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Welfare Reform Symposium

Hon Sir Roger Douglas
Parliament Buildings Wellington
Saturday 14 August 2004

In 1930 Sir Keith Hancock described Australia's main political philosophy as follows:

"Australian democracy has come to look upon the State as a vast public utility whose duty it is to provide the greatest happiness to the greatest number."

A similar expectation has been true on this side of the Tasman.

Whether you agree that this is a rightful (and righteous) role of the State or not, the unassailable fact is that more than 60 years later the practical effects of this philosophy have not been what were expected.

In the years following the Second World War, there was a general consensus on the goals of the budding welfare system.

1. A reduction in social and economic inequality.
2. The fulfilling of certain basic needs, as of right.
3. The demonstration and encouragement of kinder and more communal relations between citizens.

On all three counts the present system could be said to have failed.

• Socio-economic inequality still exists and is possibly increasing;
• Some people continue to live impoverished and disadvantaged lives because certain basic needs are inadequately attended to
• And people's relationships with one another are not noticeably more harmonious or filled with neighbourly concern.

In addition, we have seen the development of two totally unexpected side effects:

• dependency through the creation of incentives that encourage people to change their behaviour and circumstances so as to qualify for benefits and ;
• political capture, where influential lobbies manipulate the redistribution process to their own perceived advantage.

Instead of fostering a sense of mutual obligation we have ended up with middle class welfare capture and welfare dependency.

We need to change the system's incentives.

We need to make the welfare area smaller by weaning the middle class away from benefits they don't need and in the words of John F Kennedy, we need to give the disadvantaged a hand up, not a handout.

The last is perhaps the most important as it affects us all when it is successfully achieved. Delivering real gains to people who are disadvantaged via self-help is crucial because it automatically delivers something of value to everyone.

The gains we should be aiming for are not just economic. Income is obviously important to the disadvantaged but it is not enough to remedy their situation. They have an even greater need to encouragement and opportunity to make real progress for themselves by themselves. In helping them to win independence and contribute more to society, instead of always being on the receiving end, their future is transformed and everyone else's improved. Those gains also have an important role to play in creating a dynamic economy that provides higher income for everyone and therefore builds a fairer society. The alternative is a country with a permanent underclass of alienated people with no stake in prosperity and no social harmony.

The key issues which affect the disadvantaged include unemployment, sickness, race, crime, health, education, housing welfare and the economy.

• None of the pressures these issues place on people can be solved with short-term, quick fix answers from government.
• All of them need to be placed within a medium-term approach to policy if they are to be solved.
• And most importantly because the issues are linked and the public know it, they cannot be solved in isolation, one from the other.
• Inadequate parenting, lack of motivation, insufficient skills, alienation, unemployment and delinquency reinforce each other.
• Low income, inadequate housing, poor health, lack of opportunity and inadequate economic growth are all part of the same syndrome.

People in these circumstances find it hard to survive without help. However, if the help we provide locks them into the role of passive recipients, all the state and society does is turn their vulnerability and dependency into a permanent condition.

It becomes a vicious cycle.

A central feature of life for many disadvantaged people is not just a lack of money - it is total lack of choice.

Any programme of reform has to be about:

• Goals, objectives, dreams and common-sense delivery.
• It needs to unite society by appealing to the majority of voters.
• It needs to encourage people of think about where New Zealand can be in the future and where they would like to be during the next 5 to 20 years.

Because the issues that surround welfare - unemployment, sickness, race, crime, health, education, housing and the economy are linked, any programme of reform must be packaged in such a way that it deals with all of these elements together.

Packaging reforms into large bundles is not a gimmick. The economy operates as an organic whole, not an unrelated collection of bits and pieces. Structural reform aims to improve the quality of the interactions within the whole. When reform is packaged into large bundles, the linkages in the system can be used to check that each action effectively enhances every other action. It also improves its selling potential.

• So what sort of package could fix welfare "once and for all"?
• What sort of programme has a chance of uniting New Zealand society, providing choice and giving the disadvantaged a stake in future prosperity and social progress?

Any programme of reform that hopes to achieve these objectives will contain both carrots and sticks.

I believe you have to start with the carrot and make it a big one, but a carrot that you can only keep if you contribute positively to society.

My carrot is to give every New Zealander of working age the opportunity to amass a small fortune during their working life.

• Currently the bottom half of New Zealanders in terms of wealth distribution have less than 3% of total wealth.
• 800,000 New Zealanders have less than $20,000 in wealth.
• 1 in 6 has a negative asset position.

The end result is that many of these people feel alienated with no stake in New Zealand's future prosperity or social harmony.

• A tax-free income level of $16,100 - $20,650 equivalent to a ($3,000 - $4,000) tax reduction.
• Increased by the rate of inflation each year.
• Available to New Zealand citizens between the age of 18 and 65 in the workforce.
• Must be invested in shares/bonds, property etc in an approved manner.
• Those who wish to do so can make the choice to continue to pay current levels of tax and be covered by current government benefit system.
• The transition to new super scheme would take 45 years when 95% of New Zealanders are expected to have sufficient savings to provide for themselves.
• Capital after 47 years in the workforce without draw down would be approximately $1.8 million or $850,000 in real terms. See Chart 1
• During transition retirees will receive two pensions, one based on fund accumulated via tax savings each year. Second a percentage of the existing government benefit, dependent on the number of years before individual turns 65. See Chart 2
• Minimum combined benefit during transition to be at least what people get today but in most cases will be considerably more.

Paid for by a mix of the following:

The stick is even simpler :

If you are on welfare you draw down on the $4,000 tax reduction before the government contributes a dollar - the cost of being on unemployment, sickness benefit, ACC or DPB is considerable e.g. an 18 year old who draws down his/her $4,000 forgoes a capital sum of around $90,000 at 65.

