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Response to finance costings of social security expenditure decisions

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4 Richard Alston




The attached 10 page document details the major costing errors Finance has made in its appraisal of the Coalition's Fightback Social Security spending decisions.

Some of the errors Finance has made are due to a poor reading of the Fightback document - for example its costings on the Coalition's JSA strategy and our deferred Pension Plan.

Other errors are based on completely dishonest and presumably highly politically motivated assumptions. For example, Finance assumes that the 'hit rate' of current mobile review teams if applied to disability support pensioners would be 1% - a figure Finance claims is based on the recent experience of such teams with other benefits and pensions. This is an absolute lie.

In fact, Social Security's own figures state that the success rate for sole parent pensioners is 10.1%, for dole recipients it is 12.4% and for multi-purpose review teams the hit rate is 17.7% - all a very long way from Finance's 1%.

Also on the disability support pension, Finance assumes annual medical reviews will disqualify 2% of pensioners. In fact, as the attached document clearly demonstrates, the Government's own figures show that a minimum of 9.2% will be disqualified from the existing stock of disability support pensioners.

DSS has apparently misled Finance on the potential success rates of annual medical reviews for the existing stock of disability support pensioners. Finance also seems unaware of new legislation in this area which it should have factored into its analysis. Had it done so, Finance would have realised that the Coalition's estimated

savings in this area are very conservative.

On top of all this, Finance has relied on an absurd assumption regarding the number of AUSTRAIN places for the unemployed. Because the implicit AUSTRAIN wage subsidy is half the maximum Jobstart subsidy, it has assumed the number of AUSTRAIN places will be half the number of Jobstart places. Finance has

completely ignored that the biggest constraint on the number of Jobstart places made available is the amount of money the Government decides to allocate it. There is no such problem with AUSTRAIN. j 'cO;.av'ON\vEALTri


Finance has also confused net and gross savings in its analysis of the sole parent pension decision, as well as some other very serious costing errors in this area.

And if this was not enough, the Finance document is internally inconsistent. It claims that during the extended JSA waiting periods there will be a 50% leakage to special benefits, but then claims that the Coalition's assumed leakage to special benefits during the extended sickness allowance waiting period of 27% "could be too high" - even though it is the same waiting period that is to apply for JSA!

Overall, the Willis costings of the Coalition's Social Security changes are incredibly shoddy, full of holes and errors - many of which seem to be overtly politically motivated.

For further information contact: Senator Richard Alston on [06] 277 3605.

10 December 1991.



Job search Allowance

Year 1 Year 2 Year 3

Coalition savings: $182.9m $738.lm $744.6m Finance savings: $79.9m $200.4m $208.6m

1. The biggest variation in assumptions which allows Finance to claim such holes relates to displacement. Finance assumes that 95% of persons who leave JSA and get a non-AUSTRAIN job displace someone who was employed. Of those displaced, 75% go onto JSA.

For those who get an AUSTRAIN job, Finance assumes 85% will displace an already employed worker. Of these 85%, 75% go onto JSA.

We assume 90,000 will go off JSA. Finance assumes that due to displacement, the net number off the dole is 37,788.

Finance says: "accepting their assumptions and using our calculation methodology, their bottom line estimates of savings are explicable if there are no displacement effects...That is, there are no fundamental arithmetic errors in the costings as far as it goes."

. The arguments on displacement are wrong for the

following reasons:

(1) Local Employment Boards will be put in place to ensure that such displacement does not occur insofar as AUSTRAIN is concerned;

(2) Finance provides no basis for the 95% and 85%


(3) in order to accept such figures, it is necessary to assume an economy which is either stagnant or

contracting and that average wage levels and on-costs which are not in anyway downwardly flexible.

2. On top of this, the Finance costing of this area has a large factual flaw. It says: "The achievement of the levels of savings claimed by the Opposition is dependent on AUSTRAIN positions being additional to the labour force."

In fact, the savings in this area depend not just on AUSTRAIN but on:

(1) JSA recipients who are ineligible for special benefits at 9 months because of the more stringent assets test on special benefits compared with JSA

(2) a tightening of the work test

(3) a general improvement in the employment situation due to industrial relations and wages reform, and economic growth in general

(4) the requirement that when JSA and special benefit claimants put in their fortnightly form to DSS they must show proof of who they are.

