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Economy

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.

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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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