The Foundations Of Social Welfare in New Zealand

Paper to a Student Group from Carleton University, 10 February 2011.

Keywords: History of Ideas, Methodology & Philosophy; Political Economy & History; Social Policy;

Europeans were greatly puzzled by the American debate over President Obama’s health reforms, for almost everyone there assumes the public sector should actively promote universal health care. Clearly that is not the norm of thinking in the United States (although the Canadians would be far more sympathetic to the European view). My point is not to suggest that the US is out of step with the rest of the rich world but to suggest that social policy differs between countries because of different social philosophies which rise out of different experiences and different histories. To understand the system you have to know something about its history and how it has been shaped by these experiences, and what the resulting philosophies are.

Now I am talking here to a group of American students. You will have particular views about social security based on the American experience. I am not arguing your views are wrong; today I am simply asking you to suspend your views in order to understand New Zealand’s social welfare system. I am not going to talk about the details of the system. Rather I want to talk about the historical context in which it evolved. You might think that because New Zealand is a new world country like America the historical contexts are the same. We shall see that they are very different. I start by identifying three major ones.

The first is, Maori aside, New Zealand government preceded New Zealand society. We usually think of New Zealand government beginning on 6 February 1840 with the signing of the Tiriti o Waitangi, which led to the British representative, Captain Hobson establishing a government at Kororareka in the Bay of Islands near the Treaty Grounds, and a year later moving the capital to Auckland. At the time the European population of New Zealand was less than 2000; if you exclude sojourners and men who would never marry, the numbers were even smaller. It is true that about a week before, the New Zealand Company began its first settlement in Wellington, but the lead time was trivial and in any case by 1843 the Company was in financial difficulties and later it was taken over by the British government.

Bruce Jesson, one of New Zealand’s most perceptive public intellectuals, described the consequence of government preceding society as the ‘hollow society’, by which he meant that it contained individuals and there was the central government but not much in between. Such social institutions as there were depended on the government, rather than rising organically out of the people. The reflex reaction of New Zealanders has been to operate directly with the government, even in situations where other countries may use social institutions independent of it. Faced by a social problem they almost always turn to the government to deal with it. This puts social institutions under the government, and strengthens the government’s hold on them, restricting their organic growth and further reinforcing the hollowness of society.

Contrast that approach with America’s. Your settlements began over 100 years before the government of the United States was established and in that period your settlers created social institutions that they needed to look after themselves. An illustration of this is that not only the American constitution was hotly debated in town halls, with many of the objections encapsulated in the Bill of Rights. In February 1840 there were not any town halls in New Zealand. In 1852, when the first constitution was imposed on New Zealand, there was no representative government here; the statute was actually passed by the British Parliament.

The second major difference is that the majority who came here in the nineteenth century came as assisted immigrants under schemes promoted either by the New Zealand Company and related organisations, or by the provinces and the New Zealand government. There is no data here, and to be confident I need to exclude sojourners (but acknowledge that some of the assisted returned too) and also men who were never married. A lot of these temporaries came and went in the early 1860s when gold was found. I treat men without wives as temporary because they typically would have no progeny’ which is integral to an ongoing society.

Assisted immigration was crucial to New Zealand because we were the furthest outpost from Europe, so it was easier and cheaper for those who wanted to migrate to go to North America. In effect we (and Australia) had to pay people to come here. (As an aside, because they were selected there is some evidence that they were a better quality of migrant on some measures – but I would not make too much of that.)

So, as John Martin in a recent book, Honouring the Contract, argues the assisted immigrants who came to New Zealand felt that the government who brought them had a moral obligation to provide circumstances which would give them a living. Of course they accepted that they had an obligation to seize the opportunity – nobody owed them a living. But what if there were no opportunities?

Almost from the beginning there was a dearth of opportunity. Most New Zealand settlements lapsed quickly into a slump, once the temporary demand from the initial injection of immigrants and capital came to an end. So, for instance, within a couple of years, the unemployed settlers of Nelson were demanding that the New Zealand Company, which had brought them out, should give them jobs, as the private sector was not generating enough of them. The Company did so by using its capital to employ them to build roads; no wonder it later went bankrupt.