(5) those whose work search has not been in earnest and are subsequently seen to be not unemployed and as a result will not be eligible for special benefits.

4. We allowed for an administration cost of special benefits of $0,036 per extra $1 on special benefits. This was what

Finance used when it costed the EAP. Finance now claims $0,097 is the correct figure. It uses D SS' 1991-92 Program Performance Statement for this.

However, using this source is misleading, as a large proportion of the special benefits program is devoted to providing short term assistance for those who face undue hardship in waiting periods. This entails assessing and putting people on payments

for several weeks and then taking them off - all administratively expensive compared with what the Opposition intends using special benefits for - longer term income support for the generally unemployed. Finance also ignores gains due to economies of scale

in special benefit administration which will be had by increasing the number of people on special benefits.

5. Finance agrees with our assumption of a 80-81% leakage onto special benefits.

6. Finance in its costings assumes that the number of people in the first year who find an AUSTRAIN job will be about 27,000. It assumes this because the implicit subsidy with AUSTRAIN is 20%, whereas Jobstart offers up to a 40% subsidy. There are about 55,000 people involved in Jobstart.

Finance assumes that because the AUSTRAIN subsidy is half the Jobstart subsidy, then there will be only half the number of AUSTRAIN participants as for Jobstart. This is a completely dishonest assumption. It assumes that there are currently as many Jobstart places as employers will bare. In fact, the

greatest constraint on the number of Jobstart places is a budget one. Funds in Victoria and Queensland have all but dried up for Jobstart this financial year, and the places offered are having to be cut back severely. The CES has simply run out of money.

Such budget constraints are not a feature of AUSTRAIN - it does not represent an impost on the budget - the only limit on the


number of places is the number employers wish to offer, and this number will obviously be much greater than 27,000.

Waiting periods for JSA

Year 1 Year 2 Year 3

Coalition savings: $186.6m $186.6m $186.6m Finance savings: $111.lm $111.2m $111.2m

The Dept of Finance claims an overestimate of savings from this initiative of $75 million. It does this by assuming a higher leakage onto special benefits than the Opposition, and does so on the basis of current leakage to special benefits under the existing waiting period.

This assumption is completely rejected by the Opposition. The current leakage of 20% is too high, and does not form any sound basis for the Government to assume leakages under the Coalition's proposal. In fact, DSS' administration of special benefits is currently the subject of a diagnostic study by the Auditor- General .

On top of this, the Finance document is internally inconsistent when it comes to leakages to special benefits during waiting periods. Finance claims that during the extended JSA waiting period the leakage will be 50%. For the same waiting period

extension which is to apply for the sickness allowance, Finance claims that the Coalition's leakage rate of 27% "could be too high"!

Waiting periods and tighter administration for sickness allowance

Year 1 Year 2 Year 3

Coalition savings: $52.7m Finance savings: $45.2m $52.7m $52.7m

$45.2m $45.2m

We estimate annual savings of $52.7m. Finance estimates annual savings of $45.2m. According to Finance: "The difference in the total is due only to the inclusion of administrative costs."

Finance assumes the increased waiting period will generate $38.7m in savings. This is approximately correct. It then assumes that we estimate savings of $14m due to tighter administration, and increased administration costs of $7.5m.

Our estimated savings due to tighter administration of this program are net of an expected minor increase in administration costs.

Finance accepts the $14m figure in the absence of "more precise details", hence there is no reason why a figure of $21.5m could


not have been accepted also, from which the alleged $7.5m in administration costs could be netted off.

In any event, there is no reason why the Opposition's proposed changes here would lead to significant extra administration costs. The costs are to be borne by the applicant who must

provide a second medical certificate and not by the Department. Hence Finance's unsubstantiated figure of $7 .5m cannot be accepted.

Extension and Tightening of the Liquid Assets test and leave deferment waiting periods

Year 1 Year 2 Year 3

Coalition savings: Finance savings: $151.7m $151.7m $151.7m $120.3m $120.5m $120.5m

Fightback says that the average additional time assumed off JSA due to these changes will be 6 weeks.

