Key findings and background facts
Background
This is the first internal actuarial report produced in relation to the forward liabilities of the welfare system. The purpose of the report is for the Chief Actuary to independently:
- Review and comment on the valuation of the forward liability and what can be learned from analysis of the change in liability
- Review overall performance of the welfare system and the effectiveness of the “investment portfolio”
- Identify areas for attention to assist in managing long-term benefit dependency
- Discuss material risks that could impact on successfully managing the forward liability and/or in meeting Better Public Service (BPS) or KPI targets.
Some of the analysis in this report relies on the liability calculations performed by Taylor Fry Consulting Actuaries and detailed in their report titled “Actuarial valuation of the Benefit System for Working-age adults as at 30 June 2013” (the 2013 Valuation Report) which was publicly released in January 2014. Prior liability calculations were also performed by Taylor Fry for the years ended 30 June 2011 and 30 June 2012.
The 2013 valuation is the first conducted after the welfare reform changes which commenced in the latter half of 2012 and gives the first results which include some impact from these changes. Impacts from the reform changes that commenced in July 2013 will appear in the next valuation due as at June 2014.
Please note: There are currently no actuarial professional standards which strictly apply to the valuation of unfunded social welfare liabilities. Where relevant, this report and the valuation calculations have been carried out consistent with the professional standards of the New Zealand Society of Actuaries.
Highlights of the performance report
Highline Numbers
The liability was expected to decrease from $86.8 billion at 30 June 2012 to $83.9 billion at 30 June 2013 based on 2012 forecasts*. The actual liability determined at 30 June 2013 was $76.5 billion, or $7.4 billion lower than expected.
$4.4 billion of this reduction was from improved experience in areas where welfare reforms and management actions are able to have influence. This can be broken down as follows:
- There were fewer people on benefit than expected at 30 June 2013. Almost $1.8 billion of the decrease is due to a higher than expected number of Jobseeker and Sole Parent beneficiaries going off benefit during the year (approximately $1.1 billion) and a lower number coming on to benefit (approximately $0.7 billion). This is the area where welfare reforms were initially targeted and case management efforts have had most impact.
- In the future, some segments of people are expected to spend less time on benefit. Changes to forecasting assumptions accounted for another $2.6 billion. The drivers for the largest changes were:
- a lower rate of returning to benefit for recent exits, implying slightly better sustainability in off benefit outcomes. Maintaining a focus on sustainable employment outcomes will be important to reducing long-term benefit dependency, and
- a higher probability of Sole Parents exiting from benefit, and removing the upward trend in average benefit levels to Sole Parents (due to higher rates of part-time work).
The remaining $3.0 billion reduction was due to differences in actual unemployment, inflation and discount rates to those assumed in the June 2012 valuation.
Overall this is a strong result, with most areas of experience having been better than expected based on the 30 June 2012 valuation.
*Includes $1.5 billion reduction due to correction to opening liability.
People receiving a main benefit
| Segment | Number | Liability | ||||
|---|---|---|---|---|---|---|
| 30-Jun-2012 | 30-Jun-2013 | Change |
30-Jun-2012 $ million |
30-Jun-2013 $ million |
Change | |
| Jobseekers | 164,169 | 155,836 | -5.1% | 20,525 | 18,104 | -11.8% |
| Sole Parents | 89,538 | 84,897 | -5.2% | 20,950 | 18,004 | -14.1% |
| Supported Living | 101,379 | 101,444 | 0.1% | 17,927 | 17,155 | -4.3% |
| Youth | 2,949 | 2,857 | -3.1% | 705 | 554 | -21.4% |
| Total on a main benefit | 358,035 | 345,034 | -3.6% | 60,107 | 53,817 | -10.5% |
The numbers of beneficiaries in the table above will differ from officially reported figures. The main reasons are:
- Official numbers are reported immediately at the end of each month, whereas the data for the valuation is collected one month after the valuation date to allow for back-dated administration adjustments
- The valuation counts partners as separate clients whereas the official count does not
The number of people on a main benefit aged from 16 to 64 has decreased from 358,000 at June 2012 to 345,000 at June 2013, a decrease of 3.6%. Most of the decrease was in the number of Jobseekers and Sole Parents. The liability for this group decreased from $60.1 billion to $53.8 billion. Of the 10.5% decrease in liability, approximately 4.5% was due to the change in real discount rates.
