A Welfare State  for the 21 st  Century Peter Saunders Centre for Independent Studies Australian National University Demog...
The changing social structure
Drivers of change <ul><li>Rising real incomes – mass welfare state not needed when ‘masses’ achieve affluence </li></ul><u...
How to defend the marginalised minority <ul><li>Resist change (conventional response): “underpin the support of the middle...
Examples of self-funded welfare <ul><li>Direct purchases – e.g. purchase of child care (offset by tax allowances)  </li></...
Key questions about self-funding <ul><li>Is it  possible  to extend personal ownership/control to all who want it? </li></...
Question (1): Is it possible? <ul><li>100 yrs ago, majority self-provided (WWI almost half covered by friendly society ben...
Redistribution mainly tax, not welfare <ul><li>Percentage share for each gross income quintile: </li></ul><ul><li>Lowest 2...
Churning in Middle Incomes <ul><li>Average weekly value (1999 dollars) of tax paid and benefits/services received by gross...
Churning in families <ul><li>Tax payments (income tax and GST) and welfare receipts (benefits+services) for different type...
Lifetime Churning <ul><li>Ann Harding: ‘Over the lifetime there is significant ‘churning’ as taxes  </li></ul><ul><li>paid...
So self-funding  should be  possible   <ul><li>If split is 50:50 between intra-personal churning and inter-personal transf...
Question (2): Is it desirable? <ul><li>Economic benefits: </li></ul><ul><li>Efficiency : Churning is costly (administrativ...
<ul><li>Sociological benefits: </li></ul><ul><li>Personal empowerment:   Greater sense of autonomy, self-worth and persona...
Conclusion <ul><li>Key social division today is between a self-reliant ‘middle mass’ and a state-dependent, marginalised m...
For further information… <ul><li>CIS ‘Issue Analysis’ Papers: </li></ul><ul><li>The $85 Billion Tax/Welfare Churn </li></u...
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A welfare state for the 21st century

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Presentation to Australian National University Demography seminar, March 2006

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A welfare state for the 21st century

