected]
1
Outline
Nature and limitations of the approach
The design of benefit systems
Targeting, progressivity and redistribution
How New Zealand compares – particularly to
Australia
Summary and some conclusions
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Sources and additional material
2
Caveats and limitations

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Approach is descriptive and based on statistical calculations.
Most analysis is static.
The counterfactual effectively assumes that the welfare state has had no
incentive effects, or at least is the same in all countries.
Some welfare state features treated as if they are produced by market
mechanisms (e.g. minimum wages).
Does not include non-cash benefits (health care, education, social housing,
child care); indirect taxes – VAT, employer social security contributions also
not included.
Employer social security contributions are paid by businesses direct to
government and do not pass through the household sector. Particularly
problematic as they are one of main sources of funding for the welfare state.
Employer provided fringe benefits not included.
The distribution of wealth, including owner-occupied housing makes a
difference.
3
A framework for assessing social
protection
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Many analyses focus only on government provided social protection, but
this needs to be seen within a broad framework
In addition to government cash benefits, assistance can be provided
through allowances or concessions in the tax system or through direct
service provision. (e.g. child care).
The tax system can also offset or reinforce the objectives of social
protection.
Occupational social welfare can be provided on a voluntary or mandatory
basis.
In New Zealand and Australia, labour force regulation has a long history –
since the 19th century.
Private social welfare can be provided by churches, NGOs, family and
friends or purchased in the market (insurance).
4
Social security design

The New Zealand and the Australian social security systems differ 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 New Zealand and Australia, 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 these systems are 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.
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5
Social security design
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Because the New Zealand and Australian systems are income-tested and
not contributory, there is a tendency for overseas commentators to see
them as residual, rather like vast forms of social assistance. This view is
mistaken.
Benefits are legal entitlements and there is very limited discretion in the
system, and recipients have the right to appeal to administrative and judicial
tribunals in case of disagreements about administrative decisions.
The social security system is also a national system, with entitlements and
conditions being uniform across the country. While income support
payments are means-tested, these assets tests are much more generous
than those typically applying in social assistance schemes in other
countries.
In a sense, the New Zealand and Australian systems are hybrids falling
between a social insurance system and a social assistance system, being
less “generous” than some social insurance systems, but more “generous”
than most social assistance systems.
6
Who benefits under different welfare
states?
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A “pure” social insurance system is status maintaining – contributors get out
what they have put in, and you have to be a contributor to benefit.
On average, social insurance systems are more expensive and therefore
appear more “generous”, but this can be generosity to the middle classes
and the well-off.
Universal and income-tested schemes are therefore likely to be relatively
more generous to the lifetime poor and to those who have not contributed or
been able to contribute to social insurance schemes, particularly young
people, women and migrants.
However, one of the central issues in the literature is that more
encompassing welfare states provide higher levels of benefits because the
middle class have a stake in the system.
Does targeting undercut political support for generosity to the poor?
Incentives – general considerations
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Different forms of assistance and financing have different implications
for incentives:

Contributory systems may enhance incentives to participate in the labour
market
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Paid maternity/parental leave with right to return to work promotes labour force attachment, but
if parental leave is too long (> 6 months) may be associated with loss of earnings potential.

Child care support encourages employment, particularly if targeted to
employed families or those looking for work;
 Family allowances likely to have a small income effect, discouraging
employment;
 More generous, joint income-tested payments for the low paid likely to have
stronger work disincentives;
 Family-based taxation likely to discourage employment of second earners;
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Generous income support for the non-employed may act as work
disincentive, unless associated with active job search requirements;
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Practically all OECD countries have income-tested payments for low income
families, which dominate the effects of the tax unit.
Generosity needs to take account of ease of access and potential duration of
benefits, not just benefit levels.
Specific eligibility conditions are important, e.g. Early retirement
provisions
 Expectations are likely to be important.
Types of redistribution in social security systems
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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 lifecycle
(the piggy bank) – risk insurance (against unemployment, disability, sickness etc.),
savings (for retirement).
All welfare states are a mix of the two, but the mix varies.
Other types of redistribution – notably between men and women and also across
regions.
Behavioural effects may undercut redistribution; private provision also redistributes
across the lifecycle.
Point in time, static analysis implicitly 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.