The liability also includes people who are not currently on a benefit but who received a benefit payment within the 12 months prior to the valuation date and people only receiving supplementary payments such as accommodation support. For the purposes of the valuation and this report, they are referred to as non-beneficiaries. The recent exits have been included in the liability as there is a high rate of return to the welfare system for previous benefit recipients.
Not receiving a benefit
| Segment | Number | Liability | ||||
|---|---|---|---|---|---|---|
| 30-Jun-2012 | 30-Jun-2013 | Change |
30-Jun-2012 $ million |
30-Jun-2013 $ million |
Change | |
| Supplementary Benefits Only | 105,638 | 102,742 | -2.7% | 6,672 | 5,891 | -11.7% |
| Recent exits* | 163,809 | 154,704 | -5.6% | 10,115 | 8,762 | -13.4% |
| Future expenses | 7,955 | 7,698 | -3.2% | |||
| Net Loan cost | 420 | 372 | -11.4% | |||
| Total | 269,447 | 257,446 | -4.5% | 25,162 | 22,723 | -9.7% |
*Excludes those incorrectly included in current clients for 2012 valuation.
The number of people receiving a supplementary payment only (including orphans benefit) decreased from 106,000 to 103,000, a decrease of 2.7% and the liability decreased from $6.7 billion to $5.9 billion.
The remainder of the liability ($16.8 billion at 30 June 2013) relates to people who had received a benefit in the previous 12 months, but were not on benefit at the valuation date, and to expenses, loans and debts.
Youth Entrants to welfare
Although the number of new youth entrants to benefit each year is small, they account for a significant proportion of the liability over time. More than 70% of the forward liability is in respect of people who first received a benefit before age 20, indicating that many remain vulnerable to benefit dependency for their entire lives. Some key observations regarding youth entrants (based on the 1993 birth cohort* are:
- About 90% of new 16-17 year old beneficiaries have been supported by main benefits at some time in their childhood
- One third had recorded findings of substantiated abuse or neglect
- One third of new youth clients enter the system as parents.
A strong focus on youth is needed to help reduce the inflow of new people who are at risk of long-term benefit receipt. However, the problem is not a Work and Income one alone. For a large portion of youth the path to dependency is established long before they begin to receive benefits in their own right. An across agency strategy is needed.
For those who entered as youth and are now of working age, more support is likely to be needed to help overcome what are likely to be fairly entrenched barriers to sustainable employment.
*“Young people supported by benefits at age 16-17: a profile” – Centre for Social Research and Evaluation. Findings are based on cohort of young people born in the first half of 1993.
Post Exit return to benefit
A large proportion of new beneficiaries each year are people who have previously been on benefit. Of these returning clients, 44% had been off benefit for less than 12 months and a further 19% for less than two years. While seasonal labour markets are a cause of some of this cycle, there is a significant number of people who remain vulnerable to long-term benefit dependency even after being able to find work.
For these people, work placement alone is insufficient to overcome susceptibility to welfare dependence. Pre-work and in-work training along with post placement support is likely to be needed to achieve sustainable work outcomes for this group.
Impacts of the Global Financial Crisis
There is a cohort of people who first came onto benefit during the Global Financial Crisis (GFC) who before that were connected to the labour market or in some form of study, but have yet been unable to return to work. Many of these have been re-entering the work force as the economy improves and opportunities arise.
However, a significant number of them, because they have been out of the labour market for some time, may not have skills suited to the current jobs that the economy is creating. Or, they may have developed a health condition following a long absence from the workforce. Targeted support will be required to overcome any barriers that may have developed over the time away from the labour market.
Ethnicity
People in receipt of benefit who identify as Māori make up a significantly higher proportion of the people on benefit than their overall share of the population. They also have a higher average liability, indicating a greater risk of long term dependence. This applies to varying degrees across all geographic regions and levels of education.
Māori would appear to be the most vulnerable to long-term benefit dependency and further consideration is needed to determine if current levels and types of support are sufficient to help reduce the disparity between ethnic groups.
Benefit transfers to Health condition, Injury or Disability (HCID) state
The number of people receiving Supported Living benefits has tracked close to or slightly ahead of valuation forecasts, mainly because of a higher number of exits from the benefit than expected. Within these movements, however, the following observations can be made:
- While the number of people on Jobseeker and Sole Parent benefits has also been declining at a faster rate than the 2012 valuation projected, there has been a higher than expected rate of transition from Jobseeker – Work Ready to both the Jobseeker – HCID state and to Supported Living Payment.
