May 04, 2021

The ever-increasing social welfare budget

Another area of difficult-to-control government spending

Government spending on superannuation and benefits has more or less doubled in the past 15 years. 

Some of this is the result of inflation, but the underlying need for the spending has grown and will continue to grow. The question is whether the spending can be reined in to enable increases in other areas, such as health and education, to be afforded?

Spending on social security and welfare is almost as great as spending on health and education combined.

As the graph below implies, government spending on social security and welfare, which includes superannuation and various kinds of benefits, has more-or-less doubled since 2005, and only roughly one-third of the increase has been the result of inflation. The graph also shows that spending in this area is almost as great as spending on health and education combined.

Governments would ideally like to spend less of the budget on social security and welfare, to enable more spending on health and education, but this is likely to be extremely difficult. The fact is that the drivers of social security and welfare spending are largely beyond governments’ control, and any attempts to limit the spending would undoubtedly be unpopular among large sections of the electorate.

Roughly two-thirds of social security and welfare spending is accounted for by superannuation (pensions) payments. The remainder is accounted for by various benefits, the largest types of which are the Jobseeker Allowance, the Accommodation Supplement and the Support Living Allowance.

Total spending on Superannuation is driven very largely by the number of people entitled to receive it, and this means virtually any New Zealand citizen or permanent resident aged 65 years and over. The main options for limiting the spending would be to increase the age of entitlement (to, say, 67), or to decouple any increases in the payments from the rate of inflation or the rate of increase in average earnings, or to exclude certain population groups from entitlement.

The first of these options has been mooted several times, but political parties in power and those in opposition have tended to oppose the idea. The second option would also be unpopular, and implementing it would tend to result in modest saving in any case. The third option, in the form of denying entitlement to migrants until they have spent longer in the country, has gained acceptance, but it too is likely to result in fairly small overall savings.

There are now 800,000 people aged 65 and over now, and this number will probably reach 1,500,000 by 2050.

In the absence, therefore, of political cross-party will to delay the age of entitlement, government spending on Superannuation will go on rising significantly. This is because the number of people in New Zealand aged 65 years and over is increasing rapidly, and will continue to do so for several more decades. As the graph below indicates, there are now a little over 800,000 people aged 65 and over now, and this number will reach a million by around 2027. The rate of increase appears likely to slow after 2038, but the number is likely to reach about 1,500,000 by 2050.

Any attempts by government to cut benefit entitlements and increases are also likely to be politically difficult. Theoretically, the demand for benefits would be reduced by improvements in the performance of the economy, but the improvement would need to be dramatic to have much of an impact. And has been seen during the past decade or so, New Zealand’s economy has been adversely affected by factors – such as the GFC, the Canterbury earthquakes and COVID-19 – that have beyond the control of government.

In a normal year for the economy (i.e. one not affected by COVID-19) social security and welfare spending accounts for roughly 33 percent of all government spending and is equivalent to around nine percent of GDP. Future governments will do well to keep these percentages from growing significantly.