An insurance mindset is vital for the future of the welfare state

Feb 20, 2023
Female doctor with stethoscope holding piggy bank.

“Lifters” and “leaners”; “makers” vs “takers”; “strivers” and the “skivers”. The language may be different but the pejorative sentiment around the welfare state is similar, be it in Australia, the United States or the United Kingdom.

However, it is highly misleading. Government payments to people who are unemployed are a fraction of the spending on the welfare state’s two largest programs – health and the retirement income system. Everyone benefits from these two programs. We all rely on well-trained doctors and nurses, vaccines, a strong hospital system and so on. A productive, technologically advanced economy also relies on a strong welfare state – one that educates its citizens and keeps them healthy.

However, we now stand at a fork in the road. The welfare state, which is one of society’s greatest and most civilising achievements, comprises some 50% of the federal budget and it is expanding in a number of areas, including aged care and the national disability insurance scheme.

It is timely, then, to consider whether, and how, we can do more to support our fellow Australians, especially our most vulnerable, without materially increasing taxes as a share of GDP.

I believe there are three intellectual pillars to the welfare state: the universal provision of services; the redistribution of resources; and a focus on risk management. All are important. However, we could gain from placing a greater emphasis on the third pillar.

Covid was the perfect example. For decades, governments had ignored warnings from experts of the need to prepare for a pandemic. The failure to sufficiently prepare for a pandemic was astronomical financially, with the federal government spending more than $340 billion in response.

Consider, also, that between 2009 and 2012, governments in Australia spent 50 times more on cleaning up after natural disasters – $11 billion – than on mitigation and resilience programs – just $225 million.

Governments tend to adopt a reactive approach to the many risks that society and individuals face. But we can no longer afford such an approach if we want to keep our welfare state strong and sustainable.

The welfare state arose out of insurance schemes and I think it is instructive to return to these roots. In the 1880s, key social bills introduced by Otto Bismarck’s government included the word insurance. Insurance for health; insurance for income in retirement; insurance for workplace accidents; and insurance for disability.

So, too, Franklin Delano Roosevelt’s core Second New Deal reform in the midst of the Great Depression – the “Old Age Survivors and Disability Insurance scheme”, which remains America’s most effective anti-poverty measure.

A historical study of speeches by US legislators advocating the expansion of social insurance schemes found that they referred to core economic risk management principles such as adverse selection and moral hazard.

(Adverse selection is the phenomenon whereby bad risks are more likely than good risks to buy insurance. Moral hazard is the phenomenon whereby having insurance may change one’s behaviour – and become more reckless, for example. Both situations pose a dilemma for insurers.)

The US economist Paul Krugman once described the post-World War Two US government as an insurance scheme that employed a standing army.

In Australia in the 1920s and 1930s, there was considerable support from both sides of politics for a social insurance scheme. However, many on the Labor side supported such a scheme only if it were funded out of progressive taxes and was not a contributory scheme. This political divide continued for decades and led to much of the thinking about the welfare state as redistributive, from rich to poor.

However, it is more helpful to think about the welfare state as a vast social insurance scheme. We all pool our resources to help those who through no fault of their own need assistance after fate has dealt its cards. As noted earlier, we all benefit from this vast insurance scheme, particularly in the area of health.

An insurance mindset is important to the future of the welfare state. First is its focus on long-term outcomes. In short-term budgetary cycles there can be too much emphasis on delivering services rather than outcomes.

An insurance framework is also better for individualised service delivery. In some areas, universal service is the right focus, such as for vaccinations, access to GPs and childcare. In other areas, particularly where people have complex, long-lasting requirements, bespoke packages will be more suitable. These packages should reflect each person’s needs and, as much as possible, their priorities. The NDIS is a good example of this.

Empowering recipients, through a greater investment in case managers and navigators, will enable them to direct scarce resources to what they desire most. This will help achieve individual outcomes and a long-term return on investment.

A key plank of insurance is risk management, which leads to more resources being invested in prevention rather than cure. As the 19th century poem stated: “Better put a strong fence ’round the top of the cliff than an ambulance down in the valley.”

A risk management framework can also involve shifting risk, which can have a positive impact without hitting the government’s bottom line. The Higher Education Contribution Scheme, an Australian innovation, opened up higher education for many. Income contingent loans could be applied in other areas, including social housing and medical expenses.

As a Victorian MP, I worked on a scheme to fund women’s change rooms. Rather than just provide grants, which limits the number of projects that can be funded, the government developed an additional scheme that backed low interest loans and assumed some of the project risk. This saw a 10-fold increase in the number of projects the government could fund for a given public investment.

Finally, an insurance mindset offers the best way to rigorously and transparently measure and report on the long-term sustainability of our key social insurance institutions.

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