  1. 1. A Welfare State for the 21 st Century Peter Saunders Centre for Independent Studies Australian National University Demography seminar, 7 March 2006
  2. 2. The changing social structure
  3. 3. Drivers of change <ul><li>Rising real incomes – mass welfare state not needed when ‘masses’ achieve affluence </li></ul><ul><li>Rising expectations (the more that exit, the more possible and desirable it appears to those that remain) </li></ul>
  4. 4. How to defend the marginalised minority <ul><li>Resist change (conventional response): “underpin the support of the middle classes, without which the welfare state would founder politically” (Peter G Saunders) > high tax, extensive middle class welfare </li></ul><ul><li>Embrace change (alternative response): let everyone become an effective consumer by cutting tax (so we can afford to buy) and topping up spending power of marginalised minority </li></ul>
  5. 5. Examples of self-funded welfare <ul><li>Direct purchases – e.g. purchase of child care (offset by tax allowances) </li></ul><ul><li>Tax credits rather than government service provision – e.g. family support, schooling </li></ul><ul><li>Personal savings accounts for predictable future needs – e.g. superannuation; routine medical; unemployment/ sickness </li></ul><ul><li>Insurance – e.g. health, unemployment (linked to savings?) </li></ul><ul><li>Loans against expected future income – e.g. higher education </li></ul><ul><li>NB: Residual role for state in long-term care (disability; chronic illness) and when self-funding runs out (e.g. work for long-term unemployed) </li></ul>
  6. 6. Key questions about self-funding <ul><li>Is it possible to extend personal ownership/control to all who want it? </li></ul><ul><li>- could we afford to self-finance </li></ul><ul><li> adequately </li></ul><ul><li>Is it desirable to phase out state provision in favour of self-funding? </li></ul><ul><li>- economically? </li></ul><ul><li>- sociologically? </li></ul>
  7. 7. Question (1): Is it possible? <ul><li>100 yrs ago, majority self-provided (WWI almost half covered by friendly society benefits) </li></ul><ul><li>Last 40 years, real incomes doubled: Frank Field: ‘For the first time a sizeable part of the working class and lower middle class now have incomes that give them real choices’ </li></ul><ul><li>Yet welfare state spending has escalated ($80 billion pa on welfare payments, $94 billion on services = two-thirds of all the federal and state taxes) </li></ul><ul><li>Proposition: Most people could afford most of the services they need if they were not taxed so highly to pay for government services </li></ul>
  8. 8. Redistribution mainly tax, not welfare <ul><li>Percentage share for each gross income quintile: </li></ul><ul><li>Lowest 2nd 3rd 4th Highest </li></ul><ul><li>quintile quintile </li></ul><ul><li>Private income 1.0 5.5 15.9 27.3 50.3 </li></ul><ul><li>Direct taxes 0.2 2.5 12.0 25.4 60.0 </li></ul><ul><li>Indirect taxes 9.3 14.1 18.6 25.0 32.9 </li></ul><ul><li>Total taxes 3.1 6.2 14.1 25.3 51.4 </li></ul><ul><li>Welfare payments 28.3 38.6 18.3 9.3 5.4 </li></ul><ul><li>Welfare state services 16.4 22.3 20.1 19.9 21.3 </li></ul><ul><li>Total welfare 20.6 28.0 19.5 16.2 15.7 </li></ul><ul><li>Final income 7.4 13.5 17.7 23.9 37.5 </li></ul><ul><li>Neil Warren, Tax: Facts, fiction and reform Australian Tax Research Foundation, Sydney, 2004, Table 2.12,. </li></ul>
  9. 9. Churning in Middle Incomes <ul><li>Average weekly value (1999 dollars) of tax paid and benefits/services received by gross income quintiles </li></ul><ul><li>Average weekly value for each gross income quintile: </li></ul><ul><li>Lowest 2nd 3rd 4th Highest </li></ul><ul><li>quintile quintile </li></ul><ul><li>Total benefits 286 416 293 244 221 </li></ul><ul><li>Total taxes 40 76 179 324 661 </li></ul><ul><li>Net benefit/cost +246 +340 +114 -80 -440 </li></ul><ul><li>ABS Government Benefits, Taxes and Household Income 1998-99. </li></ul>
  10. 10. Churning in families <ul><li>Tax payments (income tax and GST) and welfare receipts (benefits+services) for different types of households, 2001-02 </li></ul><ul><li>Single Couple Couple Couple Couple Couple Couple Single </li></ul><ul><li>person <35 kids kids kids 55-64 >65 person </li></ul><ul><li><35 no kids <5yrs 5-14 15-24 no kids no kids >65 </li></ul><ul><li>Private income 630.8 1390.6 1095.4 1160.0 1395.6 684.5 287.6 150.7 </li></ul><ul><li>Total Benefits ($/wk)101.7 107.2 292.3 507.8 564.1 264.5 548.8 351.3 </li></ul><ul><li>Total taxes ($/wk) 208.5 426.9 373.8 393.5 474.4 223.4 102.3 56.1 </li></ul><ul><li>Net cost/benefit -106.7 -319.7 -81.6 +114.3 +89.7 +41.1 +446.5 +295.1 </li></ul><ul><li>Final income 524.1 1070.9 1013.9 1274.3 1485.3 725.6 734.1 445.9 </li></ul><ul><li>Abstracted from Rachel Lloyd, Ann Harding and Neil Warren, Redistribution, the welfare state and lifetime transitions Paper to the conference on ‘Transitions and Risk’, Melbourne, 24 February 2005, Table 1. </li></ul>
  11. 11. Lifetime Churning <ul><li>Ann Harding: ‘Over the lifetime there is significant ‘churning’ as taxes </li></ul><ul><li>paid to government at some point in the lifecycle are returned to the </li></ul><ul><li>same individuals at some other point’ </li></ul><ul><li>Poorest decile of lifetime income earners pay in income tax for more than half of the income support payments they receive (and if they are male, they pay for all of them). </li></ul><ul><li>Ann Harding ‘Lifetime versus annual tax-transfer incidence: How much less progressive?’ The Economic Record vol.69, June 1993, Tables 1 and 3. </li></ul><ul><li>Each individual on average funds 73% of his/her lifetime consumption of government health services through taxes paid. Even poorest lifetime decile pay for more than 1/3 rd of health care they receive </li></ul><ul><li>Ann Harding, Richard Percival, Deborah Schofield and Agnes Walker, ‘The lifetime distributional impact of government health outlays’ Discussion paper No.47, (Canberra: National Centre for Social and Economic Modelling, February 2000). </li></ul>
  12. 12. So self-funding should be possible <ul><li>If split is 50:50 between intra-personal churning and inter-personal transfers: </li></ul><ul><li>$85 billion released for tax cuts (almost equivalent to eliminating personal income tax) </li></ul><ul><li>E.g. worker on wage of $50,000 might pay only $3,000 in income tax (currently $11,172) but would have to save more for retirement, pay health insurance, etc. </li></ul><ul><li>Remaining $85 billion is redistributed (as now) – this supplements purchasing power of those who cannot afford to self-fund without additional help </li></ul>
  13. 13. Question (2): Is it desirable? <ul><li>Economic benefits: </li></ul><ul><li>Efficiency : Churning is costly (administrative costs, compliance costs, enforcement costs) </li></ul><ul><li>Incentives: Reduced tax would raise the rate of economic activity, and lift general living standards. </li></ul><ul><li>Sustainability: Reduced pressure on gov’t budgets from ageing population (personal superannuation means age pension costs up 1.7% to 2040 cf 3% for OECD); medical savings accounts would similarly reduce pressure on government health budgets(up from 4% to 8% of GDP in next 40 yrs) </li></ul>
  14. 14. <ul><li>Sociological benefits: </li></ul><ul><li>Personal empowerment: Greater sense of autonomy, self-worth and personal responsibility. Welfare state has ‘infantilized’ us. </li></ul><ul><li>Social cohesion: Cohesion built from the bottom up, not by governments taking responsibilities away from us. Increased government welfare spending has coincided with rising social problems such as crime. </li></ul><ul><li>Depoliticisation of civil society: The welfare state is the core business of government. As spending increases, so government’s influence on society increases. Corrupts civil society: competition for government hand-outs, vote-buying, moral hazard of unconditional welfare </li></ul>
  15. 15. Conclusion <ul><li>Key social division today is between a self-reliant ‘middle mass’ and a state-dependent, marginalised minority </li></ul><ul><li>The mass welfare state is unravelling because the former can increasingly afford to exit the system. Policy challenge in next 20 years: to extend opportunities for self-provisioning from the middle mass (who will seize them anyway) to the marginalised minority (who will otherwise get left behind). </li></ul><ul><li>Defenders of the mass system want the escaping ‘middle mass’ to be locked back in by increasing their taxes, thus forcing them to accept state services. </li></ul><ul><li>A more sensible alternative is to redirect resources into boosting purchasing power of those who are currently unable to afford self-funded alternatives. </li></ul>
  16. 16. For further information… <ul><li>CIS ‘Issue Analysis’ Papers: </li></ul><ul><li>The $85 Billion Tax/Welfare Churn </li></ul><ul><li>http://www.cis.org.au/IssueAnalysis/ia57/IA57.pdf </li></ul><ul><li>Six Arguments in Favour of Self-Funding </li></ul><ul><li>http://www.cis.org.au/IssueAnalysis/ia61/ia61.pdf </li></ul>
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