WELFARE FACTS #2: BENEFIT FRAUD ON THE RISE

Three separate welfare stories caught my eye this week, all on benefit fraud.  The Bay of Plenty Times reported that more than $1 million of benefit fraud was committed by 41 Western Bay people prosecuted in the 18 months to the end of last year.  According to a lawyer for the Ministry of Social Development, benefit fraud is on the rise.

Benefit fraud cost New Zealand taxpayers nearly $16 million last year, and fraud detected by the Ministry has almost doubled from $8.1 million five years ago. That figure includes fraud committed by 10 social welfare staff, who were sacked for ripping off the system.

 MSD chief executive Peter Hughes says:

I do not tolerate benefit fraud and whenever a client has [been] deliberately involved in planned and premeditated benefit fraud they are prosecuted.

And yet I read in Tuesday’s New Zealand Herald about 5000 people who had moved off the dole, but who it seems should not have been on it anyway. This was, according to Minister Paula Bennett,

… because of the new requirement to reapply after a year, either because they did not reapply, had found jobs or were no longer eligible.

“It was an interesting exercise that tells you 5,000 people who were on an Unemployment Benefit didn’t actually need it and probably shouldn’t have had it.”

What is that if not benefit fraud? 

A conventional view is that you can’t get immediate savings from welfare reform – you have to first invest up front to get people into work. Cases like this cast doubt on that view.  And I suspect there would be a lot more low-hanging fruit. 

Here’s another example from the same Herald story. Until recently only 37 percent of beneficiaries were work-tested, but changes already brought in by this government are making a difference, such as part-time work requirements for DPB recipients with children over the age of six:

The number of those coming off the DPB since part-time work requirements were introduced had increased by 22 per cent over the past year – to more than 3,500 people.

Then on Tuesday in Rotorua’s Daily Post  I read about two Rotorua households being investigated by MSD:

Figures released to The Daily Post show two homes in the city, each occupied by six adults and one child, receive weekly benefits totalling $1749.60 and $1590.74.

That’s $173,000 being collected by these two households annually. The article also reported that:

… one Mangere home has 18 occupants, including 11 children, collecting weekly benefits of more than $2400.

Rotorua beneficiaries advocate Paul Blair has slammed the investigation as “benefit bashing” but Ms Bennett told The Daily Post it was about accountability to taxpayers and ensuring fairness.

Ms Bennett said some of the worst cases of child abuse in New Zealand occurred in situations where multiple people were living and collecting benefits.

Good on her. Too few people in the welfare sector have the courage to speak out about the link between child poverty, child abuse and benefit-dependent households.

‘Beneficiary bashing’ is also the tired old term a number of so-called beneficiary advocates have used to attack the Welfare Working Group’s report on reducing benefit dependency. ut you’d be hard pressed to find anything in the report that sounds remotely like that.  Indeed there is much in the report that proposes improving the lot of beneficiaries, not just through helping those with work capacity to get jobs, but also, and importantly, improving support for the truly needy with significant sickness and rehabilitation needs or disability issues that prevent them from participating in society.  The report’s emphasis on the need for much improved core health services, such as mental health services, disability support and rehabilitation for people recovering from sickness and for those with drug and alcohol dependency problems, should be welcomed by people working in these sectors.

Meanwhile it is good to see MSD getting tough on benefit fraud and abuse.  Relationship fraud is reportedly one of the most prevalent forms of abuse, and measures are needed to remove the difference between payments made to single individuals and those living with a partner. Among the working group’s recommendations in this area is a publicity campaign to reduce public tolerance of benefit fraud and abuse and promote use of a hotline to report it.   Sounds like a smart idea. After all, as Minister Bennett said: 

“Hard-working New Zealanders are doing it tough and would love to have an extra $1000 a week coming into their homes.”

FAIRNESS, POVERTY AND WELFARE REFORM

The respected British thinktank Policy Exchange has just published a research note Just Deserts: Attitudes to Fairness, Poverty and Welfare Reform.

It reports findings by market research company YouGov on what the British public thinks fairness really means and the implications of this widely endorsed concept for poverty and welfare issues.

Interesting results are as follows:

What is fairness?

• Second only to “economic responsibility”, “fairness” is the second most important value which voters want to see in a political party.
• The majority of people think that fairness is mainly a question of people getting what they deserve, rather than being about equal treatment.
• By a margin of four to one (73%-18%) people agree that society can be fair even if it is unequal – as long as there is equality of opportunity.
• Some of the least popular options for increasing fairness were reducing tuition fees (11%) and banning private education (4%), while increasing welfare benefits was the least favoured option of all, with just 3% identifying this as an effective way to create a fairer society.