The Canterbury Province was an exception because it was founded at the same time as the Victorian gold rushes and benefited from provisioning them, thereby missing out on the usual slump. Even so, the Provincial Superintendent had to warn men that if they rushed off to the goldfields on the other side of the Tasman, they could not expect the local government to look after their wives and children; it did, to some extent, of course.

The myth is that New Zealand was founded to escape the British – call it ‘Victorian’ – poor relief, which was seen as punitive. Being able to farm one’s own piece of land moderated the need for relief, but the destitute still existed and the localities coped with those in need as best they could.

Some of the traditional British approaches could not be used. You could not dump responsibility for a man onto his family if he did not have one, or it lived elsewhere. You could not send people back to their parishes, because they were on the other side of the world. Because there was no established church, and the other denominations jealously guarded the principle of a secular society, it was not possible to create parishes for poor relief. You could not even use independent local agencies. The original constitution had established a set of provinces – not unlike the states of America – but in 1876 they were abolished by an act of the national parliament.

Time out for the American perspective. Can you imagine in 1876 – Ulysses Grant was president – the American congress abolishing, virtually overnight, all the states of America and there being nary any dissent? That is a real indication of just how powerful and centralised the government of New Zealand had become.

So New Zealand was founded with a powerful central government and a population which looked to it when it needed help. On their own, New Zealanders could be fiercely individualistic, but once a social problem arose, the demand was for a collective solution in which the government played a central role. It was a demand based on a moral obligation which the assisted immigrants and their children thought was a part of the deal of being brought out here.

The third particularity is the response to the question as to what sort of policies they demanded? With occasional exceptions, New Zealand’s approach to social problems has been essentially practical with a focus on simple short-term solutions with little attention to long term complexities. I dont want to get into a dispute about which country is the most pragmatic, but let me illustrate the New Zealand approach with a couple of quotations which typify public policy to this day.

The first comes from a French political analyst, André Siegfried, in his book Democracy in New Zealand published in 1905:

“Their outlook, not too carefully reasoned, and no doubtful scornful of scientific thought, makes them incapable of self distrust. Like almost all men of action they have a contempt for theories: yet they are often captured by the first theory that turns up, if it is demonstrated to them with an appearance of logic sufficient to impose upon them. In most cases they do not seem to see difficulties, and they propose simple solutions for the most complex problems with astonishing audacity.”

This view of New Zealanders is not unique. Samuel Butler wrote a utopian novel Erewhon. The title, the name of the utopia, is almost ‘nowhere’ spelt backwards. Butler developed a Canterbury sheep station between 1860 and 1864 before returning, a wealthy man, to England to write. His 1872 novel is set in a Canterbury landscape, and it is not implausible he is writing about the early settlers. Of them he might have said:

“It will be seen … that the Erewhonians are a meek and long-suffering people, easily led by the nose, and quick to offer up common sense … when a philosopher arises among them …”

Exactly as Siegfried was to articulate three decades later. For a third example, skip forward to the 1930s, to the major housing construction program. I once asked an economist involved with it what were its intellectual underpinnings. He was Bill Sutch, one of New Zealand’s most able public intellectuals, and probably the first New Zealander to read Maynard Keynes’s General Theory. I asked in the expectation he would refer to Keynesian theory but, no, Sutch explained that at the time they saw a demand for housing, there were unemployed builders, there were unused materials, there was vacant land so they provided the credit to bring them together. As simple and practical as that – not a hint of deep Keynesian theory.

I am sure there are parts of the American population who would be sympathetic to this approach, but it is hardly the basis of the thinking underpinning the US constitution; Hamilton, Jay, Jefferson and Maddison were fine intellectuals,. Today America has outstanding think-tanks and high quality debate which outsiders like me follow, plunder and adapt. New Zealand has no such rich theorising, partly because we are small and partly because we prefer practical people over public intellectuals even, if as Keynes says, they depend upon defunct intellectuals. We dont have quality think-tanks either; instructively the best we have are government agencies – independent think tanks would be filling in a hollow in society.

