Katrina Bell still remembers the doctor at Waikato Hospital who effectively turned her away when her life collapsed.

She was 25. She had worked all her life and was about to leave for a new job picking cotton in Queensland.

"I thought everything was fine, everything was going well in my life," she says.

"Then one evening I went to the toilet with diarrhoea. Later that night my head started going crazy. It quickly turned into 10 different radio stations at once, no, it was more like a thousand. I got the shakes and the sweats. I was just a complete mess."

She went to her family doctor.

"He did tests. Because nothing showed up in any of the tests, he said to me, 'There's nothing I can do.'

"So I went to Waikato Hospital, but because mental illness doesn't show up in a blood test, they were no good either. It was a female doctor, she said, 'Stop being bloody stupid, get home and start eating properly.' I still feel hurt all these years later."

Finally her pharmacist referred her to another general practitioner who referred her to a mental health service.

She spent the next four years on sickness and invalid benefits searching for the right combination of medication and personal management techniques to restore her mental health.

She went on anti-depressants.

Eventually her psychiatrist referred her to Workwise, a charitable company which helps people with mental health issues to find and keep jobs. She had an interview with them, and the next day they found her a part-time job as a gardener at a rest home.

Her confidence built up gradually to the point where she found her current job in the laundry of a Hamilton motel by herself and no longer needs Workwise.

"I can still go back to them if anything goes wrong," she says. "I don't think I'd be back in the workforce if it wasn't for them."

Bell, now 34, has had a lucky escape. But at the end of March there were still 360,000 working-aged New Zealanders on welfare benefits or accident compensation (ACC).

That's 12.4 per cent, or one eighth, of all those aged 15 to 64 - up from just 2 per cent a half-century ago.

More than a fifth of our children (21 per cent) are growing up in benefit-dependent families. More than a quarter of working-aged Maori (26 per cent) are on benefits or ACC.

"This is not sustainable," says Paula Rebstock, the former Commerce Commission czar picked by Social Development Minister Paula Bennett to head a working group to tackle the hard issues at the heart of our welfare state.

"There are real question marks about the sustainability of the current predictions for sickness and invalid benefits and the domestic purposes benefit. It's just not a sustainable path. It has to change."

Despite the current recession, unemployment is not the long-term problem. Numbers on unemployment benefits melted from 7.4 per cent of working-aged people in 1992 to just 0.7 per cent in June 2008.

More surprisingly, ACC has also been tamed. Numbers on ACC weekly compensation for a year or more have fallen from 1.2 per cent of the working age group in 1996 to 0.5 per cent today.

Former Finance Minister David Caygill, heading a stocktake of ACC, says the two key changes were an early 1990s decision to let ACC buy medical treatment from private as well as public hospitals, and the 1996 introduction of "work capacity testing" which stopped compensating people as soon as they were capable of any kind of work - not just the particular work they did before their accidents.

Instead, the Rebstock review is focused on the two remaining beneficiary groups - sole parents, and the sick and disabled.

Some sole parents do get jobs in good times. Numbers on the domestic purposes benefit (DPB) and widow's benefit dropped from 4.9 per cent of the working-aged in 1998 to 3.6 per cent a decade later.

But this was still four times as many as the 0.9 per cent who received the widow's benefit before the DPB was introduced as as a discretionary benefit in 1968.

"Right now we are out of step with other countries on the DPB," Rebstock declares.

"Until just recently you were not work-tested on the DPB until your youngest child turned 18. If you look at most other jurisdictions, those ages come right down to as low as four months, and almost always under 10 - usually around the age when children start school at 6 or 7."

On top of this relatively soft regime (some would say because of it), New Zealand has the developed world's second-highest proportion of sole-parent families (30 per cent).

Sole-parent families peaked at 31 per cent in 2001 and came down fractionally in the last census, possibly because growing employment made more men "marriageable". But 39 per cent of Maori in families with children still live in sole-parent families.

If anything, the trends for sickness and invalids benefits are even more worrying. They have risen relentlessly for 30 years regardless of economic cycles, quadrupling from 1.2 per cent of the working-age group in 1980 to 4.8 per cent today, and are projected to keep on rising as our population ages.

Most developed countries are also grappling with this problem. But some, including Australia and Britain, have managed to reverse the upward trend by actively helping sick and disabled people back to work. Lessons from those countries will be a major focus of the Rebstock group's first public forum in Wellington this coming week.

Actually, a 2005 analysis found that ageing, and the increase in the pension age from 60 to 65, accounted for less than half of our increase in invalids benefits in the previous decade and none of the increase in sickness benefits.

Instead the main factor driving the increases, here as elsewhere, was mental illness. Psychological disorders, led by stress and depression, accounted for the entire increase in sickness benefits and a third of the increase in invalids benefits from 1996 to 2002.

Mental Health Commission chairman Dr Peter McGeorge believes stress and depression have increased as we have moved from close-knit villages to transient urban lifestyles isolated from family and friends. "There's been a breakdown of the extended family, the divorce rate has gone up, there's much more of a focus on the individual and immediate gratification," he says.

"It's destroying that sense of community and connectedness that is normally associated with being able to manage one's mental health better. People who are married and in stable relationships have less tendency to be depressed and suicidal."

In the past decade or two the developed world has begun to realise that simply maintaining an income for people caught in the vortex of social breakdown is not enough. Welfare benefits were invented for the aged, the physically sick and the unemployed, but something more is needed for the psychological victims of our fractured urban life.

