Address to the National Press Club “The Best Form of Welfare”

Location: National Press Club, Canberra

Download the National Press Club presentation [PDF: 1.6MB]

E&OE

Thank you very much Laurie. It is great to be with you all here in this new role. Can I particularly acknowledge my parliamentary colleagues who are here with me today and of course my assistant Minister Mitch Fifield and Marise Payne the Minister for Human Services, and Connie Fierravanti-Wells also my Parliamentary Secretary when it comes to multicultural affairs. It’s great to have many of my other colleagues here from the parliament, thanks to the whips in the Senate and in the House for giving them the leave. It’s great to have Patrick McClure here and Patrick thank you so much for the report we’ve released today and we thank you for the hard work that you’ve done. Can I also acknowledge my department secretary, Finn Pratt. Today I wanted to really lay out what I believe are the challenges that are before me as the Minister for Social Services and the Government more broadly when addressing this incredibly important area and I’ve chosen the topic of ‘the best form of welfare’ as the obvious answer is ‘a job’.

There’s no doubt, as Patrick’s report shows, that the system that supports so many Australians is in need of change for the sake not only of those who receive it today but for the generations who will rely on it in the future. The Department of Social Services spend this year [presentation page 3] is around $150 billion. $150 billion that is both the welfare payments and other payments that go out to support the various initiatives in this portfolio. This is more than the combined annual spending for health and education. It already takes eight out of every 10 income tax payers to go to work every day to pay for this system. 8 out of 10 to pay for the system that we have today. And before long, that could be 10 out of 10 and when it comes to welfare that’s not a perfect score. It’s very important that we understand that every single benefit paid is paid for by a taxpayer and there are two partners in that process, the people we’re trying to help and the people who have to pay for it.

Australia has historically kept the cost of its welfare system below the costs of some overseas models through its flat-rate structure and its means testing and its means-based approach. In many ways we’re world leaders in these areas however social security and welfare payments are still the highest growth areas of Government expenditure with an extra $11.7 billion dollars over the forward estimates [presentation page 4]. Now as a proportion of outlays and as a proportion of GDP, social services expenditure increases over the Budget and forward estimates and that includes the savings measures which are not yet passed through the Senate. If those measures don’t pass, then obviously that proportion will indeed be greater.

Unless there is major structural change that is made to our welfare system over the next decade and beyond, over a generation, our social services expenditure will swallow the Budget. It will swallow the Budget and that’s why it is important to get a handle on what we’re spending, why we’re spending it, what we’re hoping to achieve and what changes we need to make now and into the future. Just going through quickly some of those expenditures, you can see there very clearly that social security payments obviously being the lion’s share but as Mitch knows, in particular, that does break out into other areas which are important in terms of expenditure aging and aged care, childcare and early learning which has been a topic of very recent debate, families, community and women, disabilities and carers and a small proportion on housing [presentation page 5]. Most of this spending is in the aged pension followed by family tax benefits, disability support, Newstart allowance and childcare [presentation page 6]. The spending is increasing fastest for childcare, carers and the unemployed [presentation page 7].

But it’s not just about how much we’re spending, it’s also about what we’re doing in the myriad of systems and payments that are made. As Patrick’s report shows, it’s not just costly, it is also tremendously complex. There is a labyrinth of payments, supplements, schedules, thresholds, tapers, indexation rates and none of these lack programmatic specificity [presentation page 8]. The system complexity is compounded by what Senator Payne and I know is Walkman-era technology. Walkman-era technology that drives our payments ICT system. And that has been left adrift over a long period of time. The current system, which is explained by what Marise calls the candy crusher chart [presentation page 9], summarises a system that consists of 30 million lines of code, undertakes more than 50 million daily transactions, was built 30 years ago – perhaps not when Cliff Richard was wired for sound but certainly Duran Duran was there when it was built – today the system delivers 40 payments not just in the social services area but from other portfolios and 38 add-ons, it is responsible for delivering around $100 billion in payments to 7.3 million people every year. This equates to approximately $290 million per day or $12 million every hour. The system undertakes 50 million daily transactions, processing 500 to 1,000 transactions per second, including reporting employment income to lodging a claim for paid parental leave. The system now consists, as I said, of 30 million lines of code, that’s equivalent to the code needed to run 75 space shuttles. If all the information was printed on paper, the stack would almost double the height of Centrepoint tower in my home town of Sydney. If we invest in an updated ICT system, we could make the system more efficient right now.