So there are three particularities of New Zealand compared to the United States:

– a hollow society in which there are few social institutions which are independent of the government;

– a belief that the government has a moral responsibility to help people help themselves;
– a practical rather then cerebral approach to policy making.

I now highlight some of New Zealand’s history of social security to illustrate how these particularities led to particular policy outcomes.

A watershed moment was in 1898 when the Old Aged Pension was introduced. It’s need had been debated in previous years with particular attention to whether the elderly should be supported on the basis of need or as a right of citizenship. The government began to run fiscal surpluses towards the end of the 1890s, and some was used to pay a benefit to those over the age of 65 who were in need. Some groups, such as Asiatics, aliens, alcoholics and those of doubtful moral character, were excluded and the criteria included a residence requirement and restricted the entitlement to those with low incomes and little wealth.

The needs argument seemed to have won. Certainly there were needs. The men without families who had arrived in the gold rush period thirty years earlier, were aging and poor relief could not cope with them. The introduction of the state pension for the elderly markedly reduced the number with whom charities needed to deal.

But the notion of a universal entitlement never went away. Over the years the restrictions have been lifted, and the level relative to wages raised. Today New Zealand Superannuation has a not ungenerous benefit to everyone over the age of 65, although it is treated as taxable income so it is not as valuable to the rich as to the poor.

It is based on a non-contributory pension scheme funded out of general taxation. It could not be contributory in 1898 since the need was urgent and the elderly were long past the stage when they could contribute. Subsequent attempts to introduce one, either as a supplement to the existing state pension in 1975 or a replacement in 1998, were rejected by the voters. As a result there is no comprehensive occupational pension scheme; typically only retirees who were public servants and the highest echelons of management have significant contributory pensions. They are a minority of the population. In 2006 the government introduced a voluntary occupational based contributory scheme, but that wont have much impact on retirement incomes for decades.

New Zealanders consider the state provides New Zealand superannuation as a matter of right. A political party which advocated curbing the scheme would not attract a lot of support. Over a hundred years ago some practical decisions were taken to meet a particular social problem and those decisions shape a key public policy to this day.

Thus evolved a system of universal non-contributory flat-rate benefits based on entitlement which became characteristic in New Zealand’s social security system, although over the years there have been variations in income testing (such as treating it as income for taxation purposes). The approach also applies to health care. There is no formal incomes test on public health provision, although there is the option of the individual skipping over a public waiting list by purchasing private care if they can afford it.

There is no point in today’s context of detailing the extension of the income maintenance system to other benefits. However I want to illustrate the utter pragmatism of New Zealand by describing how another part of the income support system was, almost absent mindedly, added without anyone noticing that it involves quite different principles.

In 1896 an explosion at the Brunner coal mine on the West Coast killed 65 miners. At the time the national population was about three-quarter of a million so one in a twelve thousand died in the worst mining disaster in New Zealand’s history. A Workers Compensation Act followed shortly after in 1900. It was based on earlier British legislation, and unlike the Old Age Pension it was contributory and earnings related. Again the scheme has evolved. I dont need to go into its historical detail, nor into a variety of extensions and complications, but basically today we have the Accident Compensation Scheme which involves comprehensive no-fault coverage for injury from all accidents, in which the compensation is earnings related and which is funded from levies.

The social security system and the accident compensation do not sit easily together. Consider two people each of whom has lost a leg and is suffering an identical degree of handicap. If the amputation was due to a medical condition the sufferer could be entitled to a flat rate benefit and various services; if it was due to an accident the sufferer will receive a more generous treatment including higher income and be entitled to better rehabilitation and support services. New Zealanders are well aware of the inconsistency but to mesh the schemes effectively together involves either a very great cost to the public purse if the social security entitlement s are to be brought up to the accident ones, or a considerable loss of entitlements if the accident compensation system is downgraded.

