Australia: Selected Issues

This Selected Issues paper for Australia highlights the dynamics of the Australian real exchange rate and its impact on Australia’s trade. The main findings are that the Australian real exchange rate is largely driven by world commodity prices and that it adjusts relatively rapidly to large shocks, with an estimated half-life of 16 months. The real exchange rate is a significant determinant of Australian imports, with an elasticity of one, but does not appear to have a significant impact on Australian exports.

Abstract

This Selected Issues paper for Australia highlights the dynamics of the Australian real exchange rate and its impact on Australia’s trade. The main findings are that the Australian real exchange rate is largely driven by world commodity prices and that it adjusts relatively rapidly to large shocks, with an estimated half-life of 16 months. The real exchange rate is a significant determinant of Australian imports, with an elasticity of one, but does not appear to have a significant impact on Australian exports.

III. Disability Support Pension in Australia and the Netherlands25

A. Introduction

73. Increasing labor force participation is at the center of the government’s strategy for promoting growth and easing fiscal pressures associated with an ageing population. Incentives to work are affected by various elements of the income support system such as the maximum rates of payments, the maximum level of income and assets that allows individuals to qualify, and eligibility criteria attached to payments and obligations (such as requirements to look for work). Ensuring that the income support system provides an adequate and well-targeted safety net without discouraging work requires careful balance.

74. The Australian Disability Support Pension (DSP) program has grown rapidly, from 3¾ percent of labor force in 1990 to 6¾percent in 2002, exceeding the unemployment rate of 5½ percent. While the overall cost of the disability program in Australia remains below the OECD average (Table 2)—almost 1½ percent of GDP in Australia compared to almost 2½ percent for the OECD average in 1999—the disability program in Australia has been growing much more rapidly than in other OECD countries (Table 3). This note compares the disability support systems in Australia and the Netherlands, a country with one of the largest disability pension programs among OECD countries. The proposed reforms in both countries are briefly discussed.

Table 1.

DSP Recipients

(percent of labor force)

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Source: Australian authorities and Statistics Netherlands
Table 2.

Public Expenditure on Disability-Related Programs1

(In percentage of GDP)

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Various definitions of disability benefits are as follows:

Disability benefits = Contributory (earnings-related) and noncontributory disability benefits.

Broad disability benefits = Disability benefits, sickness cash benefits, and work injury benefits.

All disability programs = Broad disability benefits and employment-related programs for disabled people.

Note: Sickness cash benefits included mandatory private benefits, i.e. continued wage payment.

Excluding Korea, Mexico, and Turkey.

Table 3.

Australia: Growth in Disability Benefit Recipiency

(Percent Change)

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Source: OECD (2003).

B. The Disability Support System in Australia and the Netherlands

75. The Australian DSP scheme is essentially based on medical disability or a test of whether people are able to work full time at full-award wages. Those who are permanently blind or have a permanent impairment qualify for the DSP on medical grounds. To meet the second criterion, a physician must certify that the person has a continuing inability to work, or to be re-trained within two years. Currently, qualification for the DSP is not subject to a work reintegration test, it is not taxable, and has more generous income and asset tests than some other benefit transfers.26 For those aged 55 years and over, local labor market conditions are taken into account in determining their qualification for DSP.

76. The two most common medical conditions for people receiving DSP are muscular-skeletal (just under a third) and psychological or psychiatric (around one fifth). People aged between 45 and 65 represent two-thirds of the DSP population. Around one fifth of DSP recipients have been on the payment for more than ten years. The majority of recipients remain on pension for life and only 8 percent have income from earnings. Australia now has one of the lowest rates of employment for disability recipients.27 Some have argued that the DSP system discourages work participation. To ensure that DSP remains the appropriate income support payment only for those with little or no capacity for paid work, the government proposed two changes to tighten its eligibility requirements as part of the 20002/03 Budget: The proposal makes to the DSP qualification criteria:

  • to change the continuing inability to work test from 30 hours to 15 hours a week; and

  • to change the special inability to work test applied for those aged 55 or more, from referring only to the local labor market to considering the overall labor market, as is currently the case for those aged less than 55.

The proposal have not passed the Senate.

77. There are different types of assistance programs available to help people with disabilities participate in the workforce. These include rehabilitation services; help to find work through specialist disability employment services; and incentive programs for employers to hire people with disabilities. Participation in these is voluntary. However, only a relatively small number of people on DSP has taken advantage of these services. As a consequence, the outflows from DSP have been relatively small leading to a sharp increase in people on the DSP since 1990.

The Reform of the Dutch Disability Support System

78. Like Australia, the Netherlands has had large inflows of disability benefit recipients. During the 1970s and 1980s, the Dutch disability scheme was used by employers as a convenient way to lay-off workers with relatively mild consequences for the member’s incomes. Consequently, while unemployment rates dropped, the number of disabled rose, reaching almost one million in the late 1990s, or about 13 percent of the labor force. The outlays of the program amount to about 2.7 percent of GDP in 1999 (or 4.6 percent when including sickness benefits, which are paid by the employer, and other related costs), which is very high by international standards (cf. Table 2).

