Mother-of-three Rhiannon Thomson took to the streets in protest at proposals to make sole parents look for paid work when their youngest children turn 1 or 3.

"I support my whole family on my part-time salary, topped up by Working for Families," she said, waving a placard saying "Caring for kids is real work".

"We are struggling and we are lucky because I'm a skilled worker. I look around at people I know who are making the choice to stay home with their children. I don't like having the boot put into them by the Government."

Thomson was among about 60 people outside the Henderson Work and Income office waving photos of Social Development Minister Paula Bennett and economist Paula Rebstock, labelled "Beneficiary Basher" and "Razor Rebstock".

Although they got plenty of supportive toots, it's a fair bet that most passers-by were baffled.

A welfare working group that Rebstock chairs, charged with conducting "a wide-ranging and fundamental review of New Zealand's welfare system", has produced two reports so far that have barely broken into public consciousness.

In contrast to huge demonstrations against similar welfare cuts in Europe, the low-key Henderson event organised by former Green MP Sue Bradford passed virtually unnoticed.

But the debate is about to step up a notch. Asked last week what his party's agenda would be for the next 12 months, Prime Minister John Key told the Stuff website: "It will be dominated by Budget 2011, which may well have a theme around savings and investment, along with responding to the welfare working group recommendations."

Commenting on Budget deficit figures this week, he said ministers would consider further decisions on public spending in the new year, assisted by the welfare working group's report due in February.

And on Thursday a six-person "alternative welfare working group", including Bradford, gave the debate a focus with a 163-page "alternative" report.

First principles
Getting a handle on the debate starts with the principles of that 1938 Social Security Act, framed in the wake of the worst unemployment in our history.

As this week's alternative report reminds us, the act's long title aimed "to safeguard the people of New Zealand from disabilities arising from age, sickness, widowhood, orphanhood, unemployment or other exceptional circumstances".

Unlike later European social insurance schemes, ours was based on people's needs, not contributions.

A Royal Commission on Social Security in 1972 said those needs were relative to general living standards. The aim was "to ensure, within limitations that 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".

Ultimately, welfare is based on a basic ethical position that if we can reduce suffering and increase well-being anywhere, we should do so.

As Auckland University sociologist Louise Humpage puts it: "Fundamentally, I don't believe humans can survive as individuals. I don't believe we could survive without each other."

Off track?
For 30 years after 1938, the welfare state arguably worked as planned. There was minimal unemployment and the total of all working-aged beneficiaries never exceeded about 2 per cent of the working age group.

Three things changed around 1970. First, unemployment began to skyrocket as the economy ran into stagflation and trading difficulties.

Second, a new domestic purposes benefit (DPB) introduced in 1972 was taken up by growing numbers of separated parents, reaching five per cent of the whole working age group by the 1990s. The benefit both reflected and made possible women's new sense of independence that was also marked by most women moving into paid work.

And third, the numbers on both sickness and invalid's benefits began a steady climb from 1 per cent to just over 5 per cent of the working-aged. Rebstock's first report in August said this last change "was not caused by the population getting sicker or more disabled".

"We have come to the view that the scale and consequences of long-term benefit receipt are deeply concerning and that the system is not achieving what New Zealanders could reasonably expect," she said.

Rebstock's remedy
Rebstock believes almost all of our 322,000 working-aged beneficiaries could work, either now or in the future.

She estimates there are only "about 20,000 people in New Zealand with high support needs" who will never be able to work again.

"Paid work is good for income, health and well-being," said her second report last month.

Although the report puts up numerous options, it leans towards scrapping separate domestic purposes, sickness and invalid's benefits and putting all those who can work, now or in the future, on the dole.

Sole parents would have to look for work part-time when their youngest children turn 1 or 3 and full-time when their children turn 6. (Even tougher options are also offered, but seem unlikely).

Medical certificates saying someone is unfit for work would be replaced by "fit notes" specifying what a person can do, followed by full work capacity assessments.

The report recognises that people who have been out of paid work for a long time need extra help to get work. It proposes targeting case management support to potential long-term beneficiaries, targeting childcare subsidies to low-income working parents, more funding to treat beneficiaries' alcohol and drug addictions and other health problems, more employment programmes for ex-prisoners, and more help with moving to where the jobs are.

It suggests giving beneficiaries more incentive to work part-time by reducing the current 70c clawback rate out of every $1 earned above $80 a week on unemployment and sickness benefits or above $220 on invalid's benefit or DPB.

It would fund this by starting the clawback from below $80 a week.

It would also transfer part-time workers off benefits on to in-work tax credits, possibly with subsidies for transport, childcare and other costs for up to a year.

The report proposes creating insurance-style incentives by contracting out more job placements and support to private companies and charities and paying them only by results.