Poverty and its causes

• Few members of the public endorse the more expansive definitions of poverty favoured by many academics, which equates poverty with differences in relative incomes, or some people not having goods that other people have. 
• By a margin of four to one (71%-16%) people agree with the statement that “Some people who are poor are much more deserving than other people who are poor. We should focus help on those who are trying hard and doing the right thing, rather than those who have made themselves poor.”
• Asked what factors might make a child more likely to end up poor in later life, people identify factors like growing up with drug/drink addicted parents (60%), failing to gain any qualifications at school (37%), or growing up with parents who are unemployed (33%).

Fairness and welfare reform

• By a margin of six to one (80%-13%), people agree that “people who have been out of work for 12 months or more, who are physically and mentally capable of undertaking a job, should be required to do community work in return for their state benefits.
• The median voter would back the idea that jobseekers should spend 3-5 hours a day searching for work.
• The public would back a stronger sanctions regime in the benefits system than exists at present.
• The public would back particularly tough sanctions for drug users, people with criminal records, or those who have claimed benefits several times before.
• By more than two to one (66%-27%) people agree that “People who have more than three children should not get extra child benefit if they have a fourth”.
• The government shouldn’t encourage marriage through the tax system, but should discourage people from becoming lone parents.

It seems the views of respondents to the YouGov survey are consistent with many of the themes in the recent Welfare Working Group report chaired by Paula Rebstock.

The research note quotes a perceptive statement by Liberal Democrat leader Nick Clegg.  His view contrasts with the views of some ‘poverty advocates’ in New Zealand:

“You cannot measure poverty with a snapshot because people’s lives last longer than a single second. If you want to measure genuine fairness, the question to ask about government policy is what its dynamic effects are, particularly across the generations. How does it change the future course of people’s lives? How does it increase their opportunities? Will it unlock the poverty trap or deepen it?”

THE FAIRNESS TEST

Just out from the Reform thinktank in the United Kingdom is a report The Fairness Test.  The author is Dr Patrick Nolan, formerly of the New Zealand Institute of Economic Research.

The current UK government has defined fairness as one of its three core values (together with freedom and responsibility).  The report argues that the current debate on fairness is flawed and in danger of leading policy astray:

• It is dominated by measures that emphasise existing spending through the tax and benefit system.
• It assumes that more government spending is synonymous with fairness.
• Many arguments around progressivity and inequality are based on little more than assertion.
• The role of economic growth in providing resources for redistribution is often ignored.
• The actual nature of tax avoidance and evasion (the tax gap) is poorly understood.

It concludes that:

To avoid these problems clearer thinking on fairness is needed. While there is no one single agreed view on fairness most people would accept that the extent to which government actions combat disadvantage should be central to any definition. This supports a focus on education and welfare reform. This does not support encouraging high-earners’ migration, maintaining the middle class money-go-round, increasing personal tax allowances or postponing difficult decisions.

Some specific points in the report resonate with debates on fairness and social policy in New Zealand.

On the book The Spirit Level, the report states:

There is no proven connection between the claims in The Spirit Level and the implied policy responses. The theory on equality could, for example, be used to justify a flat tax (which would equalise proportionate sacrifice).

It notes Okun’s “leaky bucket” trade-off:

Spending on welfare not only comes at a financial cost to the taxpayer but also creates other economic and social costs. This can be illustrated by the famous trade-off between equality and efficiency, which Arthur Okun described as the “leaky bucket.” Money transferred to the poor to alleviate poverty must be, as he wrote, “carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich.” The losses are due to administration costs and incentive effects. These incentive effects are due to people who are receiving welfare having less incentive to work as they are able to reach a desired standard of living with a lower level of work effort and they may face clawback of assistance as their incomes increase.

The report rightly stresses “the dynamics of income distribution (that people will move up and down in the income distribution over their lifetime” rather than static analysis, and the importance of facilitating social mobility, eg through education.

It criticises the use of personal tax allowances, noting that they benefit primarily higher income earners and damage work incentives because they require higher marginal tax rates to replace lost revenue.  A tax-free threshold, as proposed for New Zealand by the Labour Party, would have similar effects.

Interesting points are made about welfare reform in the United Kingdom, echoing material in the recent Welfare Working Group report in New Zealand:

• The flipside to having a welfare system which provides an important social safety net is that most people can reasonably be expected to take up work if it is available and adequate.
• The welfare system is too complex. The Department of Work and Pensions’ Decision Makers’ Guide is no less than 8,370 pages long.
• One of the first initiatives the Government announced was the Work Programme, which will outsource all welfare to work services. The new commissioning framework will give providers longer and larger contracts, greater freedom and will fund welfare to work services through the savings made in reductions in benefit expenditure. Following reforms begun under the previous Labour administration, a number of benefits for people out of work (such as the incapacity benefits) have been reformed to be more active. These are the right changes.