Nearly half of all Centrelink transactions are still done face to face or over the phone, a quarter of digital transactions still require the help of a DHA staff member. The current back end systems are not updated in real-time to our customer-facing digital systems, for example, our current system cannot send real-time information regarding the process of a claim to a customer’s digital account. This leads to a higher number of calls from customers who simply want to know how their claim is progressing. By comparison, most people are used to ordering a pizza online and knowing exactly when it will be delivered. Our system doesn’t do that. ICT is not just about access it is also about making sure that the changes Government makes can be implemented quickly and cost effectively, even simple changes to policy can be time consuming, expensive and can have unforeseen impacts on other parts of the system due to the tangled web of code that has been built up over the years. The highly bespoke nature of the aged technology also requires costly, ongoing support from a declining number of specialised staff familiar with the technology. ICT reform would also ensure that the more Government systems are talking to each other, taking the compliance burden away from individuals and employers and service providers. Creating a simpler system will make it easier for people to comply with requirements and spend more time searching for jobs which is the key element of welfare reform.

In advancing many welfare reforms, we will need a major haul of our service delivery and ICT systems. Now, Minister Payne has been leading the charge on this since taking up the job after we were elected and she has been doing an extraordinary job. It is a very complicated process and I will leave it to her on other occasions to take you through how this can be progressed but you can’t fix the system if you can’t change the engine which drives that system and makes it work on the ground. Implementation of policy is as important as the development of policy. I think that is one of the key lessons out of the last Government. Lots of ideas, you could say it was a festival of dangerous ideas running for six years, but nevertheless, even when they had a good idea the implementation of that policy always let them down. We won’t be repeating that mistake. We want to ensure the sort of change we can implement are changes that are backed up by the systems that need to drive it. The size, nature and complexity of our welfare system begs the question: Is it being spent effectively? Is the bulk of the vast spending on welfare getting to those most in need? Is it helping to improve people’s lives? Is it helping people develop self-reliance and independence? Is it being leveraged to help people get into jobs or is it stifling opportunity and at worst creating an underclass of intergenerational welfare dependents?

Patrick McClure has provided an excellent report that answers many of these questions and presents, I think, a very worthy vision of a more simple, more targeted welfare system that understands that the best form of welfare is a job. I want to thank Patrick and the other reference group members, Mr Aird and Sally Sinclair for their important work on the report and its completion is the culmination of many, many months of hard work by the reference group and includes input from an extensive consultation process that I know many in the room have been participants in. The key reform proposed in the review is a major redesign of the welfare payment structure to address the costly, confusing and inequitable elements of our current system by establishing five primary payments. The report suggests that each primary payment type have rates that better reflect people’s different circumstances, these payment rates would need to cover basic costs of living and the cost of getting a job, payment rates also need to better reflect people’s circumstances and capacity to work. The report importantly promotes a no worse-off approach by transitioning to a new system over time. While these proposals have been put forward as a report to Government, not from Government – and that’s a very important distinction to make – they do point a way forward, I believe, for the next generation of necessary change in this area. The changes proposed and the way to achieve them are not revolutionary but medium to long-term change that can be achieved incrementally.

Our welfare system must respect those who need our help and depend on that help but it must, as I said before, respect those who pay for it and that is the taxpayer. Our welfare system must be based on need not entitlement. Every payment must have a purpose and it must deliver the outcome, the benefit that the taxpayer is paying to provide. My concern is that right now there seems to be no appetite for the change that is necessary and that Patrick has referred to in his report, whether that’s in the community, the parliament, the opposition, some members of the cross bench even but unless this does change, unless we are able to move to a better system that better reflects the needs of the next generation and even this one, then change even incremental change will not be possible. That is the modern political reality. What we sew now in apathy will be reaped in a terrible harvest for future generations who will not get the safety net that our generations has been provided by those who went before us. It is not just about whether we are better off or worse off as a result of any individual measure that is introduced. It’s about will the next generation be better off or worse off? I understand the focus on whether people will be better or worse off under precise changes that are introduced into any system. Of course we understand that. But at the end of the day, as a member of parliament, as a Minister – and I’m sure echoing the views of my colleagues in this room – we don’t want to leave something worse for the next generation than we were given by the generation who gave it to us. I think that needs to impact on the political debate in this country. Change will not happen if there’s not an appetite for change and we need to work on that appetite for change because the need for it is very real and there are millions of Australians who, in the future, are depending on it for it.