Another example of the difficulties which pragmatism often induces evolved out of the widows benefit introduced in 1912. Over the years its scope was extended to cover other solo mothers such as women with their partners in mental hospitals or prisons. Men in equivalent situations became entitled too.

Notice that while the event which precipitated the entitlement was fairly well defined, say the death of partner, there was a problem if the woman got involved in another relationship – particularly if it was not legally acknowledged. Initially one could use the morals clause to deal with such instances; when it was revoked as an inappropriate judgement for a government to make – recall New Zealand is a secular state – the law was revised to exclude those who were in a marriage-like relationship. That requires a degree of judgement by the authorities, and led to a series of problems of application.

One case was sufficiently well documented for me to form the opinion that the solo mother had drifted into a marriage-like association with a man, but when the social worker advised that was the situation, it literally broke up the relationship. The law today sets the definition for a couple in terms the actual nature of the relationship rather than its legal status. Thus an unmarried couple living together are likely to be treated as married; a married couple living separately may – depending on the exact circumstances – be treated as singles.

Probably nowhere in the modern world can the state deal well with the intricacies of intimate relations, and everywhere there are various ad hoc decisions, some of which can be quite repressive.

In the mid-1960s a new problem arose concerning solo mothers with insufficient income because, one way or another, the father of the children would not support her – perhaps he had deserted them, perhaps the mother was not married. A discretionary grant was introduced, but in 1973 this was converted into a statutory Domestic Purposes Benefit which meant the authorities had much less discretion as to who was entitled to the income support.

From one perspective this was a further extension of the approach begun in 1912 giving state support to solo parents. However, no one at the time, as far as I can recall, observed that a fundamentally new principle had been introduced. Previously the entitlement was based upon something happening to the beneficiary over which they had little control – like one’s husband dying. (The principle of entitlement being based on events outside one’s control applied throughout the system; for instance it is time – one’s age – which determines entitlement to the state retirement pension.) However under the extension the parent could take an action which gave them a benefit – for instance she could get pregnant without the father being willing to support her and the child; she could leave her partner taking the children with them. Under the new regime she would be entitled to a benefit. The technical term for this is ‘moral hazard’, but in order to avoid righteous indignation I call it ‘behavioural response’, that is, you can change your entitlement by your personal behaviour. The issue of this behavioural response – it applies elsewhere in the benefit system – has never been sorted out. Perhaps given the complexity of the human condition it is impossible to do so completely, but any progress requires a careful analysis which practical men and women have yet to do.

Instead they add to the system making it more complex, more administratively onerous and less workable. I’ve already mentioned that unemployment entitlements may also engender a similar behavioural response since solos and couple could choose to stay on the benefit rather than seek work. To discourage this, the ‘working for families’ support was introduced in 2005, raising the income of working families with children relative to beneficiary families – presumably to encourage the latter to seek work. The scheme is incredibly clumsy. It is said that a committee designed a camel – a calumny on the ship of the desert; the committee that designed the Working for Families package designed a pushmi-pullyu.

To give an example of its two headedness, the scheme requires a decision as to whether two people are in a marriage-type relationship. In order to minimise the cost of the scheme the Department of Inland Revenue will declare a couple in particular circumstances as not married. Meanwhile in order to minimise benefit entitlements Work and Income New Zealand may declare the same couple as married. So one’s marital status may depend on which department of state is reviewing you. Coming to think of it, the pushmi-pullyu is much better designed.

I want to finish by trying to explain how this increasing muddle occurred, but at the same time giving you a bit of the historical background. In 1938 the first Labour government passed the Social Security Act which extended and consolidated the haphazard collection of income support which had come into the existence over the years. (As an aside, the term ‘social security’ came from the US.) It proved a robust piece of legislation for over three decades, with a variety of minor extensions. A curious feature was that there was no overarching explanation of the principles which underpinned the system. Prime Minister Michael Joseph Savage, the politician who it is most associated with it, described it as ‘Applied Christianity’ but as noble a notion as that is, it is not very helpful when you want to think about, say, how to organise a Domestic Purposes Benefit.