Governments are discovering that the way to restore their own fiscal "sustainability" is also one of the best ways they can help people like Katrina Bell - helping them back to work.

In what Rebstock hails as "one of those watersheds", the Royal Australasian College of Physicians issued a position statement last week affirming that "for most people, work is good for their health".

Dr David Beaumont, who chairs the physicians' occupational medicine division, says time off work is "like a dangerous drug", weakening people's connections with each other.

"People don't realise the degree of risk," he says. "If you have been off work for more than 50 days, your chance of ever getting back to work is reduced by 50 per cent."

Across the developed world, the OECD says, countries are "transforming sickness and disability schemes from passive benefits to active support systems that promote work".

The new agenda ties in with a new "social model" of disability. People with physical or mental impairments are now seen as disabled by society, and can be enabled to work and participate in the community if society supports them.

The essential change is to provide supportive case managers in the state welfare agency and/or in agencies contracted by the state. Australia has recently removed a funding "cap" on the numbers of disability beneficiaries able to get such support.

Australia and Britain have also backed up this "carrot" with a "stick". Both now put new applicants for disability benefits through "job capacity assessments" to establish what kind of work they can do and what supports they will need to do it, with penalties for those who don't take steps towards finding suitable work.

Britain changed its disability benefit to an "employment and support allowance" in 2008, with a "return to work credit" of £40 ($86) a week for a year for those who get work.

In April this year it replaced the doctor's "sick note" with a "fit note" enabling doctors to certify that patients are fit to return to work with appropriate support from their employers. Patients can now use these notes to negotiate changes in their working hours and conditions.

Rebstock believes it is in employers' interests to accommodate workers who need such support. She cites Kiwi Rail as one company that has realised the productivity benefits of helping staff back to work after an accident, if necessary in a different role.

Foreign Affairs chief John Allen has agreed to head a new Employers Disability Network. A website with contacts and information on how to join the network is due to launch next month.

Politically, the push to get beneficiaries back to work in this country reaches back at least to the Bolger/Shipley governments of the 1990s, which merged the sickness benefit and the dole into a work-focused "community wage" and began work-testing sole parents with no children under 6.

Although the Clark Government elected in 1999 reversed these two changes, it gradually extended personalised case management aimed at helping, rather than forcing, beneficiaries into work.

Paula Bennett's Social Assistance (Future Focus) Bill, now before a parliamentary committee, is bringing out the stick again with proposals to work-test sole parents with no children under 6 and sickness beneficiaries judged capable of part-time work.

The "carrot", in the form of contracted employment support for people with disabilities, was cut in last month's Budget by $2.5 million (3 per cent). Work and Income head Patricia Reade said $1 million would come from unfilled placements and $1.5 million "by Work and Income absorbing previously outsourced monitoring and evaluation".

The agency has largely abandoned personalised case management to cope with a recession-driven influx of unemployed.

Beneficiaries now see the next available person in their local office, allowing officials to see 30 per cent more clients a day.

Rebstock says these decisions are driven by a policy environment which ignores the huge costs that could be saved in the future by "front-loading" services to help beneficiaries into work now.

In contrast, ACC spends money upfront on medical treatment and personalised services to get its clients back to work because it is a fully funded "insurance" scheme, where this year's levies cover the full future costs of this year's accidents.

Rebstock notes that all OECD countries except New Zealand and Australia fund other welfare benefits through social insurance schemes too.

"If, for example, with the sickness and invalid benefits, you had far greater focus on identifying the unfunded liability, possibly you could get a change in behaviour," she says.

"I'm not sure at this stage whether you have to think differently about the institutional arrangements, but certainly you have to change the delivery model."

Beyond such administrative changes, Katrina Bell's experience points to the need for wider social change.

Governments alone cannot replace the social support that close-knit villages once provided. Doctors, employers, workmates, families and friends all have parts to play in rebuilding supportive communities in our urban jungles.

Nor is work enough. Beneficiary advocate Kay Brereton says that although most beneficiaries do want to work, some will never be able to and will contribute to society in other ways.

"People may contribute to their community in all kinds of ways, like taking their next-door neighbour some scones when they're sick or sharing the produce of their gardens," she says.

"Those things have no value in today's economy, but back in the village economy they were the things that made a really good person."

REBSTOCK REVIEW
Paula Rebstock has been charged with tackling welfare issues.

Terms of reference
1. How long-term benefit dependence can be reduced and work outcomes improved, including for sole parents.

2. How to promote opportunities and independence from benefit for disabled people and people with ill health.

3. How welfare should be funded and whether there are things that can be learned from the insurance industry and ACC in terms of managing the Government's forward liability.

4. Whether the structure of the benefit system and hardship assistance in particular is contributing to long-term benefit dependency and what could be done to address this.

Members
* Paula Rebstock, economist (chair)

* Prof Ann Dupuis, labour market sociologist

* Prof Des Gorman, occupational medicine specialist

* Catherine Isaac, former Act Party president

* Prof Kathryn McPherson, rehabilitation specialist

* Enid Ratahi-Pryor, Ngati Awa Social & Health Services CEO

* Adrian Roberts, supported employment firm CEO

* Sharon Wilson-Davis, Tamaki Ki Raro Trust CEO

www.ips.ac.nz/WelfareWorkingGroup