On education, the report endorses the moves by the UK government to adopt a Swedish-type education voucher programme, saying:

The greater use of choice and competition in the education system can support fairness. Competition is not a zero-sum game where the profits made by private sector companies deprive public services of funds. This zero-sum view ignores productivity. Profits (especially when they attract new entrants into markets) can encourage competition and drive up standards and productivity. These productivity improvements can mean, for example, that the supply of services can expand even when costs are falling. Indeed, as Tony Blair has argued:

“Choice mechanisms enhance equity by exerting pressure on low quality or incompetent providers. Competitive pressures and incentives drive up quality, efficiency and responsiveness in the public sector. Choice leads to higher standards. The over-riding principle is clear. We should give poorer patients or parents the same range of choices the rich have always enjoyed. In a heterogeneous society where there is enormous variation in needs and preferences, public services must be equipped to respond.”

The Business Roundtable has discussed issues of fairness in social policy in a number of reports.  They include the books Equity as a Social Goal by Cathy Buchanan and Peter Hartley, and Middle Class Welfare by James Cox.  Both are cited in the Reform report.

OPINION WITHOUT ANALYSIS IS PRETENTIOUS

It’s always frustrating to come across opinionated comment unsupported by evidence or reasoning.

A case in point is this February 25 New Zealand Herald editorial on last week’s Welfare Working Group report.

The editorial states:

… the group errs in spreading its net too widely. John Key’s queasiness related to women who had more children when they were already on the benefit being required to look for part-time work when their baby was just 14 weeks old. The intention is to stop mothers having additional children simply as a means of remaining a beneficiary. Every so often, an example of this gains publicity. It is probable, however, that the problem is overstated. Either way, the Prime Minister is right to rule out the proposal.

This is just fact-free ex cathedra opinion. It is “probable” that the problem is overstated?  There is no need to surmise. Did the leader writer not read the WWG report which states (p76), “In New Zealand, an estimated one is seven sole parents who enter the benefit system will have an additional child while on a benefit (and ultimately one in four of current sole parent beneficiaries)”?  That hardly looks like a small issue to me.

And what is the Herald’s alternative position? Does it condone the behaviour of the appalling, foul-mouthed Joan Nathan of MeGehan Close, a long-term beneficiary with six children, one of whom, befriended by John Key, is now in CYF’s hands because she is “better off” there and “it’s a life I can’t give her”? Does it think taxpayers should support such DPB recipients on an open-ended basis when most responsible, working families plan the number of children they have on the basis of how many they can afford to provide a good life for? What is its view on the responsibilities of the fathers in question? Does it support the other WWG recommendations on this issue, eg free contraception? Does it favour the minority recommendation that work obligations should commence after 12 months rather than 14 weeks? And why? We are not told.

The editorial goes on to say:

In the same way, the working group goes over the top in recommending that mothers should be forced to look for work once their first child turns 3. Many couples on two incomes may well be willing to return to work soon after a baby’s birth. But that does not mean other people’s priorities are wrong. In parenting terms, there is much to be said for mothers who stay at home with their pre-school children. Whatever the benefits of work, for the individual and the economy, insisting that sole mothers take paid work before their children attend school is a step too far.

It describes this recommendation as “radical” and “extreme”. By what standards?  Welfare researcher Lindsay Mitchell has pointed out that the United States and Canada have a range of ages according to the state or province, with the United States having a maximum of 1 year.

Social democratic Norway, France, Germany and Switzerland have been work testing at 3 for some years.

Why does the Herald think that New Zealand can afford a welfare system with rules that are more lenient than those of these much richer countries, with all the consequences for child poverty and social breakdown that they generate?

The WWG reports (p66) that three-quarters of recipients of paid parental leave returned to work within 12 months, and two-thirds of those returned to work after taking six months or less.

The expectation that, with exceptions, parents be required to look for part-time work of at least 20 hours per week once their child reaches three years of age, and thus relieve the burden on taxpayers and society, looks neither radical nor unreasonable to me.

The leading newspaper in New Zealand’s leading city could do better.

Friday graph: Sue Bradford’s legacy

Eric Crampton of the economics department of the University of Canterbury is a fine economist. Some months ago he estimated conservatively that the abolition of the youth minimum wage has cost the country over 9000 jobs.

Eric noted that youth unemployment during the current recession, relative to adult unemployment in prior recessions, seemed very high.

More evidence on this point is shown in the graph below (taken from The Economist).

It indicates that New Zealand’s current youth unemployment rates are an outlier relative to other OECD countries.

 Click to enlarge
The further north a country is, measured on the perpendicular from the ‘four times as high’ line, the worse youth unemployment is relative to adult unemployment. Only Sweden and Luxembourg have worse youth unemployment outcomes than New Zealand relative to adult rates. 

That is former Green MP Sue Bradford’s legacy to New Zealand.  We are talking here about the most marginal low-skilled young people.  Firms will pay young workers the minimum wage or higher wages if their productivity warrants it.  Indeed they will be forced to do so because of competition for labour by other firms.  But they won’t if young workers’ productivity doesn’t warrant it – they will make losses if they hire such workers.

Sue Bradford may have been well intentioned but it is outcomes that matter.  This outcome is tragic.  How does she sleep at night?

The government’s Welfare Working Group will have failed if it turns a blind eye to this appalling situation.