In 1969 a Royal Commission was established to review the Act (which also contains health provisions). Its 1972 report includes the following codification of the system:

“These are the essential principles on which we consider our social welfare system and its administration should be based:

(a)        The community is responsible for giving dependent people a standard of living consistent with human dignity and approaching that enjoyed by the majority, irrespective of the cause of dependency. We believe, further, that the community responsibility should be discharged in a way which does not stifle personal initiative, nor unduly hinder anyone trying to preserve or even enhance living standards on retirement or during times of temporary disability.

(b)        Need, and the degree of need, should be the primary test and criterion of the help to be given by the community irrespective of what contributions are made.

(c)        Coverage should be comprehensive irrespective of cause wherever need exists, or may be assumed to exist.

(d)       Identification and measurement of need is essential if the primary test is to be observed. We believe that this is best done by establishing categories of people who are most likely to be unable to derive adequate incomes from the market system, or who are most likely to face unusual expense in maintaining an acceptable standard of living. It is still necessary either to:

(i) Discriminate between those falling within a category (for example, the aged, the widowed, the sick) who need or do not need help, or to find out how much help is needed (the selective approach); or to

(ii) Assume that need exists, and therefore dispense with further discrimination where the expectation of need within a category is high enough, and other considerations (such as the effect of taxation) are favourable. (This is the universal approach.)

(e)        The aims of the system, should be

(i) First, to enable everyone to sustain life and health;

(ii) Second, to ensure, within limitations which may be imposed by physical or other disabilities, that everyone is able to enjoy a standard of living much like that of the rest of the community, and thus is able to feel a sense of participation in and belonging to the community;

(iii) Third, where income maintenance alone is insufficient (for example, for a physically disabled person), to improve by other means, and as far as possible, the quality of life available.

(f)        Social security cash benefits are only one aspect of the total problem of maintaining incomes and raising living standards. Taxation, wages, employment, economic development, education, health, housing, social services, and cultural policies are all also of great importance. There is a manifest need therefore to co-ordinate those areas which impinge on, one another.

The first thing is to observe is that the welfare system had been operating for a third of a century without any such systematic account of what it was actually about. That’s pragmatism for you.

Second, while one might want to do a bit of fine tuning – for instance I’d put the aim of the system first– I reckon it’s a pretty good account of what New Zealanders want from their welfare system. I dont know what an American would think about it since it places government responsibility right at the theoretical centre.

Third, application of the principles still evolves a lot of decisions about categories, levels and administration. The Commissioners would have been comfortable with the notion that such things would change over time reflecting changing social evolution, so those decisions will evolve.

But, fourth, while it provided a sound foundation for the welfare system New Zealanders might desire, the Royal Commission’s principles tell us little about the structure which should be raised up from the foundations.

Instead there was a continuation of the social evolution of the previous third of a century. In practice there have been some revolutionary changes which the resulting structure has proved inadequate to deal with. Here are some of the big ones:

1. Unemployment, while low by international standards, is now a fact of New Zealand life. Before 1968, during the heyday of the system, unemployment was very low. There were so many jobs available that when a jobless worker came in the appropriate response was not ‘Are you entitled to a benefit’, but ‘Get a job’. On one occasion, when the population was near three million, there were but two people on the unemployment benefit.

(Indeed the Royal Commission remarked that it was inconceivable that the Government would allow high unemployment. Subsequent events proved it had surprisingly little control over unemployment in the long term.)

One implication of higher unemployment is that opportunities for behavioural response are magnified. New Zealand has much the same problem as every other rich country: how to get the right balance of incentives and pressures to ensure that the unemployed diligently look for work and accept it, rather than staying on the benefit.

2. Before 1972 it could be reasonably assumed that mothers, even wives, did not work. Today most do, even those with young children. About 45 percent of the workforce are women although they dont work as long hours as men.

