The social welfare (5)

In the closing post of the social welfare series I will offer some thought on the way forward for the West. As mentioned previously:

In a democratic society, once the state-funded welfare sets in, it becomes a permanent feature of landscape and cannot be gotten rid of

so the best we can hope to achieve is to control the welfare spending but not to eliminate it. How can even this limited objective be achieved? There are three approaches I can think of. One, quite cautious and measured, has been tried in the US with reasonably good results. The other two are a bit more radical and to the best of my knowledge have never been attempted.

The parameters of the problem are that social welfare assists with solving some social problems while creating new undesirable changes and imbalances. The cost of welfare, including the flow-on effects, is staggering. In New Zealand social welfare spending amounts to NZD7.2b a year. Assuming approximately one million people in full time employment this is equivalent to NZD7200 per each worker in the country. One way of limiting this spending would be to cap the length of time any one citizen is entitled to stay on welfare. So, for example, one could receive the dole or the sickness benefit (or a combination of both) for 3 years during one’s lifetime. The rationale is that 3 years should be enough to find a job, even assuming one needs to retrain. Similarly, 3 years on a paid sickness leave should allow one enough time to sufficiently get on top of one’s health problems to be able to find some employment. It would be great if we could pay all people a living allowance in all circumstances and for unlimited time but if the money is short this is one way of prioritising who gets it. The additional benefit (pun incidental) of the time-limited welfare is that the government would not need to spy on the beneficiaries so much. When the 3 years’ time period runs out the money tap simply gets turned off.

The second approach to welfare is my original idea. Biased as I am towards simple solutions to complex problems I would cap the total dollar amount allocated to welfare – either in absolute numbers or, even better, as a percentage of GDP. The welfare fund would be managed by a representative group of beneficiaries. They would be responsible for divvying up the money each year according to the needs of the recipients. Here are some sample scenarios which could arise in my “capped welfare fund” system. If more citizens put their hands up for benefits the working population would shrink, affecting the GDP. The welfare managers would then have to reduce the payments – there would be less money to spend and more recipients. This would probably drive the most motivated beneficiaries to look for a job instead of vegetating on a state pittance, so the system would be self-regulating. It would also encourage beneficiaries to spy and rat on one another in hope of catching benefit fraudsters who would then be stuck off the list, increasing the benefit payments for others.

The third (partial) solution to the problem has been described in detail by Gareth Morgan in his book The Big Kahuna:

It is delightfully simple. In essence it introduces a community wage called Universal Basic Income (UBI) paid to all citizens over the age of 18. Yes – ALL citizens; working, unemployed, paupers and millionaires alike. The flip side is that ALL business activities would be taxed at a flat rate of 30%. The UBI, combined with a flat income tax rate would create the income tax progression. For those on low incomes their UBI would be worth more than the 30% of their wages so they would effectively pay negative income tax. The effective tax rate of the wealthy citizens would approach 30%. The break-even point would be around the level of income below which the current tax credits kick in. The savings on tax lawyers and accountants would be astronomical – all economic activity would be taxed at 30% so tax dodges like fringe benefits or family trusts would become redundant overnight. Kudos to Gareth Morgan for coming up with this radically simple idea.

If you think that my three proposals are off the mark but something needs to be done to control the welfare spending in the West please share your thoughts in the comments section.



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