Key findings and background facts 2015

Background

This is the third internal actuarial report produced in relation to the forward liability of the benefit system. The purpose of the report is for the Chief Actuary to independently:

• Review experience over the year of exit rates, numbers of new clients and clients transitioning between benefits
• Review overall performance of the welfare system and the effectiveness of investments made to reduce benefit dependency
• Review and comment on the valuation of the forward liability
• Identify areas for attention to assist in managing long-term benefit dependency

Some of the analysis in this report relies on the liability calculations performed by Taylor Fry Consulting Actuaries and detailed in their report titled “Valuation of the Benefit System for Working-age Adults as at 30 June 2015” which was publicly released in January 2016. Prior liability calculations were also performed by Taylor Fry for the years ended 30 June 2011, 30 June 2012, 30 June 2013 and 30 June 2014.

Highlights of the performance report

This report highlights analysis of the interaction between long term benefit dependency and a person’s Child, Youth and Family (CYF) history and/or criminal convictions.

The analysis highlights the importance of early action as the most effective strategy for preventing long-term benefit dependency, concluding that there are limitations to materially influencing people’s likelihood of staying on benefit once they are in the benefit system. This requires much longer-term thinking with a focus on childhood experience and vulnerable families. The report also quantifies family benefit history as a significant factor in long-term benefit dependency.

While it is unsurprising that clients with a CYF history, criminal convictions, or family history of benefit receipt are significantly over-represented in the benefit system, this is the first time we have been able to quantify that impact and demonstrate the increase in overall benefit liability as a result.

The report also measures the performance of a range of initiatives aimed at getting people into sustainable employment.

Breaking down the drivers of long-term welfare dependency provides us with a valuable insight into how best to target interventions, to assist more people into work and out of the cycle of welfare dependency.

Evidencing benefit dependency risk factors highlights how the Government’s investment approach can be expanded to other social sector services. The report includes early examples [DS1] of the coordinated approach across government ministries and agencies administering social sector services that are joined up, with the person needing help firmly at the centre.

Impact of Childhood Experience on Benefit Dependency

In the most recent valuation, the CYF data used goes back far enough to consider current clients up to the age of 25.

Across all benefits, clients with a CYF history have on average a $47k (or over 40%) greater average liability. Considering their higher average liability, this cohort represents 47% of the total liability for beneficiaries aged 16-25.

The liability difference is even more pronounced the more interactions a person has had with CYF, and if the first contact occurred within the first 3 years of life.

Children of benefit system clients are significantly more likely to become clients themselves. Looking at a group of 83,000 children born between 1993 and 1995, 47% had entered the benefit system themselves by age 23.

Once in the system themselves, children of benefit system clients are also more likely to be long-term benefit dependent. They make up 83% of the total liability for under-25s.

The importance of intervening early is key to the establishment of the Youth Service and recognizes that a person’s future benefit liability is impacted by earlier childhood experience and characterised through their interaction with other government services.

While young people receiving Youth Payment or Young Parent Payment make up less than 1% of the total current liability, 75% of the liability relates to people who first came on benefit while teenagers.

Return on Investment

Work and Income runs a number of employment assistance programmes aimed at supporting people into sustainable employment. The performance report evaluates whether nine individual programmes are delivering value; including four currently at trial stage. Measuring the success in terms of a return on investment supports our overall investment approach, to ensure funding is committed to supports that lead to tangible, positive change in peoples’ lives.

Where possible, programmes have been evaluated both excluding and including the long-term liability reduction. A return of investment above ‘one’ over time (one being the break-even point for a return on investment) is a good indicator that the programme is delivering value.

The report finds that some programmes, such as Flexi-Wage, are delivering value over time, while noting that programmes delivering poor outcomes should be revised or ceased.

Recognising that it is too early to draw firm conclusions around the trials, the report includes some early analysis of performance.

Social Housing Valuation

The report signals the development of an actuarial valuation of social housing. This will be closely aligned, and integrated with the benefit system valuation. This will allow us to understand how household dynamics impact on benefit dependency and will assist government to forecast future demand for social housing.

By understanding the risk factors of both systems, it is anticipated more holistic support can be put in place for clients.

