Why we need a sensible debate about welfare reform

OPINION: Half of us are lifters and half of us are leaners. Is that fair? Jessica Irvine explains why we need to change our welfare system.

Why our welfare system isn’t fair

DO half of Australian households really need to be the net beneficiaries of government support?

This question drives to the very heart of the debate about welfare reform.

It surprises most people to learn that half of Australian households contribute no net tax to the federal government’s coffers, after welfare benefits are deducted from the income taxes they pay.

To borrow the phrase de jour: half of us are lifters and half of us are leaners.

Is that fair?

Former Labor finance minister Lindsay Tanner — hardly a right wing crusader — didn’t think so. He used to employ the statistic to argue the need to reduce middle class welfare.

From Opposition, his former comrades now decry any attempts to cut welfare spending — and that’s after doing much themselves to reduce the generosity of payments for middle income families.

Critics of the Abbott government’s review of the welfare system retort that Australia already has one of the most tightly targeted welfare systems in the world.

In a sense, they’re right.

Not only does Australia spend less on welfare as a per cent of our economy than almost all developed nations, those benefits are better directed at those in need.

The poorest fifth of Australian households get about 40 per cent of all welfare, while the richest get only about 3 per cent, according to Professor Peter Whiteford of the Australian National University.

Welfare reform ... more people in Australia are receiving Centrelink payments.

That means poor Aussie households get 12 times as much welfare as rich households. In the United States, the poor get only 1.5 times as much as the rich.

But is the rest of the world any yardstick to live by?

It’s like Australia’s debt position. Yes, it’s low compared to Greece, but is that the height of our ambition?

The truth is, welfare systems around the world are under pressure from ageing populations. We need even more people to work — and for longer — and fewer people to rely on welfare if budgets are ever going to balance.

Aged pensioners are already the biggest recipients of welfare in Australia.

The aged pension costs around $36 billion a year — a third of Australia’s total welfare bill. By comparison, the disability support pension costs $15 billion — about as much as we spend on family tax benefit part A — and the Newstart allowance costs $7 billion.

There is a large and growing gap between the generosity of the age pension — which pays around $800 a fortnight — compared to the jobless allowance — which pays only $500.

The perverse incentive created by this system is clear. Which would you prefer to claim? Evidence of widespread rorting of the DSP is non-existent. But the system is clearly unsustainable.

The National Audit Commission recommended future pension increases be linked to rises in the cost of living — rather than the more generous measure of wages — until the value of the pension fell to 28 per cent of average weekly earnings.

It is a little noted feature of the May budget that the Abbott government instead proposes to decouple pensions from wages entirely — with increases in line with inflation from here on in until eternity.

Similarly contentious are attempts to reduce the number of people living on the disability support pension.

It is true that the proportion of working aged Aussies living on welfare has fallen over the past two decades. But this is mainly due to shrinking joblessness and fewer people living on the jobless allowance.

But a stubborn percentage of the working-aged population — about 5 per cent — remain reliant on the DSP. Obviously a large proportion of the now 800,000 plus people on the DSP will never work due to permanent disability.

But the fastest growing group of people on the disability support pension are those with a mental health.

Mental health issues can be permanently debilitating. Recovery can be slow and sporadic, not at all conducive to stable employment.

But often there is great hope for adequate treatment and rehabilitation.

Ageing population ... the aged pension is an expensive part of the federal budget.

Nobody — not welfare advocates and not the government — wants young people in particular with some capacity for work to be consigned to a life on the DSP.

But the current DSP system is ill equipped to deal with this rise in mental health problems.

The McClure report praises programs like the “headspace” program which helps young people with mental health issues get job ready.

More funding for such programs would raise more money than they cost in moving people into work.

So can our welfare system be better targeted? The answer is, of course.

In fact, we can’t afford NOT to target it better.

That budget crisis Joe Hockey was talking about didn’t go away, even if the government stopped talking about it amid the budget backlash.

And we haven’t even begun the tax side of the debate.

If low income earners are to see the generosity of their benefits reduced, higher income earners will also need to do more of the heavy lifting, including foregoing some of their generous super tax breaks.

But at the end of the day, fixing the budget — with spending cuts and tax increases — is the only way to fund Labor’s two most important reforms of government: a National Disability Insurance Scheme to improve services for the disabled and the proposed Gonski reforms to boost funding for our most disadvantaged school kids.

We need a sensible debate about sustainable spending and fair taxation reform if we are going to protect the truly vulnerable against the budgetary ravages of the ageing population.

• Jessica Irvine is National Economics Editor for News Corp Australia

Originally published as Why we need a sensible debate about welfare reform