Finance says asserts that the savings figures given are

consistent with an average additional wait for JSA of 8 weeks. As our calculations make clear 8 weeks is the appropriate

duration and Finance has simply purported to cling to a self evident typographical error.

Finance does not reveal whether it used 6 or 8 weeks, or either. It is impossible to certify the validity of Finance's claims in this area without any indication of its assumptions on this.

Because of the 6/8 weeks disparity Finance claims it appears as if there may be some double counting between this proposal and the extension of the JSA waiting period proposal. If it is

accepted that 8 weeks is the relevant figure, then no such double counting arises.

Finance (on DSS advice) assumes that 165,400 would be affected by the changes proposed here, but that 22% of this group would leave JSA before reaching the additional waiting period. We assumed 113,750 would be affected.

In addition, Finance assumes that 15% of those affected will not be able to survive on 80% of AWE for the additional waiting

period and will go onto special benefits. This is a ridiculous assumption. A breakdown is not given of this assumption's contribution to the overall figure.

Overall, Finance provides almost no detail on how it arrives at the $120.5m figure. No breakdown other than a $4m administration costs component is provided.

Tightening up of Income and Assets Tests


Year 1 Year 2 Year 3

Coalition savings: $250m $250m $250m Finance savings: $250m $250m $250m

We assumed $250m annual savings. Finance accepts this saying no estimate is possible given insufficient data.

Finance says this proposal would be complex and expensive to administer. However information on super payments for which a tax deduction can be made and fringe benefits on which fringe benefits tax must be paid is collected by the tax office and could simply be supplied on individual's tax returns, which are the principal means of determining eligibilty for the family allowance and the family allowance supplement.

Parental Assets and Income Test for 18-20 Year old JSA Recipients Living at Home

Year 1 Year 2 Year 3

Coalition savings: Finance savings: $50m $50m $50m

$32.2m $32.2m $32.2m

Finance claims this proposal merely extends the parental income and assets test 16 and 17 year also face to 18-20 year olds and proceed with their costings on this basis.

Finance's understanding of this proposal is not correct.

The income and assets test to be applied will be based on a more comprehensive definition of parental income and assets, for example any employer sponsored fringe benefits the parents

receive will be counted as income for the purposes of the income test. Finance makes no allowance for this. Subsequently, Finance's assumption that 24% of 18-20 year old job search allowees will have their payments reduced because of the parental

income test, for example, is irrelevant. The assumption that of those who do have their payments reduced due to the parental income test, the average reduction will be 83% of the maximum possible reduction is therefore also irrelevant.

Sole Parent Pension to Cease when Youngest Dependent Child Turns 12 Year 1 Year 2 Year 3

Coalition savings: $30.4m $88.4m $115.3m Finance savings: $28.9m $46.4m $48.lm

Finance agrees with the Coalition's intention to replace the sole parent pension with the JSA when the youngest dependent child reaches the age of 12. In its policy implications, Finance says in what will prove to be an embarrassing rebuff to Senator



"The proposal would address recognised work

disincentives, particularly for part-time work, facing sole parent pensioners and would be consistent with the direction of policy in recent years towards lower dependence on income support."

Finance's costings of this proposal are wrong for a multitude of reasons.

1. Finance's alleged savings overestimate for this proposal appears largely derived from spurious and unstated assumptions regarding displacement effects as sole parents return to work - assumptions for which again, it presents no basis.

2. Finance also assumes that of those sole parents who lose eligibility for the sole parent pension, 15% will automatically be eligible for either the disability support pension or the widows B pension. It assumes this on the basis of experience in

1987 when the child qualifying age was dropped from 24 to 16 years.

Firstly, 1987 experience and hence the 15% figure are utterly irrelevant. because:

(1) widows B pension is only paid to those women who have no dependent children (12 year old children are of course dependent, whereas sole parents could transfer to widows B pension in 1987 because their youngest dependent children being age between 16 and 24 were not and are not classed as dependent.)

(2) the widows B pension is currently being phased out. This phasing out began in 1987 and since then only

those sole parent pensioners who were aged 45 years or more on 1 July 1987 and who are 'widows' as defined in the Social Security Act would be eligible to transfer

to the widows B pension. Before 1 July 1987, there were no such age restrictions. Now, any woman aged under 45 years must go onto JSA as they lose

eligibility for the sole parent pension.

