Introduction

This note describes trends in benefit receipt and the labour market over the last 15 years. It is intended to provide a context for assessing the extent to which DWI has been successful in its objective of increasing participation by working age beneficiaries in employment.

The information in this note is drawn primarily from the 1999 Post Election Briefings of the Ministry of Social Policy (MSP) and Department of Labour (DoL).

Trends in Benefit Receipt

New Zealand's Benefit System

In New Zealand benefits are funded from general taxation and are paid at a flat rate, based on marital status and the number of dependents. As benefit payments are tested against joint income, a non-earning spouse is ineligible unless the working spouse is receiving a very low income.

The New Zealand system of benefit payments differs from many overseas countries, which frequently combine a system of "unemployment insurance" payments, related to previous earnings or contributions and available for a limited period, with a "social assistance" scheme which pays a lower level of benefit to people who are ineligible for, or who have exhausted their entitlement to, insurance payments.

The main types of benefit in New Zealand are: unemployment benefit (UB); training benefit (TB); sickness benefit (SB); invalids benefit (IB); widows benefit (WB) and domestic purposes benefit (DPB). UB, TB, and SB are now collectively referred to as the "community wage".

The basic features of New Zealand's income support system were introduced in the 1930s. Income support was designed to provide relatively short term assistance for unemployed people, and was accompanied by the expectation that the head of a household would search for full time permanent employment.

Over time, social, demographic and labour market changes have challenged the assumptions upon the income support system is based. In particular:

• as unemployment has increased, there has been a steady rise in the average duration a person has remained on a benefit, to the extent that benefits are no longer a temporary income for many people;
• changes in family structures and women's labour force participation (such as the growth in sole parent families and women returning to work) have created new demands on the benefit system.

In an attempt to address these changes, new benefits were added to the existing system.

The benefit system is now highly complex, both because it is required to cover a wide range of situations and because it has evolved through many changes over a number of years. This can make it difficult for people to know what their obligations are, or what support they could get. It also makes the system difficult to administer.

The Relationship Between Benefits and Employment

Overall trends in benefit receipt are closely related to trends in employment. This reflects the primary role of benefits in providing income support for people while they unemployed.

As shown in Figure 1, between 1986 and 1992 trends in benefit receipt and employment assistance were broadly symmetrical. There was a rise of 10 percentage points in the proportion receiving benefits and a decline of 10 percentage points in the proportion employed full-time.

In the early to mid-1990s, the reduction in the proportion receiving benefits corresponded with, but was less pronounced than, the increase in the proportion employed full-time.

This asymmetry has continued into the most recent period. There was a 2 percent decline in the proportion in full-time employment between 1996 and 1998, while the proportion receiving benefits grew by only 1 percent. This is likely to reflect recent policy changes, which are discussed further below.

Figure 1

Source: DSW Annual and Statistical Reports (main benefits are unemployment, training, widows, domestic purposes, sickness and invalids benefit); SNZ, HLFS full-time employed aged 15-64, population aged 15-64, March quarters to 1989, June quarters 1990 onwards.

Movements in different types of benefits over the same period are shown in Figure 2.

Figure 2

Source: SWIFTT; HLFS, March Quarters to 1989, June quarters 1990 onwards. Note: Includes spouses.

Drivers of Benefit Trends

The drivers of benefit trends vary by benefit type. The discussion below identifies the general drivers over the last 15 years. Further detail on the impact of policy changes introduced over the last two years is provided later in this note.

Unemployment Benefit

Trends in receipt of UB (now Community Wage - Job Seeker) mirror changes in the economy. When the economy was in difficulties between 1987 and 1992, the rate of receipt of UB climbed rapidly. Subsequently, when the economy began growing strongly after 1992, the rate declined significantly. As the economy contracted after 1996, partly in response to the Asian economic crisis, UB receipt began climbing again.

Domestic Purposes Benefit and Widows Benefit

The rate of receipt of the DPB and WB has been relatively flat since 1991, and in the past year the numbers have begun to decline, despite only moderate economic performance. Four factors contributed to this levelling off in DPB numbers:

• reduced flows into the younger reproductive age groups;
• rising rates of employment among sole parents;
• policy changes such as the introduction of work expectations (discussed in more detail below); and
• delivery improvements such as individual case management and the COMPASS scheme.

Given the ageing of the working age population, there is likely to be less pressure on DPB expenditures in the next decade.

