Understanding the growth in invalid's benefit receipt in New Zealand.

• Author: Wilson, Moira

Abstract

This paper reports on research that uses the Ministry of Social Development's benefit administration data to advance our understanding of the growth in the number of people receiving the Invalid's Benefit over the decade to 2002. It investigates the growth in inflows of people to Invalid's Benefit, as this was the main cause of growth in recipient numbers. Some of the growth in inflows can be explained by population growth, population ageing, and the effects of the rise in the age of eligibility for New Zealand Superannuation. However, more than half cannot be accounted for by these factors and is explained instead by an increase in the proportion of people aged 15-59 taking up Invalid's Benefit. This increase was explained both by growth in transfers from other benefits, and by growth in entries from outside the benefit system, some of which was associated with growth in uptake by former benefit recipients returning after a period off benefit. Possible explanations for these shifts, many of which warrant further investigation, are canvassed.

INTRODUCTION

In New Zealand, income protection for working-age people unable to work due to incapacity takes three main forms:

* Invalid's Benefit, which provides for people with a long-term and severe incapacity

* Sickness Benefit, which provides for people with a short-term incapacity

* Accident Compensation Corporation (ACC) earnings-related weekly compensation, which provides for people with an accident-related incapacity. (2)

To qualify for an Invalid's Benefit, a person must be "permanently and severely" restricted in his or her capacity for work, where "permanently" means that the sickness, injury or disability is expected to continue for at least two years, or the person has a terminal illness and is not expected to live more than two years; and "severely" means that a person could not regularly work 15 hours or more per week in open employment. Payments are subject to a test of the joint income of the claimant and their partner.

The number receiving Invalid's Benefit has grown considerably over the last three decades (Figure 1). Growth was particularly rapid between 1992 and 2002, with a doubling of numbers over this period. This occurred in the context of a downward shift in unemployment. The official unemployment rate fell from its peak of 10.6% in 1992 to 6.2% in 1996 and 1997, and then rebounded to 7.5% in 1999 before falling once more to 5.3% in 2002. (3) All measures of unemployment, including long-term unemployment, were lower in 2002 than in 1992. (4)

[FIGURE 1 OMITTED]

The proportion of working-age people receiving a Sickness Benefit, an Invalid's Benefit or ACC weekly compensation rose from around 1% in the 1970s to 5% in June 2002. Most other OECD countries also experienced a rise in the proportion of the working-age population claiming incapacity benefits over this period. By the late 1990s and early 2000s, it was common for around 4-6.5% of the working-age population to receive such benefits (OECD 2003:60-63).

While the proportion of the New Zealand working-age population receiving incapacity benefits in 2002 was not high relative to other developed countries, it was acknowledged that there was a need to understand the growth in order to inform the development of policy and service responses. (5) In late 2002, the Ministry of Social Development (MSD) established a programme of research that aimed to:

* identify the key factors behind the growth in Sickness and Invalid's Benefits

* understand the populations in receipt of these benefits

* identify approaches and interventions that support the social and economic wellbeing of these populations and their participation in employment.

This paper summarises the findings of the research that was undertaken on the growth in Invalid's Benefit numbers, (6) which centred on analysis of the MSD benefit dynamics data set. This is a longitudinal research data set assembled from benefit administration records. (7) At the time the analysis was conducted it covered the period 1 January 1993 to 31 December 2002, and these dates mark the start and finish points of the study. The data set includes all people who received any main working-age benefit in that period, either as the primary recipient or as a partner. This allowed examination of the contribution to the growth of transitions from other benefit types to Invalid's Benefit.

UNDERSTANDING HOW NUMBERS GREW

The number of benefit recipients grows whenever more people come on to the benefit than leave. Figure 2 shows official data on the number of grants of Invalid's Benefits each year, and the number in receipt. The number of cessations is obtained by subtraction. (8) Over the decade to 2002, there was growth in both grants and cessations, with the number of people entering Invalid's Benefit each year exceeding the number of people leaving by a widening margin. (9)

[FIGURE 2 OMITTED]

Examination of these data suggests that the widening gap between grants and cessations between 1992 and 2002 was caused mainly by growing inflows rather than an increase in the length of time people were staying on the Invalid's Benefit. The length of stays was in fact shorter for those who entered later in the decade 1993-2002 than for those who entered earlier in the decade. (10,11)

Even though duration did not increase for those entering Invalid's Benefit over the decade, the long length of stay associated with Invalid's Benefit receipt was important in explaining how numbers grew so rapidly. Of those who entered Invalid's Benefit in 1993, for example, half remained continuously in receipt of that benefit six years later, and more than a third remained 10 years later. These long durations meant that growth in grants caused the number in receipt to rapidly cumulate.

BEGINNING TO UNDERSTAND WHY NUMBERS GREW

This section begins the process of investigating the growth in inflows of people to Invalid's Benefit, because this was the main cause of the growth in the number of recipients. (12)

Demographic Change and the Rise in the Age of Eligibility for New Zealand Superannuation

Growth in inflows could have been caused by a number of factors, including:

* growth in the size of the population aged 15-64, which increased the numbers of people potentially eligible

* population ageing, which increased the proportion of the population aged 15-64 in age groups at which the likelihood of taking up Invalid's Benefit is high

* growth in the proportion of the population in given age groups coming on to the benefits each year; i.e. an increase in age-specific "inflow rates", which, in turn, could have been caused by:

--growth in inflow rates for the population aged 60-64, as a result of the rise in eligibility for New Zealand Superannuation (13)

--growth in inflow rates for younger working-age groups.

Table 1 shows the independent contributions these various factors made to the growth in the number coming on to Invalid's Benefit, comparing 2002 and 1993. The contributions are estimated by calculating the growth that would have occurred had each factor changed in isolation while all other factors remained constant. (14) It should be noted that a different choice of years to compare would result in different contributions. (15)

Table 1 indicates that some of the growth was inevitable given the growth and ageing of the population and given the rise in the age of eligibility for New Zealand Superannuation, which led increasing numbers of people with incapacities in the 60-64 age group to take up the Invalid's Benefit.

More than half of the growth in inflows cannot be explained by demographic change and the New Zealand Superannuation age rise. It reflects, instead, an increase in inflow rates for people aged between 15 and 59. Figure 3 shows that inflow rates were higher in 2002 than in 1993 for all age groups within this band.

[FIGURE 3 OMITTED]

Inflow rates at ages 15-59 fell temporarily in the late 1990s. This may partly reflect the October 1998 change in the criteria for entry to the Invalid's Benefit from "75% incapacitated" to "permanently and severely" restricted capacity for work.

The remainder of this section concentrates on gaining a better understanding of the upward movement in inflow rates at ages 15-59, because this is the component of growth that requires the most explanation.

Growth in Transfers from Other Benefits

Benefit administration data allow us to examine whether people coming on to Invalid's Benefit came from other parts of the benefit system or from outside the benefit system. (16)

What we find is that growth in inflow rates at ages 15-59 was partly associated with growth in the number of people making direct transfers on to Invalid's Benefit from other parts of the benefit system. (17)

We estimate that growth in transfers explains 60% of the growth in Invalid's Benefit inflow rates at ages 15-59 between 1993 and 2002. (18) This translates to a 31% contribution to the overall growth in inflows to that benefit (Table 2), (19) a share of growth that is bigger than the independent...