9
Targeting, progressivity and redistribution
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Targeting is a means of determining either eligibility for benefits or the level
of entitlements for those eligible. In a sense, all benefit systems – apart from
a universal “basic income” or “guaranteed minimum income” scheme – are
targeted to specific categories of people, such as the unemployed, people
with disabilities or those over retirement age. Income and asset-testing is a
further form of targeting that can be applied once people satisfy categorical
eligibility criteria.
Progressivity refers to the profile of benefits when compared to market or
disposable incomes – how large a share of benefits is received by different
income groups – e.g. do the poor receive more than the rich from the
transfer system?
Redistribution refers to the outcomes of different tax and benefit systems –
how much does the benefit system actually change the distribution of
household income?
Effectiveness measured by how much redistribution is achieved; efficiency
by the resources used to achieve this redistribution.
10
New Zealand’s distinctive tax/benefit
system
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Total NZ spending on social protection (cash benefits, health care, social services) at
18.5% of GDP in 2005 was about 90% of the OECD average – but this is mainly due to
lower than average spending on age pensions; health and disability spending are a little
higher than average and cash benefits for people of working age about 20% higher;
spending on non-health services about 2/3rds of average. (Australia spent 17.1% of GDP.)
Direct taxation paid by benefit recipients is higher than average, but indirect taxation of
benefits is a little lower – in Australia direct and indirect taxes on benefits are amongst the
lowest in the OECD .
NZ tax expenditures are very low. Australian pension tax expenditures are the highest in
the OECD, but other tax expenditures below average.
Mandatory private social benefits are very low in New Zealand, but in Australia (sick pay
and superannuation) they are amongst highest.
Thus, net expenditure – after direct and indirect taxes paid on benefits – is even closer to
average – and tax expenditures and mandatory private social expenditure increase
Australia’s ranking but reduce New Zealand’s ranking.
Net total social expenditure is 16.4% of GDP in New Zealand, but 19.3% of GDP in
Australia – the rankings are reversed (in addition, Denmark falls from 26.9% of GDP to
21.6%, while USA rises from 15.9 to 25.3% of GDP).
To assess distributional impacts it is necessary to look at all components of the system
together – ideally.
11
Australia and New Zealand rely on incometesting more than any other OECD countries
% of GDP spent on income-tested benefits, 2005
7
6
5
4
3
2
1
0
12
Australia and New Zealand have the
most progressive benefit systems in the
OECD
Ratio of benefits received by poorest quintile to benefits received by richest quintile, total
population, 2005
14
12
10
8
6
4
2
0
13
Progressivity of transfers, 2005
Concentration coefficient of transfers
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
14
Australia and New Zealand have low
levels of churning
Churning as % of equivalent household disposable income
2000
2005
35%
30%
25%
20%
15%
10%
5%
0%
15
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
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
16
Direct taxes on public transfers
% of public social benefits paid in direct taxes
17
Indirect taxes on public transfers
Implicit average indirect tax rate (%)
18
OUTCOMES
19
Levels of inequality, OECD countries,
2005
Gini coefficient for disposable income
20
Income poverty rates and poverty gaps
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21
In most international comparisons, income poverty is measured by reference to median
household income “after” taxes and benefits, adjusted by household size (either 40, 50 or
60%).
The poverty rate or headcount is the % of the population with incomes below the
benchmark; the poverty gap is the difference between the average income of the poor and
the benchmark – a measure of distance (and possibly exclusion?).
Household surveys do not include many of the most disadvantaged – people who are
homeless, in nursing homes, boarding houses or in prison (about 2% of the Australian
population).
Measured at 50% of median income, New Zealand is almost exactly at the OECD average,
with the equal lowest poverty rate among the population aged 65 years and over in the
OECD (2%). Poverty among the working age population is a little higher than average (11%
compared to 9%), and child poverty is higher (15% compared to 12%)
Australia has more people between 40% and 50% of median income than any other OECD
country. Using a 50% of median income poverty line, the poverty gap is the 6th lowest in the
OECD and a little lower than in Denmark. So Australia has a relatively high share of the
population in poverty, but close to the poverty line.
New Zealand has more households between 50% and 60% of median income than any
other OECD country. At 60% of median income, New Zealand has the fifth highest poverty
rate in the OECD. The poverty gap is the 8th highest in the OECD.