- A higher than expected rate of transfer to Supported Living Payment is also occurring from both Jobseeker – HCID and Sole Parents.
Over the last few years, the probability of remaining on Jobseeker - HCID benefit has also been slowly increasing. Further investigation and monitoring of these trends is recommended.
Investment Performance
To achieve the goal of reducing long-term welfare dependency, the Government has implemented an Investment Approach to welfare. The aim of the Investment Approach is to use appropriations better by providing services that best help people become independent of the welfare system as well as supporting those who are unable to work.
A key part of the Investment Approach is a multi-category appropriation (MCA) which provides greater flexibility for management to direct funding to where it will be most effective. This brings a responsibility to monitor the effectiveness of the various investments. The MCA begins from 1 January 2014.
Several policy and operational changes have occurred over the last three years. These have generally had a positive impact on reducing the number of people who are dependent on welfare.
The Future Focus changes were introduced from September 2010. They require reapplication for unemployment benefit every 52 weeks and place part-time work obligations on sole parents whose youngest child is aged five or more and full-time obligations if youngest child is aged 14 or more.
Both of these initiatives have led to a shorter average time spent on benefit for Jobseeker and Sole Parent clients of approximately one and a half weeks. There is no indication to date of an increase in the time spent off benefit for either group, which suggests greater focus is required to ensure off benefit outcomes are sustained.
A revised case management service was trialed in 24 Work and Income offices from October 2012. The rate of people coming off Jobseeker and Sole Parent benefits (where the trial was targeted) was higher in these sites than in sites where the new service was not available and higher than the control groups within these sites. This new service model was extended to all service centres from July 2013.
Work and Income provides a series of incentives to assist with barriers to work, including training programmes and wage subsidies. Results from these targeted investments have been mixed. For example:
- Transition to Work has been an effective form of assistance across all main benefit categories
- Training Incentive Allowance and Course Participation Allowance do not appear to have been effective. Changes to how this support is targeted may improve the programmes effectiveness as the valuation shows the risk of long-term benefit receipt is reduced with higher levels of education and skills
- Foundation Focused Training Opportunities, which has been the largest spend under employment assistance initiatives, has not been effective to date and has been discontinued for the 2014/15 fiscal year and replaced with a series of more targeted training options.
Trials of contracted case management services to clients with common mental health conditions and to sole parents with full-time work obligations commenced from July 2013, after the date of this valuation. It is too early to draw conclusions as to the effectiveness of either trial. Full cost effectiveness analysis is due in 2015. The Supported Living and Sole Parent segments have the highest expected durations on benefit. These and other targeted trials will help management decide what support works best to achieve appropriate quality of life or work readiness goals.
Data
It is recommended Work and Income investigate what data can be provided from other agencies, in particular education, care and protection, and youth justice services, for use in future liability valuations. This would enable better analysis of early entrants’ vulnerability to long-term dependency, including intergenerational effects and other drivers of youth welfare dependency.
Better Public Services (BPS)
The BPS target with respect to long-term benefit dependency is to reduce the number of Jobseekers who have been on benefit continuously for more than 12 months to 55,000 by 2017. On the current rate of exits the target looks likely to be achieved, however:
- To continue to achieve the current rate of decrease, more will need to be achieved in respect of clients who have been on benefit for longer durations. As at 30 June 2013 there were approximately 55,000 Jobseekers who had been on benefit for more than two years. This has been fairly stable over the last two years.
- The number of Jobseekers with a deferment because of a health condition, injury or disability has remained fairly stable over the last few years. The proportion of Jobseeker–HCID clients has been slowly rising as the number of work ready clients has fallen, so that they now make up more than half the BPS target group.
- Economic conditions strongly influence benefit numbers. Valuation assumptions allow for the unemployment rate to reduce gradually to a long term rate of 4.5% and then remain level from June 2022. Any deterioration in the economy or failure to improve sufficiently to support the expected decline in unemployment will make the target difficult to achieve.
The type of assistance that may be needed to make lasting change for those people most vulnerable and at risk of long-term dependency, means it is likely to take time to achieve effective results. Without a reasonable level of success in respect of long-term beneficiaries, the BPS target will be difficult to achieve. This is to be expected as the target was an ambitious one designed to increase the focus on and level of support provided to long-term beneficiaries.