Again that is not too different from other rich countries, but it raises a number of problems for a non-contributory system. Being in work is now a much more fluid phenomenon; how is the administrative system to define full-time work and the entitlements for compensation or income support when it ceases? And how is it to provide for a couple when a partner is working and the other is unemployed or sick or whatever? It is not such a problem in a contributory system such as accident compensation because entitlement is based on work record.

3. Since the Royal Commission, we have realised that our support for the elderly is sufficiently generous to mean that serious deprivation is largely a child phenomenon – on international measures among rich countries. we have one of the highest poverty rates among children. The last time I estimated the poverty rate – admittedly before the Working for Families package – I found that over 80 percent of New Zealand’s poor were children and their parents. Moreover in contrast to the popular perception, more were in two parent families than one, in Pakeha families than Maori, in their own house (with a mortgage) than renting, and with the head of the family earning rather than being on a benefit. The rhetoric talks about where there are the highest rates of poverty, but not where there are the highest numbers. The defining characteristic of being poor is a family with children.

There is not the time to untangle what is going on. However, as I observed back in the 1970s the welfare state had evolved predicated on a man being able to provide an adequate standard of living for his family. Even if that was true in the past it is certainly no longer today.

I have less competence on my final two dramatic changes, so we proceed with caution.

4. We seem to have had a rise in drug and alcohol addiction and psychiatric cases, and these are more likely to end up beneficiaries. The traditional welfare system was ever designed to deal with such groups and it seems probable that it is designed no better today.

5. The Maori began pouring into the cities from the countryside in the 1970s just as unemployment started rising. My impression is that Maori social structures are still struggling with that transition. The same may be true for Pacific migrants. Regrettably, there is surprisingly little research about these great migrations which is relevant to the welfare state.

To this list I could add many other factors which the plain vanilla welfare system of 1938 to 1972 finds it difficult to deal with – factors like increasing income and social inequality, the rising demand for skills in the labour market, international labour mobility, the aging of the population and fiscal stress. Let’s leave them all here and ask how are these dramatic changes being dealt with?

You might expect a rich intelligent public debate addressing the fundamental issues, but that rarely happens in a hollow society of practical people.

Think of the income maintenance system as a many-floored building built on foundations such as those set down by the Royal Commission principles. Each floor needs to be built to serve its purpose but also as a sound basis for the floor above it. What is happening is that rather than looking at the structure as a whole, the public debate is about what is happening on the top floor of the building. Everyone acknowledges that there is something terribly askew up there, but they give no attention to the adequacy of the floors below. Instead the left says the system should be more generous and the right says it should be more selective.

Practical men and women dont think systematically about these things. This is well illustrated in the report of last year’s Welfare Working Group which hardly looked at any of the fundamental issues I have just listed. When it held a conference the empirical research papers came from overseas, the majority of the New Zealand contributions were of (not very informed) opinion which practical people give a status at least equal and often in priority to the evidence.

This is not just a problem of the political right. When the Labour Party, which created the 1938 Social Security Act, was in power from 1999 to 2008 its advisers were largely practical men and women who could neither think analytically, and did not encourage others to do so – the unkindly would even say they discouraged them. In a hollow society dominated by the government that effectively stifled all public discussion. The Fifth Labour government does not have a proud record of innovation in social security – the clumsy, inept, ineffective and costly Working For Families package symbolises its failures.

What we have got are some serious institutional disfunctionings which are causing unnecessary hardships and inefficiencies. But there is a deadlock of ignorance about addressing them systematically so instead practical people propose superficial short term fixes. The situation is neither peculiar to New Zealand nor to social welfare.

At which point I return to my central thesis. The social problems the welfare state addresses may be near universal, but New Zealand will tackle them, and perhaps resolve them, in quite different ways from other rich societies. Of course we can learn from them, and adapt their more successful resolutions. Which is why international touring courses such as you are on are an important part of your education; to enable to think outside your own society, and in doing so to appreciate its unique and special qualities, and yet to learn from others.