(3) given that very few sole parents if any will transfer to the widow B pension, it must be assumed that most of the 15% are assumed by Finance to go onto the

disability support pension. However, Finance provides no basis as to why the figure of 15% (or close to it) is the appropriate one. Given (4) it is reasonable to assume that it is significantly overestimated.

(4) It is highly likely that any sole parent who would

qualify for the disability support pension would be on that pension already, rather than the sole parent pension, as the disability support pension while it pays the same as the sole parent pension, is not


taxable and is therefore a far more attractive

proposition. Thus it is highly unlikely that anywhere near 15% of the sole parent pensioner population would transfer to the disability support pension, as most of

them would already be on it.

(5) Finance's assumption of almost 15% transferring to the disability support pension also ignores the tightening of the administration of the disability support pension planned by the Coalition, as well as the

changes to the disability support/invalid pension programs since 1987.

3. Finance acknowledges that to achieve the Opposition's savings based on an the our assumption of average weekly earnings of $200 per ex-sole parent who returns to work, just 20% of those placed onto the JSA by the Opposition will have to find work.

The figure of 20% is very conservative. From this, however, Finance reduces claimed savings due to spurious and unstated assumptions regarding displacement effects.

4. Finance assumes that second and third year savings arise only from those sole parent pensioners whose youngest dependent child reaches the age of 12 in each of those two years.

This is an utterly dishonest and unreasonable assumption.

The significant part of the Opposition's savings estimates for the second and third years are derived from those sole parents who are put onto JSA in the first year (a stock of 33,350 sole parents) and who miss out on finding work in the first year, but

find it in the second or third years. The Finance costings

assume that sole parents placed on JSA in the first year and who do not find work in that year will not find work in the second or third years. This clearly is an unreasonable and an

unacceptable assumption.

5. Finance also confuses net savings and gross savings in its analysis of this area. It says that 30% of those sole parent pensioners whose youngest dependent child is 12 or more would leave the sole parent pension each year under the current rules

as those children reach 16 years. In fact, Finance says:

"savings from the existing stock decline as pensioners would have ceased to receive income support in any event as their oldest child turns 16."

Most sole parent pensioners actually go onto JSA as their

youngest dependent child turns 16. They do not leave income support as Finance erroneously suggests. But this does not stop Finance from discounting the Coalition's savings estimate on this basis.

Instead of assuming that 30% leave income support, a more

realistic assumption is that most of these 30% in the first instance transfer to JSA. Hence, this represents a program


saving but not a net saving for Social Security, but Finance claims it as a net saving.

Thus, where the Coalition's initiatives encourage sole parent pensioners to make an earlier return to work, savings can be claimed for the pension which is saved and the subsequent JSA the sole parent would have received once she or he is taken off the pension when the youngest child reaches 16.

Restricting pension eligibility for wives of disability support pensioners Year 1 Year 2 Year 3

Coalition savings: $43.3m $141.8m $199.3m Finance savings: $28.7m $93.7 $130.5m

1. The Dept of Finance agrees with the proposal to restrict pension eligibility to such wives. It says:

"Payment of pension to all wives of DSPs, regardless of the extent of their role as a carer, runs counter to the direction towards an "active" income support system encouraging labour force participation where possible."

2. In order to claim an overestimate of savings in this area, Finance has had to rely on dubious assumptions regarding

displacement effects - assumptions for which Finance provides absolutely no basis.

3. Finance says that the assumption the Opposition makes about the number of wives likely to be affected are reasonable.

4. Finance assumes that the rate of pension paid to wives under 50 years is $119.77. It neglects to consider the amounts by which the pension is marked up on account of dependent children. This is an oversight, because, the significant part of the

savings claimed by the Opposition in this area derive from a return to work by such wives. With a return to work, not only is the basic JSA/pension paid foregone, but generally the amounts by which these payments are increased in respect of children.

This omission allows Finance to incorrectly claim a costing hole, the size of which it neglects to indicate, but is presumably subsumed into the overall "hole" erroneously claimed for this proposal, to which other spurious assumptions also contribute.

5. Finance says that it "makes an appropriate displacement adjustment" but neglects to say what that adjustment is and on what basis it is made.