We don’t have to make this change overnight. Right now we can still manage and define the pace of change but only if we commit to it now. It’s not just about system reform, though. I’ve talked about – and as I would encourage you to work through Patrick’s report to see the many things and worthy measures that are outlined in that report but at the end of the day the best form of welfare is a job and creating jobs and getting people in a position to take one is even more important than system reforms itself.

This is a chart [presentation page 11] that I was shown by Finn and his team when I became Minister and I found it an absolutely fascinating chart. What you can see there is the percentage of people between 15 and 64, receiving an income support payment. That’s the blue line. The green line is the employment to population ratio for that same age group. When Patrick last did a report for the Government which provided, I think, a direction for the Howard Government’s reforms over those years, they were very important reforms but what you can see is that running from 1996, the percentage of the population receiving a support payment was 24.7%. Over the course of that Government it fell to 16.6%. At the same time, the percentage of people employed to population rose from 67.3 to 73.4. That’s what says to me is the best way to achieve savings in the welfare system. You get people into work. That’s the most important thing that it has to achieve. There has to be jobs, that’s why economic growth so important. There has to be jobs, that’s why policies that support, create, encourage jobs are so important. That’s why incentives are so important, that’s why the success of small business in particular is so important because without that there will not be the jobs for people to go into so creating the jobs is as important for welfare reform as the many things outlined in Patrick’s report.

So where do we start? There are three areas that I would nominate to you as being the areas that I’m keen to work on and my colleagues are as we work through the course of this Budget and the Budgets that follow. Getting families back to work is the first of those. 12% of children under 14 are growing up in jobless families. 12%. 42% of those families are single-parent families. Getting families back to work and indeed helping them stay in work once they’ve had children is a critical area for improving labour force participation. Female labour force participation has been rise now for some time, that’s been a generational change, it’s been one of the key drivers of our economy but when we look at the area where we fall behind our OECD partners it is in the 25 to 44 age groups [presentation page 13]. The child-bearing age groups where we are falling behind, whether it’s Canada, New Zealand, the UK or the United States or other places, that’s where we are lagging. That’s where we can do better. If we look specifically at the maternal labour force participation rates in those areas [presentation page 14], we learn that it’s actually mothers – not surprisingly – with very young children under 5 who are those who are falling behind the most in terms of their labour force participation, and particularly single mothers amongst that group. As the children grow up more mothers return to work when their youngest child goes to school. These are figures that have come out of the Productivity Commission report [presentation page 15] and I think are fairly intuitive, they’re common sense and they reflect what I think people’s lived experience is. But compared to other countries, we actually do fall behind when it comes to mothers participation rates when compared to other countries [presentation page 16], not just overall female participation rates in those key demographics but mothers in particular and the red box there is Australia and if you look at the two triangles it shows that Australia lags the OECD average for participation for the youngest child being 0 to 2 and the little square shows that we fall behind also for the youngest child aged 3 to 5. They’re the areas where we don’t do as well.

That naturally and importantly raises the issue of childcare which was the focus of the Productivity Commission report, the final report of which was released last week and according to parents in the various research that was referenced in that report, other than a personal choice – and it’s not the Government’s job to tell people what their personal choices are when it comes to how they care for their kids, that’s a decision for every family to make in their own time, in their own way, that’s up to them – but the main reason for those who want to go back to work was the cost of child care [presentation page 17]. Now the Productivity Commission, I think, has done an excellent job, as I said last week. They have come up with a set of proposals that seek to put downward pressure on the rising costs of child care, to have a strong work focus as to why you’d be spending the $7 billion in that system. It recognises the need for quality and affordability, not either/or. The quality debate around child care I think has been had, the systems are now in place. That’s not an issue that I think requires further remonstration. I think it’s something that we need to accept. Yes, it’s come at a cost and if we think it hasn’t we’re kidding ourselves. We have representatives of the early childhood sector here today, professionals working in child care centres. They know that. It’s come at extra cost but the quality is important. Parents want quality but they also want affordability and I think that’s the task we now have to address – affordability for parents who want to stay in work and go back to work.

