Is Australia's welfare spending heading down the same path as Europe's?

Updated

A report showing one in five Australians receive income support has prompted Social Services Minister Kevin Andrews to label the welfare system "not sustainable" and order a review.

Talking on ABC radio, Mr Andrews said: "With the population ageing at the rate that it is, we've got to ensure in the future that we're able to sustain the welfare system, otherwise we'll find ourselves in 10 or 15 years' time in the situation that some of the countries in Europe are in".

The claim: Kevin Andrews has labelled Australia's welfare system unsustainable and says in 10 to 15 years' time Australia could find itself in the same situation that some European countries are in.

Kevin Andrews has labelled Australia's welfare system unsustainable and says in 10 to 15 years' time Australia could find itself in the same situation that some European countries are in. The verdict: Treasury projections to 2050 show welfare spending as a proportion of GDP will remain steady over the next three decades.

What do European governments spend on welfare?

There's been much talk of the European welfare state, particularly since the global financial crisis dramatically increased welfare payments in many European countries. Experts contacted by ABC Fact Check said it was difficult to find internationally comparable data on welfare systems, but pointed to data collected from the OECD, a collaboration of 34 wealthy countries around the world.

The OECD Social Expenditure Database collects government and private spending on income support payments like the old age pension, and unemployment benefits. Its primary reports include money spent on health care and aged care services as part of its definition of social expenditure.

Its latest report shows the Australian government's social expenditure is 19.5 per cent of gross domestic product (GDP), lower than many of the wealthy European countries Australia usually compares itself to, and countries which were affected most by the financial crisis.

Professor Peter Whiteford, from the Crawford School of Economics at the Australian National University, says a closer look at the OECD data shows Australia is "relatively low in terms of social security and around average in the terms of spending on health".

A breakdown of the OECD data into smaller categories is available in a 2012 report which looked at social spending during the financial crisis, citing 2009 figures.

This includes the OECD's list of "cash benefits" paid by its member countries.

This is comparable to how the Australian government defines welfare spending, which it calls "income support" and includes age pension, veterans' pension, disability support pension, unemployment benefits, study and carers' allowances, and other payments.

The 2012 report shows Australia was well below many European countries in "cash benefits" in 2009.

The largest single welfare payment in Australia and Europe is the age pension. According to the OECD Pensions at a Glance 2013 Australia's public spending on the age pension was 3.5 per cent of GDP.

Many European countries spend a significantly higher percentage on age pensions. Italy spends 15 per cent of GDP, France 14 per cent, Belgium 10 per cent, Sweden 8 per cent and the United Kingdom 6 per cent.

Professor Whiteford says Greece is projected to be spending 16 per cent of its GDP on the age pension by 2060, but if it had not made pension reforms in 2009-10 it was projected public pension spending would reach 26 per cent of GDP.

Many European countries also have a significantly higher percentage of the population over age 65 than Australia. Italy, Germany, Sweden, France and Belgium all have a high proportion of old people to the ratio of working members of society.

What are the predictions for Australia's welfare spending?

The federal treasury produced its third comprehensive Intergenerational Report in 2010. The report, "Australia to 2050: future challenges" analyses the changes Australia will face over the next 40 years. Experts referred Fact Check to the report for future predictions on welfare spending.

The report says government spending on pensions and income support payments in 2009-10 was 6.9 per cent of GDP. It predicts that there will be minor fluctuations and it will still be 6.9 per cent in 2049-50.

The report says Australia is facing an increase in age-related spending, but more in health and aged care services than in welfare payments. It says that as a proportion of GDP, spending on health is projected to rise from 4 per cent to 7.1 per cent by 2049-50. Aged care is projected to rise from 0.8 per cent of GDP to 1.8 per cent. Spending on age-related pensions is projected to rise from 2.7 per cent of GDP to 3.9 per cent.

The number of people of eligible pension age is projected to increase by around 150 per cent by 2049-50, however the report predicts there will be a decline in the proportion of pensioners receiving a full age pension because of the increased value of superannuation and other private assets and income.

Over the same period, spending on other welfare programs - unemployment benefits, widow pensions, parenting payments, carer payments and study allowances - is expected to fall.

The report says the ageing of the Australian population will place substantial pressure on government spending over the next 40 years, however two thirds of this cost will fall under health.

The report also comments on Australia's comparative position. "Australia is comparatively well-placed in relation to age pension spending because the pension is means-tested and targets poverty alleviation," it says. "By comparison, many OECD countries pay age pensions based on pre-retirement individual earnings, resulting in greater fiscal pressure as their populations age."

Andrew Podger, professor of public policy from the Australian National University, wrote in the Australian Financial Review on January 22: "The claim that Australia's welfare system is 'unsustainable' would surprise observers in most other OECD nations which spend a much higher percentage of their GDP on social security payments. Our emphasis on flat-rate, means-tested payments rather than earnings-related social insurance has limited the burden on Australian taxpayers."

Professor Whiteford says: "Because we income test payments more than any other country, we have the most progressive distribution of benefits in the OECD, and we also spend less than the OECD average.

"It could be noted that the only element of the social security system that will resemble the European approach when it is introduced is the Government's paid parental leave proposal."

"We have challenges to face, but we are not heading the same way as Europe," he said.

The verdict

There is nothing to indicate that as the population ages Australia is heading toward the high welfare spending of some European countries. Treasury projections to 2050 show welfare spending as a proportion of GDP will remain steady over the next three decades.

Sources

Topics: welfare, liberals, federal-government, social-policy, aged-care, australia

First posted