Invalids Benefit and Sickness Benefit

Growth in receipt of incapacity-type benefits (IB and SB) over the last two decades is related to rising unemployment, but was unaltered by the economic recovery of the early to mid-1990s. These benefits have now levelled off, with differential movements in the two categories approximately offsetting each other.

SBs have begun to decline somewhat, primarily because of policy changes (discussed below). IBs have continued to rise throughout the decade, partly because of the ageing of the population and partly because of the rise in the age of eligibility for New Zealand Superannuation. In the absence of further policy changes, this trend is expected to continue.

The Cost of Income Support

As shown in Figure 3, the total cost of income support (in real terms) rose significantly in the period from 1987-1994. Following a dip in 1995, it resumed its upward course, albeit at a lower rate.

Figure 3

International Developments

A key challenge facing many Governments is to design social security programmes to help those who need it, while simultaneously reducing long-term costs.

Although various countries have taken their own approaches to reform in face of similar pressures and trends, there are a number of common themes.

• Increased emphasis on work requirements. Initiatives have included expanding the job search requirement beyond unemployment beneficiaries, strengthening sanctions for non-compliance with the new requirements and improving incentives for beneficiaries to move into work (US, Australia, UK and Denmark).

• Cost containment. This has taken a variety of forms, including reduction of replacement rates (Sweden) tighter targeting and conditions (US, Australia) and time limiting of benefits (US).

• Privatisation and reliance on market solutions. The Netherlands now operates a managed market for disability insurance cover and has institution a requirement for employers to cover the first year of sick leave of employees. Australia has created a market for the provision of employment services with private agencies able to complete with the state employment service.

• Partnership building. Many reform efforts have involved developing partnerships between central and local government, the non-government sector and private business (UK, US, Australia).

• Re-naming of programmes to signal changed expectations. New names are used to reflect a changed emphasis, especially in relation to the strengthened work requirement (UK, Australia), and to achieve a shift in public attitudes to welfare.

Recent New Zealand Policy Changes

In the period 1997-99 the Government introduced a number of changes to strengthen the work expectations of beneficiaries. The impact of these changes on workforce participation needs to be assessed alongside the establishment of DWI.

The work test was progressively expanded beyond the group of unemployed (who have traditionally been expected to be available for work) to encompass two other groups who had not been subject to a work test in the past: and

• sole parents (including widows) with school age children. A full-time work test is now applied if the sole parent's youngest child is aged 14+ and a part-time work test if the youngest child is aged 6-13; and
• spouses of unemployment, sickness and invalids beneficiaries.

In addition to the expansion of the work test, the sanctions for non-compliance were strengthened.

The sickness and unemployment benefits were effectively aligned, to address the large number of people transferring from the unemployment to the sickness benefit to get a higher rate of benefit, and thereby distancing themselves from employment related assistance. The criteria for eligibility for invalids benefit were clarified.

To help beneficiaries both prepare for and find a job, additional funding was provided specifically for employment services for newly work-tested clients, as well as for all clients seeking work. The funds were used to increase the volume of existing employment services (such as job referrals and job clubs) as well as to extend the range of services (e.g. some programmes specifically tailored to women).

Additional funding was also made available for low-income parents who require help in caring for their school age children while they work. A new subsidy was provided for those parents who require OSCAR (out of school care and recreation programmes) and for OSCAR establishment funding in low-income areas.

Impact of the Changes

Policy changes to strengthen the work expectations of beneficiaries, together with the structural integration of employment assistance and income support, appear to have had a noticeable impact on trends in benefit receipt over the last 18 months.

The introduction of the changes took place against a background of slower economic growth. Normally this would mean that total benefit numbers could be expected to rise until the business cycle turned strongly upwards. This has been the case for UB (now Community Wage - Job Seeker). However, differential patterns have emerged for the other benefits countering previous growth trends. These can be traced to the impact of policy changes and the establishment of DWI.

Specific trends are described below.

Total Benefit Uptake

Total benefit numbers have levelled off. In September 1999 total benefits were 386,744, just fractionally below the level of the previous year. Rises in one category have been offset by falls in other categories. This is close to what might be expected as the economy lifts out of an economic slowdown. However, the flattening out of numbers has occurred earlier in the cycle than might be expected based on previous cycles. Also the rise in UB and the fall in most of the other income tested benefits is not the pattern of previous economic upswings.