That is the kitchen-table conversation that is going to be had and continue to be had and that’s the kitchen-table conversation that I want to influence and what the Productivity Commission has shown is that kitchen-table conversation, when it comes to economic issues and cost, is most significant for those on middle to lower incomes and what the Productivity Commission has recommended you can see from there [presentation page 18] is a recommendation which leaves 83.7% of families earning 160,000 or less in a higher subsidised position than they currently are. They recommend payments directly to the provider which I think has lot of merit in it and a range of other issues that relate to that. The blue line you can see there is the current system which shows that we already have effectively a tapering of support into the system when you combine the childcare benefit and the childcare rebate. What the commission is recommending is an adjustment to that but they’re recommending that on the basis of a – I wouldn’t call it a Budget-neutral position but I’d call it a relatively Budget-neutral position. That red line will cost $200 million extra on what we’re currently spending now. If we want to spend more on childcare – and I note today the Opposition was saying they want to spend a billion dollars more on childcare – well I think we’d all like to spend more on various ranges of services but you’ve got to back it up with how you’re going to fund it otherwise it’s just unfunded empathy. It’s important to ensure that what you’re going to put up you can fund and make happen. You can’t be a wish or a promise. We don’t want to be fairy godmothers of childcare reform, we want to be actually there to ensure we have a better system that delivers on the ground and that people can rely on.

So that is what the commission has come up with and we are now in that discussion. There are many representatives in this room today who have been part of that debate and will continue to be part of that debate as we work on our final model but our goals, I think, are clear. We want to make it more affordable, we want to maintain the quality gains, we want to put downward pressure on prices and we want to make the system simpler so parents and families don’t have to agonise needlessly over details that should be far more simple.

The second area is we need to get young people into work. We need them to be learning or earning. This is a vexing issue and I don’t pretend to have any magic solutions to this and everyone I’ve met over the last couple of months, as I’ve discussed these issues and there’s been lots of good ideas but I don’t think anyone else seems to think they have a magic solution to this issue but it is real.

Our young people are struggling to get into the workforce and all these charts [presentation page 20], I think, go to those points – the level of employment has been falling off, the level of unemployment has been rising, those not in the labour force have been increasing, the one bright spot is those in fulltime education has also been increasing and that’s a good thing but when it comes to addressing this problem and this challenge we are going to have to take I think, a very novel approach and I commend Patrick in particular for his recommendation on the New Zealand investment model. The New Zealand investment model uses actuarial valuations to say which risk factors drive long-term welfare dependency and outlays and what are amenable to early effective intervention.

The concept is similar to the way insurance companies predict risk. Each year an actuarial valuation is carried out in New Zealand to determine the estimated future costs of the benefit system. This approach looks at both past evidence and how people interact with the welfare system and the characteristics of people currently receiving welfare to understand who is most likely to have an extensive reliance on welfare over their lifetime as it allows better decisions to be made on where to focus investment and who to focus on for the greatest return on Government investment. In this case, people at risk of long-term dependency and disadvantage can be identified.

The New Zealand investment system has shown that intervening and investing early and that would particularly apply to these groups that I’m referring to now, helps prevent debilitating cycles of intergeneration welfare dependence. And they’re getting results. In New Zealand, the liability of the welfare system reduced between 30 June 2012 and a year later by 4.4 billion dollars. The key reason is that more people are getting into work and staying in work. Trials are an important part of this new approach. It’s not an accountant’s picnic; it is something far more useful than that. They allowed the testing of assumptions about what works for different people and to continually test and learn and refocus services to get the most benefit in the long-term. From those measures in particular, New Zealand has reported they had a $1.8 billion New Zealand dollar, direct return on their investment. A better understanding of who to invest in means increase services and support for those who need it most while investing and – investment in other areas that don’t get that same return, that don’t deliver on what the taxpayers are actually paying for have less of a priority.

So addressing the youth challenge is one that we can all share and we can identify with but I would argue that there are some very important learnings in what the New Zealanders have done and Patrick has made that very clear in his report and the Government will need to continue to consider that as we move forward.

The third area I wanted to refer to is aging. I don’t have the view that the aging of the population is a terminal illness for the country. That’s not my view. The cohort of our population that is moving through our population and has been since the Second World War has driven our economic growth over their entire lifetimes and, guess what, they still can. They don’t have to stop doing that. They can continue to do that.

