Countdown To The Budget - Welfare

Article by Hon Sir Roger Douglas, ACT New Zealand

Tuesday, 26 May 2009

Background:
New Zealand’s welfare budget soars, despite unemployment reducing sharply over the past nine years. This graph below shows the rise in social welfare payments, occurring at the same time that numbers claiming the Unemployment Benefit more than halved:

See http://www.act.org.nz/blog/roger-douglas for Graph

Part of the significant drop in the number of people in receipt of – or waiting to receive – the Unemployment Benefit was partially achieved by transferring beneficiaries to other benefits, such as the Invalids and Sickness Benefits (which increased 66 percent and 41 percent respectively under Labour.

Welfare entitlements were originally intended as a safety net for those who lost their job; a way to tide them over until they could re-enter productive employment. Today, welfare dependency is a way of life for many – but, due to the good intentions behind it, welfare seems beyond criticism. We must look beyond intentions and consider results. The real effect of welfare is that its negative incentives damage those who are most vulnerable.

By subsidising individuals not to work, and abating benefits so quickly, effective marginal tax rates are high – meaning the benefit to be gained from actually working is small. Further, mothers often receive more handouts if their partner is not living with her. This is a driving force behind broken families.

Handouts destroy an individual’s independence and sense of dignity. Although designed to assist, the bureaucracy begins to assert control over welfare recipients’ lives – treating them like children, and trapping them in the system. Many are afraid to take jobs that become available because they fear they may it and will then have to wait before being able to go back on welfare. So they stay on welfare. This immense feeling of helplessness has the predictable effect of stifling motivation.

So What Choice Do We Have?

Option A - ACT New Zealand’s Policy:

We do have a choice. We can get this right.

The first thing we would do is end middle-class welfare – that’s schemes like Working for Families – replacing them instead with lower taxes.

For Unemployment, Sickness, and Invalid benefits ACT would devolve funding to the individual to purchase their own risk insurance. ACC or the Ministry of Social Development does not care about you. Only people care – and the people who care most are the individuals closest to you: family and friends. Devolution of funding would lead to competitive risk insurance markets that would provide competition to keep costs down, while also ensuring there was an incentive to encourage people back to work.

For Superannuation, ACT would move to progressively remove the current failing pyramid scheme (Pay-As-You-Go), and replace it with individualised accounts where people are encouraged to save for their retirement. For this purpose Kiwisaver should be streamlined, and greater autonomy given to the individual over their savings. Such a system will increase the amount of income available to those who are retired.

Option B – The Rest:

What will the other Parties do? More of the same. Because welfare has good intentions, other Parties refuse to look beneath the veneer to its actual effects. Centralised bureaucracy will continue to destroy the values that create and bind society together by encouraging more dependence, more rules, and more controls.

Taxes would remain high or increase to fund the welfare state, stifling growth and productivity.

Your Decision:

What would you do if you were the Finance Minister? Which option would you choose? See below for the outcome of your decision.

If You Think Option A Is The Best Move Forward [ACT’s Policy]:

People develop a sense of independence, and finally see the benefits of working hard to get ahead. Those who can get jobs are encouraged to do so. As people return to work, the effects of inter-generational welfare are broken, allowing those whose independence has been broken by welfare to move up.

Those who cannot find employment immediately are assisted through insurance schemes that have incentives to return people to work, ensuring that return-to-work-programmes are in place and adequately functioning.

By putting the onus back on individuals to save for their own retirement via lower taxes, superannuitants are no longer left at the whim of the current lot of politicians, and can plan for themselves.

If You Think Option B Is The Best Move Forward [All the others’ policy]:

The cycle of welfare dependence will continue. Families will remain trapped in the system, unable or unmotivated to break out of dependency. As unemployment rises during a recession, Politicians try and mask the figures by shifting people onto the Sickness and Invalids Benefits.

People’s motivation and self-respect atrophies, creating a permanent underclass that has no stake in society and sees no benefit in working.

ENDS

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