• All employees to take out an insurance cover against accident, sickness and unemployment (could be part of employer scheme).
• Insurance cover is for no more than 26 weeks each year.
• Minimum insurance policy cover to be at least equal to what the individual would receive from the government if they went on a benefit.
• Premiums to be paid for by employer 50%, by employee 50% (via tax reduction plus tax credits for low-income families).
• First 26 weeks covered by:
  • Any stand down period.
  • Any employment rights (award/employment agreements)
  • Draw down on super credits (up to $4,000 in anyone year $8,000 for a couple).
  • Government contribution if 1 and 2 insufficient.
• Second 26 weeks covered by insurance policy.
• Reduction in government expenditure within 2 years equal to approximately $3000 million

(1) Retiree cannot get less than what they receive today.

(2) Full health support in retirement given to people in this category.

The yearly cost of government ownership is around $800 per adult New Zealander or to put it another way, more than $100,000 in retirement capital.

This is simply the difference in the return the assets would earn in the private sector as opposed to what they earn today in the public sector.

The reasons are clear and include:

• When property is owned by the government, the incentive to take good care of it is much weaker (e.g. government owned housing).
• The government has less incentive to develop its assets as compared to the private sector (e.g. land that lies idle in the public sector would be developed by the private sector).
• Government has less incentive to use the assets they own in a way that is beneficial to others whereas people in the private sector gain by working out how to make their assets and services more beneficial to others.
• Government has less interest in the wise development and conservation of their assets for the future than the private sector does.

Private sector owners pay more attention to future expected gains, which leads to better conservation via property rights (trees).

Every child regardless of family income will have the right to a quality education. No child should be left behind just because of:

• where he or she lives or
• because of his or her parents' financial position

Education is first, last and always about children, it is not about government or bureaucrats.

We need to increase the role of parents and decrease the role of Wellington. Parents have the right to send their children to the school of their choice. After all, it is their money, their children and their future.

Children have the right to a violence free, drug free environment. Children who are afraid will not learn.

• We need to support those educational approaches that work and either fix or end those that fail.
• It is more important how and where we spend our educational dollar than how much we spend each year.
• We need to put more money into the classroom and not the bloated bureaucracy in Wellington.
• We need an educational system that teaches children how to think and how to succeed now and into the future.
• We need an educational system that teaches our children right from wrong, one that teaches them respect, honour and decency.
• Finally, more government and more bureaucrats are not the answer for better education. The answer lies in more parental involvement. We must search for every reform proposal that does this.

• An opportunity scholarship equivalent to what the government currently spends on children's education will be provided (available to all families with dependent children).
• Parents will be able to spend the scholarship at any approved school they wish.
• If they have any part of their yearly scholarship left, that scholarship would be held in a special account. The amount in the account can then be spent at any time on the child including university education.
• Scholarships will be inflation proofed.
• Schools will be licenced by the government.
• Schools can be of any size e.g. a sole teacher school or a chain of secondary schools.
• Schools, like any business, will be responsible for managing their own affairs within the laws of New Zealand including any special educational regulations
• Ministry of education will establish guidelines of expected standards to be reached at various age levels.
• All schools will be assessed based on results for schools in the same area.
• Objective - Raise standards dramatically over 5-10 years.

Health : Security & Peace of Mind

Five Key Principles

• Healthcare is personal and it affects the quality of life.
• New Zealand has quality doctors and nurses. There is no reason why our healthcare can't be great.
• New Zealanders want common sense, not Wellington to decide how they interact with doctors and hospitals.
• Patients should be protected from Wellington intrusions.
• Patients have the right to know.
• New Zealanders should be safe and secure in the knowledge that if they have insurance they will be covered when they are sick. Government should enforce such a principle.
• All healthcare insurance plans should have basic definitions and standards, so that there are no hidden loopholes that appear after a patient needs treatment.
• All patients should be able to see the right doctor at the right time to treat their problems.
• We must ensure New Zealanders receive quality healthcare, but do it without raising costs to the point that many people do not get treatment when they need it.

• A tax credit will be provided to every family (single person no children = a family). This tax credit along with an employer subsidy for each employee (not family employee only) will be at least equivalent to what the government spends today.
• Size of tax credit will be based on age, income, size of family and risk group individual falls into.
• Individuals receiving tax credit will be able to spend them with any approved healthcare supplier.
• Government will approve healthcare suppliers (generally an insurance company) based on the contract they will enter into with customers, and their financial position.
• Tax credits and employer contributions will at a minimum be inflation proofed.
• Ministry of Health will continue to carry out many of today's functions. All healthcare suppliers will be assessed each year.
• Healthcare organisations will buy the services they require in the open marketplace.
• Healthcare policy cover will be for catastrophic events only.
• Tax credits not spent on the purchase of health cover to be available for day to day expenditure.
• Tax credit balances at the end of the year can be carried forward; if not spent after 2 years paid out in cash to individual.

• Tax credit for retirement each year $4,000.
• Employer contribution for Healthcare.
• Employer contribution for Risk Insurance (Accident, Sickness, Unemployment)
• Tax reductions
• Low-income earners would also receive a tax credit for Accident, Sickness, Unemployment Insurance Cover.

Families as above plus

• Low income/large family will receive a tax credit for healthcare (non working spouse and children)
• Tax credit for education (pre-school, primary and secondary).

• Current super scheme locked in.
• Healthcare tax credit whereby the retired can buy their own healthcare cover if they so wish, if not they will be covered by the government. The choice would be for each retired person to make.

How do you pay for $4,000 Government contribution?