Poverty gap and composite measure of income
poverty, mid-2000s
22
Benefit recipiency in New Zealand is below average
% of working age population in receipt of income replacement benefits,
full-time equivalents, 2004
23
Reliance on benefits has increased, most
rapidly in New Zealand (from a low base)
% of working age population in receipt of income replacement benefits,
full-time equivalents, 1980 and 2004
24
Relative to their high overall employment, the UK
and Australia do worst for joblessness among
families with children – with New Zealand not far
behind
5
Percentage point difference between actual and predicted joblessness among families with children
-10
-15
-20
Nor w
ay
Aust
ralia
Unite
d Kin
gdom
and
Z eal
ds
New
erlan
ny
Net h
Ger m
a
h
ark
Denm
Czec
en
Swed
USA
d
da
Cana
Ir elan
OEC
D
Aust
ria
Finla
nd
ce
Fran
gal
Portu
Japa
n
n
mbou
rg
Pola
nd
Spai
Luxe
-5
Gr ee
ce
Belg
ium
It aly
0
Reduction in inequality due to public cash
transfers and household taxes
Point reduction in the concentration coefficient
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Australia is the most efficient country in the
OECD in reducing poverty
Point change in mean poverty gap per unit of transfer spending
0.04
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0
27
Net redistribution to the poor
Net transfers received by poorest quintile as % of household disposable
income
7
6
5
4
3
2
1
0
28
Summary
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New Zealand relies on income testing more than any other OECD country
except Australia, and has one of the most progressive structure of benefits
of all OECD countries.
New Zealand has lower churning than most other OECD countries, and the
third highest level of transfer efficiency in reducing poverty.
Australia (and Ireland) prove to be nearly as effective in reducing inequality
as the Nordic countries, while New Zealand is above average in reducing
inequality.
But these are measures of programme efficiency, not economic efficiency.
Efficiency is a means to an end – the goal is more effectiveness.
29
Conclusions
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The broad architecture of the New Zealand system has considerable
strengths.
Broadly speaking, in looking at reform options you can consider
refurbishment and modernisation, or demolition and rebuilding.
Despite impressive design features of tax and transfer systems,
disposable income inequality in New Zealand is above the OECD
average; this means that income inequality before taxes and
transfers is higher than in most countries with better inequality
outcomes.
If New Zealand wants to be more effective it could either increase its
high level of progressivity, or tax and spend more while at least
maintaining effective progressivity, or identify the factors associated
with its relatively high level of market income inequality and address
these problems more directly.
30
ADDITIONAL MATERIAL
31
Australia has the most progressive direct taxes
on retirement age households – New Zealand
the least progressive
Concentration coefficient for direct taxes on retirement age households
32
Fran
ce
Nor w
ay
Swe
den
Bel g
ium
Aust
ri a
Por tu
gal
It aly
Luxe
mb o
urg
Spai
n
Gree
ce
Effective tax
UK
Finl a
nd
Swi tz
erl an
d
USA
New
Zeal
and
Ger m
any
Japa
n
Aust
ralia
Ir ela
nd
Cana
da
Net h
erlan
ds
Denm
ar k
Effective contributions to public
pensions, redistributive and actuarial
components, mid-1990s
% of wages
Contribution
60
50
40
30
20
10
0
33
Net incomes of social assistance
recipients, 2005
% of median equivalent household income, with and without housing benefits
Lone parent, two children
80
70
60
50
40
30
20
10
0
ITA
TUR GRC USA CHE ESP SWE HUN PRT
FIN
FRA DEU CAN
IRL
LUX NLD AUT GBR BEL POL CZE NZL
JPN DNK NOR AUS
34
Unite
Ir elan
d
d Kin
gdom
Nor w
ay
Portu
gal
Cana
da
New
Z eal
and
Kore
a
Pola
nd
Hung
