Jan 11, 2016

Some simple maths to save the welfare state

Everyone calm down, writes economist John Quiggin, our generous welfare state is not going to bankrupt Australia.

The Turnbull government is apparently keen to undertake more reform, in this case applying to the welfare system. This weekend I saw a couple of media reports, unsourced, but possibly based on material supplied by Social Services Minister Christian Porter, based on the “alarming” projection that welfare payments will rise from $154 billion to $270 billion in a decade, more than can be accounted for by inflation and population growth. A huge dollar figure makes for a scary headline but not for sensible analysis. The prosaic facts underlying this projection are:
(a) Welfare payments are dominated by the old age pension; (b) The value age pension increases in real terms over time, since it is linked to earnings; (c) Even allowing for an increased age of eligibility, and more reliance on superannuation, the proportion of the population eligible for the old age pension is unlikely to fall.
Put these facts together, and it’s virtually certain that the welfare bill will grow broadly in line with national income (usually measured by GDP), and therefore will outstrip growth in population and inflation. Indeed, a quick check suggests a compound rate of growth of about 6%, almost exactly in line with nominal GDP (assuming 3.5% real growth and 2.5% inflation). The government’s proposed reforms appear to involve attacks on recipients of welfare in the popular media sense of the term (Newstart, disability benefits and so on). But the only ways in which the growth rate of the welfare bill can be held much below that of GDP are:
(i) Freeze the real value of age pensions, as has been done to Newstart since the 1990s; or (ii) Reduce access to the age pension, either by further raising the access age or by tightening means and assets tests.

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7 thoughts on “Some simple maths to save the welfare state

  1. Norman Hanscombe

    As you well know, John, the maths isn’t the problem, it’s how any politician can advocate what needs to be done without being destroyed by an alliance of the various [non-intellectual of course] elites which wield most power and are devoted to protecting whatever they hold dear, especially themselves.

  2. ken svay

    The huge figure was certainly enough to scare the morons on social media so one would assume it was scary for the electorate as well. I pointed out on facebook that this figure made no allowance for growth or inflation and any figure ten years hence will appear to be huge.I am always always pointing on social media that the whole country is on welfare through tax and superannuation concessions, the diesel fuel rebate,subsidies to industry and so on.

  3. bushby jane

    Quite right Ken. An option to increased unemployment payments is to not keep destroying jobs in industries like say the car manufacturing industry.

  4. Peter Ridgewell

    A couple of comments,John:

    (i) Freeze the value of age pensions: An real gift to politicians who can then use increases, however paltry, to buy votes every election. Eventual pauperisation of pensioners and then huge efforts spent lobbying (eg by welfare bodies) for increases;so much effort that could be devoted to better things.

    (ii) Reduce access to age pension. Couldn’t agree more.

    (iii) Get the super system back on track so it ceases to be a tax-avoiding savings system and becomes retirement income system (ie no lump sum withdrawals)

  5. drsmithy

    There’s a good argument for tightening up means and assets tests.

    A couple can qualify for a part pension even if they’ve got a million bucks in the bank and live in a mansion.

    The pension has also seen far faster growth than other welfare payments (Newstart, et al), so a short term freeze wouldn’t be unreasonable in that context.

  6. Norman Hanscombe

    I’m heartened, drsmithy, to see the Crikey Commissariat for once permitting a rational comment through so promptly.

  7. judith wakeman

    Money doubles approximately every 10 years at 6% compound interest or every 6 years at 10% compound interest (ballpark figures). So you would expect any costs to double Over 10 years as a matter of course.

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