Australia's welfare system is not mean but different and fairer

A report from the Australian Council of Social Service claims that the problem of welfare dependency among working-age Australians has been exaggerated (Australia's Social Security System: International comparisons of welfare payments, August 2004). Indeed, ACOSS thinks we should be spending more on welfare than we already do.

The report admits that one in six adults below retirement age depend on welfare payments (an increase of more than 500 per cent in 40 years), but it claims that our benefits are inadequate and that our welfare system is "lean and mean" compared with other countries.

The core of the ACOSS argument is that Australia spends considerably less on welfare than most other OECD countries. But while this is true it is also misleading, for, as the report admits, we have a very different social security system.

In Europe, workers and their employers contribute a proportion of weekly earnings to state-run insurance funds. When they are out of work, people draw down on these funds, and the payments they receive reflect the contributions they have made. Higher earners often receive higher benefits than lower earners because they have made bigger contributions.

The Australian system is different. Our system is non-contributory and benefits are flat rate rather than earnings-related. We also apply a much tighter means test than many other countries. In Europe for example, retired people who have paid social insurance contributions during their working lives receive a state pension irrespective of whether they have any other income, but in Australia the age pension is only available to those on low incomes.

Given these differences, it is not surprising that the Australian welfare system is cheaper than in most European countries. But it does not follow that we are "meaner".

Because Australian welfare benefits are funded out of general taxation, those who earn the most pay the lion's share of the welfare bills. As benefits are flat rate and tightly means-tested, those who pay most into the system often end up getting very little back. The result is a strongly redistributive system of income transfers.

A Department of Family and Community Services  report in 2002 found that, although Australia spends less than most other OECD countries on welfare, only Norway and Finland transfer more money net of tax paid to the poorest 30 per cent of the population than we do. For low-income earners or people without income, Australia operates a more generous welfare system than even Sweden.

Needless to say, ACOSS does not acknowledge this. It chooses to focus on the total we spend on welfare while ignoring the crucial question of where the money goes. In Europe they spend more because they give more money to the middle classes. In Australia, we spend less but nearly all the cash goes to the poorest third of the population. ACOSS is right that we run a lean system, but it is certainly not mean.