ary
OEC
D
Finla
nd
Luxe
mbou
rg
Slov
ak R
epub
lic
Japa
n
Swed
en
Ger m
any
Belg
ium
Denm
ark
Czec
h Re
publi
c
Spai
n
Aust
ria
Net h
erlan
ds
Switz
erlan
d
It aly
Gr ee
ce
Unite
d St a
tes
Aust
ralia
Fran
ce
Effective tax rates for parents seeking parttime work are lower in Australia than most
other countries
AETR from zero to 33% APW, 2004
120
100
80
60
40
20
0
Gr ee
ce
d St a
tes
Hung
ary
Cana
da
Aust
ralia
Slov
ak R
epub
lic
Ir elan
d
Kore
a
OEC
D
Nor w
ay
Swed
en
Pola
nd
Portu
gal
Czec
h rep
ublic
Finla
nd
Japa
Unite
n
d Kin
gdom
Luxe
mbou
rg
Aust
ria
Belg
ium
Icela
nd
Net h
erlan
ds
New
Z eal
and
Ger m
any
Denm
ark
Switz
erlan
d
Fran
ce
Unite
Effective tax rates can be high for parents
seeking full-time work, but are lower in
Australia than most other countries
AETR from zero to 67% APW, 2004
100
90
80
70
60
50
40
30
20
10
0
-20
Gree
ce
Hung
ary
Uni te
d Sta
tes
Nor w
ay
Aust
ralia
Por tu
gal
Swe
den
P
ol and
Slov
ak R
epub
l ic
Kor e
a
Finl a
nd
Bel g
ium
Luxe
mb o
urg
OEC
D
Aust
ri a
Net h
erlan
ds
J
apan
Czec
h rep
ublic
Icel a
nd
Ger m
any
New
Zeal
and
Denm
ar k
Fran
ce
C
a
na
Uni te
d Kin da
gdom
Swi tz
erl an
d
Ir ela
nd
Child care costs can increase effective tax
rates
AETR from zero to 67% APW, plus child care costs, 2004
140
120
100
80
60
40
20
0
Effective marginal tax rates can be high in
Australia but over specific income ranges
Australia 2005
Lone parent with 2 children, not eligible for unemployment insurance benefits
100
120,000
100,000
80
80,000
40
20,000
20
METR
40,000
0
0
-20,000
-20
-40,000
-40
GROSSal
UBal
SAal
ITal
SCal
HBal
FBal
NETal
NET=GROSS
200
190
180
170
160
150
140
130
120
% of AW
110
100
90
80
70
60
50
40
30
20
10
-60,000
0
National currency per year
60
60,000
METRal
38
In contrast, the Nordic approach has much
higher EMTRs at lower income levels
Denmark 2005
Lone parent with 2 children, not eligible for unemployment insurance benefits
800,000
140
600,000
120
60
METR
80
200,000
0
40
GROSSdk
UBdk
SAdk
ITdk
200
190
180
170
160
150
140
130
120
% of AW
110
100
90
80
70
60
50
40
0
30
-400,000
20
20
10
-200,000
0
National currency per year
100
400,000
SCdk
39
Social insurance does not necessarily reduce
EMTRs (for lone parents and single people)
UBdk
SAdk
ITdk
METR
200
190
180
170
160
150
% of AW
GROSSdk
140
0
130
-400,000
120
20
110
-200,000
100
40
90
0
80
60
70
200,000
60
80
50
400,000
40
100
30
600,000
20
120
10
800,000
0
National currency per year
Denmark 2005
Lone parent with 2 children, eligible for unemployment insurance benefits
SCdk
40
Why are we interested in the design
of benefit systems?

“The tax-transfer system is the principal
means of expressing societal choices
about equity. The tax-transfer system is a
reflection of the kind of society we aspire
to be.” Ken Henry, ACOSS National
Conference, (2009).
41
Working-age recipients of selected social
security payments, Australia, 2005
42
Trends in receipt of government benefits,
1978-79 to 2007-08
% of households whose principal income source is government benefits
43
Household reliance on income support, 199495 to 2007-08
44
Inequality of earnings among households of
working age, 2005
Gini coefficients for different earnings measures
45
Sources
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OECD Family database www.oecd.org/els/social/family/database
OECD Social Expenditure database http://www.oecd.org/document/2/0,2340,en_2649_33933_3
1612994_1_1_1_1,00.html
Net Social Expenditure – Adema and Ladaique (2005) http://www.oecd.org/findDocument/0,2350,en_2649_33933
_1_119684_1_1_1,00.html
OECD, Benefits and Wages http://www.oecd.org/department/0,2688,en_2649_34633_1
_1_1_1_1,00.html
OECD study of income distribution (2005) http://www.oecd.org/dataoecd/48/9/34483698.pdf
Benefit recipiency - Employment Outlook (2003)
OECD Social Indicators http://www.oecd.org/department/0,2688,en_2649_34637_1
_1_1_1_1,00.html
46