The McClure review of Australia’s welfare system, whose final report the federal government recently released, proposed an “investment approach” to welfare. This approach was taken explicitly from reforms in New Zealand that were introduced in 2012 and 2013.

The aim of the investment approach is to estimate likely lifetime benefit costs for everyone on welfare – the so-called “future liability” – and then target resources at those groups who represent the highest future liability.

The review’s chair, Patrick McClure, enthusiastically promoted the New Zealand approach:

We also talk about and recommend an investment approach. This is based on a New Zealand model that’s been very successful – one, in getting people into jobs, but also in making considerable savings over the longer term.

However, the claim that the NZ investment approach has been “very successful” is at best unproven. Arguably, it is plain wrong.

A flawed approach to welfare reform

The concept has two fundamental flaws. The first is that at the heart of the investment approach is actuarial valuation of the “future liability”.

Future liability is an estimate of how much a government is likely to pay in future welfare costs for all current welfare recipients, taking into account future periods on benefits that they might have. The problem is that future liability measures the wrong thing.

The task of any government is to determine how best to spend the revenue it raises to maximise the population’s well-being. The orthodox means of ranking alternative expenditure options is a cost-benefit analysis. A cost-benefit analysis considers all the costs and benefits, public and private, of any intervention.

As the University of Otago’s Simon Chapple has pointed out, actuarial valuation – an accountancy methodology – is concerned with only a narrower subset of concerns: the costs to one vote, or portfolio, in the government’s budget. Even within an accounting framework, it takes no consideration of the assets that match the “liability”.

The difference is far more than arcane. For example, a training program for welfare beneficiaries could easily show a net positive cost-benefit analysis outcome – taking into account future earnings and taxes paid – and yet be deemed too expensive to be worthwhile using actuarial valuation methodologies.

In New Zealand, this approach’s consequences are illustrated by the 2013 actuaries’ report and the Ministry of Social Development’s 2013 Benefit System Performance Report. These contain no mention whatsoever of employment or earnings outcomes for ex-welfare beneficiaries.

What happens to people when they leave welfare is irrelevant to this sort of analysis – just so long as they leave and don’t come back.

The second problem follows from the first. The focus on actuarial valuation creates strong perverse incentives for welfare delivery services. Far from being an “investment” approach, it promotes disinvestment by encouraging the creation of barriers to entering welfare. An applicant turned away is as “valuable” in the annual liability valuation as a similar welfare recipient placed in employment.

Administrative barriers to entry – and suspensions and cancellations – are often less time-consuming than the hard graft of matching job seekers to jobs. In New Zealand, this has happened in the development of a less facilitative, more punitive, approach to welfare recipients and applicants. It is formalised in a ministry performance target that 35-40% of “clients who participate in a triage service … do not require a benefit within 28 days”.

That “triage service” – the initial assessment of the job seeker – doesn’t necessarily mean people placed into jobs, just that they are not receiving a benefit.

What has happened in New Zealand?

So, in practice, what is actually known about the success or otherwise of the New Zealand investment approach so far?

First, let’s look at the latest actuarial valuation. As the McClure review’s report correctly cites, the 2013 valuation showed a reduction in future liability from NZ$86.8 billion to NZ$76.5 billion. Most of this reduction in costs was due to changes in forecasting assumptions, but the valuation attributes NZ$1.8 billion to “more ‘leaves’ and fewer ‘joins’”. It said:

It is probable that policy and operational changes contributed to this reduction in liability.

In other words, in the best employment growth year since before the global financial crisis, there was only a 2.07% reduction in welfare costs due to lower welfare numbers. This is hardly a resounding endorsement.

New Zealanders do have one measure of employment placements. Prior to the country’s 2014 general election, ministers frequently cited a figure that “1,600 beneficiaries were being placed into employment each week” during 2013. It has been removed from the National Party website, but this statement was repeated last month in parliament by the new Social Development Minister Anne Tolley.

The number sounds impressive. Scaling up for Australia, it would represent something like 8,000 job placements per week. However, the Welfare Working Group that designed New Zealand’s reforms also reports average placements into work in its issues paper. The data cover June 1999 to June 2005 – a period of similarly good employment growth and with roughly similar total numbers on welfare. Over that period, the average number of people leaving benefits to take employment was 1,690 per week.

So, it does not appear that the investment approach has done anything to significantly improve the performance of Work and Income, New Zealand’s welfare agency, in its core function of helping people into jobs.

Lastly, despite the strong labour market being reflected in improvements in a number of social indicators, there is growing evidence that some are missing out. For example, the Auckland City Mission recently reported a doubling in the number of homeless people living in inner-city Auckland. The mission cited welfare reforms as one reason for this.

Costly actuarial models are not necessary to work out who to target for assistance. The Ministry of Social Development already has the data to do that. Worse, they give the wrong answer and incentivise the wrong behaviours by Work and Income.

They are also no help in evaluating employment assistance. That requires more comprehensive evaluation techniques, including cost-benefit analyses as well as assessment of individuals’ needs and outcomes.

Australians would be wise to think carefully before importing this particular Kiwi invention.