Beneficiaries with Criminal Convictions

Approximately a quarter of the benefit population have criminal convictions. Liability is consistently higher for people with a criminal convictions across benefit categories, genders and ethnicities, $37k (or 37%) higher on average.

With approximately half of all people going to prison on a main benefit immediately prior, Ministry of Social Development and Corrections are to trial a targeted service aimed at those who churn in and out of the benefit and Corrections systems. This is in order to improve employment prospects and reduce recidivism.

Sustainability of Exits

Sustainability of exits is a key determinant of long-term benefit dependency and hence the liability. The longer a person remains independent of benefits, the lower the likelihood they have of returning to the benefit system.

A large number of benefit grants are to former clients returning to the benefit system. In fact, of all Jobseeker Support-Work Ready benefit grants in the year to 30 June 2015, 47% were to clients who had received a main benefit in the year prior to being granted a new benefit.

Exit rates have been higher than projected for three out of the four quarters. However, the charts suggest that sustainability rates have marginally decreased up to twelve months since exit and marginally improved for longer periods since exit.

A trial is in place that is providing targeted in-work support and incentive payments to Jobseeker Support clients who have moved into employment to improve the sustainability of employment.

Financial Incentives from Accommodation Related Benefits

The report has found that the current design of Income Related Rent Subsidy (IRRS), Accommodation Supplement (AS) and Temporary Additional Support (TAS) creates financial disincentives for clients to move out of social housing into the private market and into employment. This impacts about 100,000 people in the BPS target group.

The rate at which these clients exit the benefit system is significantly less than similar clients who don’t receive TAS or IRRS.

TAS was designed as a non-taxable benefit to be paid for a maximum of 13 weeks and intended to be a last resort. In practice, it is mainly used to meet accommodation costs, particularly rent. Despite the intended purpose, many clients receive this assistance for prolonged periods of time. Clients receiving TAS at 30 June 2015 had been receiving it continuously for an average of 17 months.

IRRS is part of the Government’s financial support for social housing. Social housing providers are paid the difference between the market rate rent for their properties and the rent that the social housing tenants pay directly.

Recent analysis by MSD demonstrated that financial incentives for social housing tenants to gain employment and move towards independence from both the benefit and social housing systems are low. This is principally because IRRS is a more generous subsidy than what is available to people in the private rental market through AS and TAS.

This is likely to be a significant constraining factor on the turnover of social houses. A more balanced design would likely increase the turnover of social houses and consequently the speed at which people with severe need can be housed. The report recommends the design of IRRS, AS and TAS is reviewed to ensure that incentives are aligned with the objective to reduce welfare dependency.

Better Public Services Targets

One of the Government’s priority results for Better Public Services is to reduce long-term welfare dependence. The Chief Executive of the Ministry of Social Development is leading work on this result with the support of the Social Sector Board cross-agency group. In February 2015, the Government set the target for this Result area to:

• By June 2018, a 25 per cent reduction (from 295,000 people in June 2014) in the total number of people receiving main benefits, and an accumulated actuarial release of $13 billion in the long-term cost of benefit dependence.

As at 30 June 2015, the total number of working-age people receiving a main benefit was 284,960. Based on a continuation of current entry and exit rates, the report forecasts a range of 258,000 to 286,000 at June 2018.

The accumulated actuarial release for the period from 30 June 2014 to 30 June 2015 is $2.3bn. The report forecasts the actuarial release at 30 June 2018 to be $6.1bn.

The report suggests that meeting the BPS 1 targets will depend on:

• Economic conditions – will need to be at a level consistent with full employment in practically possible in 2018 (at least similar to pre-GFC lows)
• BPS initiatives – need to be implemented, effective and scaled up as soon as practically possible
• Further investment and/or policy change – further action is required, particularly with supporting work-capable Jobseeker Support – Health Conditions and Disabilities (JS-HCD) and Supported Living Payment (SLP) clients into employment. Any further actions will need to be designed, approved and funded in the near future to materially contribute to meeting the BPS 1 targets.

The report notes that the existence of essentially two BPS 1 targets can cause conflicting incentives. A numerical target may drive a focus on supporting those closest to the labour market. However a focus on the liability requires support to be directed towards those with the greatest barriers. In isolation they would likely result in different management strategies. Considered together, they can conflict.