Deferred Pension Plan

Year 1 Year 2 Year 3


Coalition savings: $27.4m $82.2m $109.6m Finance savings: $27.2m $82.3m $70.lm

Finance states that its costing of this proposal is "based on pensioners deferring for two years only". Finance also says: "it is not stated in the document whether longer deferment will increase the bonus, thereby increasing the incentive to defer

further." In fact, page 199 of Fightback says "a person who wishes to remain in the workforce beyond age 65 and who qualifies for the age pension at the time and agrees to defer it, will

receive a pension bonus for each additional year of deferment."

If the individual defers the pension for 2 years, then the

pension paid will be increased by 16%. If deferment is for a period of 3 years then the pension finally paid is marked up by 24%. For 4 years, it is 32% and so on.

Thus, the Coalition's deferred pension plan does incorporate an incentive to defer beyond 2 years. The assumption which allows Finance to claim a savings hole in the third year - that

individuals will only defer the pension for 2 years - is simply not valid.

Better Tar-geting of the Disability Support Pension

Year 1 Year 2 Year 3

Coalition savings: Finance savings: $34.4m $96.2m $127.lm

-$43.2m -$23.1m -$6.9m

The Coalition intends to have annual medical reviews for those DSPs who have an impairment rating of less than 70% or whose condition is not manifest, and extend the work of mobile review teams to the disability support pensioner population. Finance's attacks here are wrong on two accounts.

Finance assumes a 3% cancellation over the first two years due to the Coalition's initiatives. The Coalition's costings assume a cancellation rate of 9.3%.

1. Finance however seems unaware that the Social Security Act was changed in October. Prior to this, it was possible to get onto the DSP (then named the invalid pension) with assessed medical impairment ratings of less than 10%. This practice was

in fact criticised by the Auditor-General in May 1990, who felt that Social Security was not administering the program in accordance with the Act.

Subsequently, a minimum impairment rating of 20% was imposed in the October 1991 changes. Thus future applicants will be

automatically ineligible for the DSP if their assessed impairment rating is below 20%.

Of those granted the invalid pension throughout 1988-89 and 1989-


90, 9.2% had assessed medical impairments of less than 20%. (This information was provided in Senate Estimates). Assuming this figure can be extrapolated across all existing DSPs (not an unreasonable assumption) then if all existing DSP pensioners are to reviewed on the basis of the new eligibility criteria, 9.2% would not have impairment ratings in excess of 20% and would be

immediately ineligible for the DSP. Thus the Coalition's figure is correct; Finance is wrong and is condemned on the Government's own figures.

Finance appears to have been misled by DSS, as DSS provided the figure of 2% of DSPs being disqualified on the basis of its

current medical reviews. However, DSS has not been medically reviewing the existing stock of DSPs on the basis of the new Social Security amendments, ie the Department has not been reviewing the existing stock of DSPs against the new minimum

impairment threshold of 20%. In fact, for the next financial year, DSS has indicated in Senate Estimates that it will only review just 2% of the existing stock of DSPs.

2. The other significant error by Finance in its costings as they relate to this area involves the success rate of mobile review teams. Finance assumes a 1% 'hit rate' if review teams were extended to DSPs. It says that the 1% figure was chosen as

it "reflects...the success of this approach with other pensioner and beneficiary groups."

This is in fact, not true. The 1990-91 Social Security Annual Report states that the 1990-91 cancellation hit rate for those on the dole was 12.4%, 11.6% for sickness benefits, 10.1% for sole parent pensioners, and 17.7% for multi-purpose review teams.

Against these figures, Finance's assumption of 1% is utterly dishonest.

3. What all this shows is that the Coalition's proposed savings in this area are if anything underestimates, which will leave ample room to fund any extra administration costs for the extra review work in this program.

Two Year Benefits Wait for Ml στ-ants

Year 1 Year 2 Year 3

Coalition savings: $50m $250m $250m

Finance savings: $50m $174m $250m

Senator Richardson in a reply to a question placed on notice by Senator Alston said that during 1990-91, Social Security paid $399m in pensions and benefits to migrants who had been in

Australia for two years or less.

Thus the Coalition's estimated savings are clearly, very conservative.