How to Reform Australia's Social Security System

By James, Michael | IPA Review, January 1, 1994 | Go to article overview

How to Reform Australia's Social Security System


James, Michael, IPA Review


Australia's social security system is not in immediate financial crisis. In 1990-91, personal benefit payments to Australian residents, at some $37 billion, amounted to 9.8 per cent of GDP and 28.4 per cent of general government current expenditure(1): well below the OECD average for 1990 of 15.4 per cent of GDP.(2) However, in 1992-93 transfer payments rose to $45.7 billion, which amounted to 11.4 per cent of GDP and 30.8 per cent of government expenditure. As such, they would have to make a contribution to any substantial reduction in the size of government and associated cut in taxes.

It has to be said at once that cutting welfare state spending need not harm people on low incomes. Indeed, done properly, it would benefit them. The economic damage done by the compulsory transfers of the welfare state has been neatly summarized by Roger Douglas, New Zealand's Finance Minister in 1984-88:

"A Labour government in particular finds it hard to face the fact that public sector waste hurts low-income people most of all. It obviously reduces the resources available to them. It also reduces the number of jobs the economy should be able to offer them. To take an extra $1 from the private sector and put it in the public sector costs more than $1--something between $1.20 and $3. Those extra cents are known as 'dead weight loss'...Then, unless the money is used in the public sector at least as productively as it would have been in the private sector, its effectiveness is decreased further.(3)"

As well as knowing the harm done by welfare state transfers, we know how social security can be reformed. Australia's Labor Governments made a good start in the 1980s: for example, they restricted some previously universal benefits, such as family assistance and the age pension, to those on low incomes; made unemployment benefits conditional on training or some other indication of willingness to work; and introduced user charges in tertiary education.

But much more could be done. Private saving could replace many welfare transfers. The private commercial sector already supplies many forms of insurance; just as it is already taking over superannuation from the State, so it could expand its insurance cover against accidents, disability, and loss of income. The voluntary sector, likewise, plays a major role in providing community services; these could be expanded both in place of and in partnership with welfare state services. All the elements of a fully-fledged private welfare system already exist.

THE MORALITY OF PRIVATE WELFARE

Significant moral considerations are at stake in welfare reform. The most important is that it returns to taxpayers control over their own incomes and widens their freedom of choice.

This is easily seen in the case of social insurance services: the state cannot be morally justified in confiscating the incomes of citizens to provide 'free' services that citizens can acquire for themselves from freely competing suppliers. But it is equally true of redistributive transfers of income that ate supposed to relieve poverty and promote social justice. Welfare state transfers reflect the preferences of politicians and bureaucrats, which may not coincide with the preferences of taxpayers. Voluntary transfers, in contrast, directly reflect the benevolent preferences of donors, and so enhance their welfare as well as that of the recipients. Even if the state retains a welfare safety-net role, many of its present redistributive programs could be handed over to, or at least supplemented by, private charities.

As well, private welfare is more likely than state welfare to promote genuine community spirit. Perhaps the biggest intellectual obstacle to welfare reform is the simple-minded but tenacious and self-serving notion that the welfare state embodies 'compassion' and 'community' whereas the private sector embodies 'selfishness' and 'atomized individualism'. A few moments' honest reflection dispels this myth. …

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