In particular, it advocates contracting out programmes for Maori people to Maori agencies under a high-level agreement between the Government and iwi.

It would also give employers an incentive to keep their workers well and help them back to work after an illness by increasing the current five days of statutory sick leave.

The broad view
Rebstock's proposals reflect what the OECD says is a general shift across developed countries "away from merely paying benefits to people with disability towards helping them stay in, or return to, work".

"The welfare working group report did strike me as being pretty much in the mainstream of where most of the thinking is," says Dr Patrick Nolan, a New Zealander who is chief economist of a London-based right-wing think-tank, Reform.

Britain's Tory Government unveiled proposals last month for a new "universal credit" to replace all working-age benefits from 2013, with a standard clawback rate of 65 pence for every pound earned above variable thresholds.

The unemployed and sole parents with no children under 5 will have to look for work, some sick and disabled people and sole parents with children aged 1 to 4 will have to prepare for work, and other sick and disabled people and sole parents with babies will have to attend work-focused interviews to "keep in touch".

Britain has also introduced "fit notes" to replace medical certificates. Britain, Australia and the Netherlands have contracted out job placement to private and charitable providers and pay them by results. In the United States, disabled people get vouchers, or "tickets to work", which they can take to the provider of their choice.

Many countries have also introduced wage subsidies and supported employment schemes to help disabled people in work.

Decision time
Key's comments indicate that ministers will act on the Rebstock review quickly, probably in next year's Budget, hoping to reduce the Budget deficit.

One thing they will certainly not be doing is raising benefits.

That was ruled out of Rebstock's terms of reference and Bennett rejected it again this week.

Clearly, ministers will be attracted to anything that will save money, such as extending work-testing, "fit notes" and contracting out job placement to providers who will be paid by results, giving them maximum incentive to reduce the welfare rolls.

However, Rebstock's whole package is no quick-fix.

It explicitly requires spending more up-front on case management, drug and alcohol treatment, fixing other health problems, and at least short-term subsidies to support long-term beneficiaries in jobs, in order to cut welfare rolls in the long term.

Some of this may be funded by switching money from other areas, such as axing early childhood subsidies for middle income earners to give more to low-income sole parents.

But an OECD report last month said getting sick and disabled people into work requires spending more.

"Countries are investing more into rehabilitation and employment measures than they used to, but, despite pro-work rhetoric, they are generally not investing enough," it said.

Key's Government too has been strong on the rhetoric. Next year will tell whether it can find the money to turn rhetoric into real jobs.

The other side: no need to panic

The alternative welfare working group, set up by beneficiary advocates and the social justice arms of the Anglican and Catholic churches, agrees that beneficiaries should not be left to rot and that those who want to work need more help to get it.

Like Rebstock, it favours combining all the existing benefits into one base-rate benefit with add-ons for children and for costs arising from sickness or disability.

But it believes that in their drive to cut welfare costs, governments risk hurting beneficiaries and their children by driving them back to paid work too soon.

It says there is actually no need to panic. Graphs from Rebstock's first report show that beneficiaries dropped from 15 per cent to 10 per cent of the working age group between 2000 and 2008 when jobs were available, and rose again only to 12 per cent in the current recession.

Although Rebstock forecasts a rising trend over the next 40 years as the workforce gets older and more prone to illness, the working group says the key factor is clearly the job market. It advocates setting interest rates and other policies to maintain full employment.

And even if the number of beneficiaries does trend upwards, Rebstock's own projections show the cost will trend downwards as a share of national income because benefits are indexed to prices, which increase less than income in a growing economy.

Professor Mike O'Brien, who chaired the working group, says if he was designing policy for a poor country without a welfare state he would still recommend a system much like ours. "First, it's about how we build real job opportunities, adequate wages, good working conditions and the educational opportunities that go with that," he says. "Second, what do we need to do to distribute income so that there is an income distribution and a tax system which ensures there are the resources to make sure no one is living below a poverty line? That is what we've done with superannuation which has been effective at reducing poverty for older people."

Super rates have kept in line with the average wage. The lowest rate of super, for a single person living with others, is still 37 per cent of the net average ordinary-time wage. But the adult unemployment benefit has slipped from 37 per cent of the net average wage in 1990 to just 24 per cent today.

The group advocates raising benefits back to 1990 levels, reviewing them to make sure they cover basic needs, and then tying them to the net average wage.

It says all beneficiaries should be able to get job search support and "maximum possible access to educational and training opportunities". But it says the sick, disabled and sole parent families should not be forced into work.

It supports contracting with non-profit agencies or iwi but opposes contracting out to private companies.

"Because those companies have to make a profit, you are using money that could be spent on higher benefits or job creation," says Bradford.

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