The intergenerational report will come out through the Treasurer in the near future and I think one of our important responses to that as a community, as a society, is to see that this can be an aging boom not an aging bust for the country. This can be a real era of opportunity and we should see it in those terms and be optimistic about it.

Encouraging Australians to stay in work longer as they grow older, healthier, as the population ages you can see more people living to age 85 and over. You can see that spike which is the Baby Boomers moving through the system [presentation page 22]. When you match that with the next chart [presentation page 23], yes, those who have to pay for things will become importantly alarmed because as you get to 85 you really are starting to crank up where the system starts to support. That’s just a reality. These are the facts that we have to deal with. So the issue is how do we empower people as they age to maintain as much of their purchasing and consumer spending capacity as possible for longer? That is what can really help continue to drive the economic growth out of this most important cohort of Australians as it has for decades.

There are two areas I would suggest that we need to look at. Obviously, labour force participation and encouraging people as they grow older to work longer and we have measures that are in before Senate which have been rejected by the Opposition even though when they were in Government we supported measures that looked at raising the pension age. They have now, in their – I won’t say wisdom because I’d be lying – but they are now opposing those sorts of changes but when you look at female labour force participation in particular for women as they age, what you can see there is a real opportunity. You can see there in the charts [presentation page 24], in the green line and the blue line, that female workforce participation in those two cohorts of under 60s and 60 to 64 years has been rising steadily now and very strongly but you can see the line on the bottom there of 65-plus years being quite flat. The same women who are going to work when they’re 62 we need to encourage to stay in work when they’re 67 and 68 and 69. Not out of any sense of compulsion necessarily but because it’s good for their families, it’s good for their income, it’s good for their support.

The pension is not a lavish payment. We all know that. I’m sure everyone would wish it was higher but we know the Budget limitations on that. One of the ways you can supplement and support and increase your income in older years is to work longer and if you’re healthy and happy in your work then please keep going. That’s what we’d like you to do. It’s good for you, it’s good for your family, it’s good for the country and every Christmas the grandchildren will be stoked, absolutely stoked. So I would encourage you, even for your grandchildren and that happy smile on that wonderful morning, to work those few extra years.

The other area I think we have to have a serious conversation about – and it came up last week – and these charts show how we hold on to our wealth and capital in our latter years [presentation page 25]. We can’t take it with us but we’re not convinced, it would seem, because we hold on to it for as long as we possibly can. And the question we have to ask ourselves in this conversation we’re having about this issue is: Is it a lost opportunity? Is it a lost opportunity? We can see there that in the first five years that people are on the pension, 57% are either increasing their asset holdings or they have about the same amount. In had last five years that they’re on the pension, they’re still increasing their assets, 42% of them, and almost 25% of them have as much as they had before.

The capital that senior Australians have tied up, if we were able to find sensible pragmatic ways to unlock it, is what can potentially drive a very different quality of life for Australians as they age. It can really change the game for them and their families and for the country and these are things we need to ponder. Before everyone gets excited again about the family home in the assets pension test, I think I made that pretty clear to Fran Kelly that that wasn’t on last week. It’s not on but that doesn’t mean the conversation that we have about how we unlock the capital and provide the deep consumer markets that Mitch knows is needed to drive consumer-driven aging service into the future – Andrew Robb has just completed an agreement with China that provides the opportunity for us to sell aging services into China.

We’re not alone in having an aging population. We’ve not alone. We’ve got countries all around the world in big economies that have the same problem. We nail this and we could become the leading aging services provider to the world. And so it’s important that we get it right at home first because you can only really sell offshore what you’ve had a good experience in doing with your own economy and so there is an opportunity, I think, for this to be fleshed out and that is exactly what I know Mitch is working on not just in the aging services space but also in the disability space. But the markets have to be deep, the capital needs to be there, the consumers need to be able to spend, not just the welfare cheque they get, but from their own capital, from their own resources. That will improve quality of life, it will drive employment and give us great opportunities for the future.

They’re the three priorities that I would argue we need to focus on as we move forward. Patrick has given us an excellent insight into how the system itself can be better into the future but I’ll finish on this note – all of this is absolutely moot unless we can upgrade the political debate when it comes to areas of important change for the country. We all want things to be better off for all Australians but let’s not forget there’s millions who will follow us, who we will also want to be better off. Thank you.

(ENDS)