79. The problems with the scheme have been long acknowledged and various reforms have taken place over the years, with major reforms in 1985 and 1993. While reducing the generosity and cost of the scheme, the reforms did not succeed in a durable reduction of inflows. In 2001, an expert committee (the Donner Committee) issued recommendations for a further comprehensive reform of the system, which were subsequently discussed and modified in the Social Economic Council (SER), the advisory body comprising the social partners. The SER proposal of 2002, which is broadly the basis for the current reform plan, includes:

  • The duration of sickness-benefits is extended from one year to two years. These wage-related benefits are paid by the employers and typically amount to 70 percent of the wage or more. Social partners have committed to limit benefits in the second year of sickness to 70 percent of the wage in order to increase financial incentives for reintegration (i.e., no top-ups).28

  • The disability scheme is restricted to only the fully and permanently disabled. The latter is defined as a loss of earning capacity of at least 80 percent, resulting from a condition from which it is not possible to recover within 5 years.

  • Partially disabled for whom the loss of earning capacity resulting from their disability amounts to more than 35 percent, will be eligible for a wage subsidy amounting to 70 percent of the difference between the new and the old wage. The subsidy is meant to provide this group with incentives to keep working. Should a partially disabled person become unemployed, however, following the initial two year sickness period, he or she will first be eligible for a normal unemployment benefit, which is 70 percent of the last earned wage and has a duration of up to 5 years depending on employment history. After that, a follow-up benefit will apply, equal to 70 percent of the minimum wage multiplied by the degree of disability.

  • Partially disabled for whom the loss of earning capacity is less than 35 percent will not be eligible for any disability benefit.

  • A mandatory work injury insurance, through private insurers, will be introduced to provide for compensation in case of work related injuries. Such a scheme already exists in most OECD countries, and is required under ILO regulations, but was thus far absent in the Netherlands.

  • The examination process that determines eligibility for disability benefits will be tightened at various levels. First, the employer and the employee will have to show that they have made sufficient reintegration efforts in the first two years of sickness. Second, medical examinations will be tightened through the use of a standard list with normal recovery periods for various illnesses. Departures from the list in individual cases would need to be substantiated by the examining doctor. Finally, criteria for determining what type of work could still be done by a partially disabled person will be loosened.

  • The new disability schemes will only apply to new entrants. Existing cases will retain their current benefits, although they may be subjected to re-examinations within the old scheme.

80. While the following table compares the reform proposals of the disability support systems in Australia and in the Netherlands:

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81. This comparison suggests that the Australian DSP scheme may need further reform to establish its sustainability. In particular, the proposed reform on the Australian eligibility requirements—the reduction in the continuing inability to work test from 30 to 15 hours a week and the shift from local to overall market conditions in determining whether a person has a continuing inability to work—appear to be less stringent than the proposed eligibility requirement for the Netherlands where the disability support scheme is restricted to only the fully and permanently disabled.

82. In 2003, the new inflows into the Dutch disability scheme dropped by 28 percent to 66 thousand for the first time in seven years. Part of the decline is due to institutional improvements. First, a law on improved gate-keeping came into force in April 2002, introducing stricter mutual obligations on reintegration efforts for employees on long-term sickness benefit and their employers. Second, the five public debility benefit agencies were merged into a single one in January 2002, reducing the influence of sector interests on the disability benefit authority. Third, the effect of experience-rating in insurance premiums at the firm level, introduced in 1998, grew stronger as premiums became more and more differentiated for medium-size and large firms. However, part of the decline may have been cyclical. A cooling labor market usually leads to lower sickness numbers as employees fear losing their jobs. Moreover, the decline in inflow numbers may also reflect public debates on the disability problem. In any event, the inflow in 2003 remains well above the target of 25 thousand persons by 2006, after the implementation of the new reform initiatives.

C. Conclusion

83. As highlighted in a recent OECD report, the disability support systems in industrial countries should move away from a compensation policy to an integration policy approach.29 A compensation policy approach stresses benefit payments as opposed to economic integration. Such an approach generates high recipiency rates and low levels of employment: as shown in the figure, the disability benefit recipiency rate is positively and highly correlated with the coverage and generosity of benefits. Alternatively, an integration policy encourages employment by emphasizing work incentives for partially disable individuals, providing incentives for firms to hire disable workers, and by tightening eligibility criteria for disability support programs.

uA03fig02

Disability benefit recipiency, per 1000 population

Citation: IMF Staff Country Reports 2004, 354; 10.5089/9781451802061.002.A003

Source: OECD (2003).
25

Prepared by Edimon Ginting (Ext. 38733) and Abdelhak Senhadji (Ext. 38380).

26

Hon Jocelyn Newman (2003), “The Challenge of Welfare Dependency in the 21st Century,” Discussion Paper, Ministry for Family and Community Services.

27

Hon Jocelyn Newman (2003), “The Challenge of Welfare Dependency in the 21st Century,” Discussion Paper, Ministry for Family and Community Services.

28

In many collective labor agreements, top-ups of sickness benefits up to 100 percent of the wage have been negotiated.

29

Transforming Disability into Ability, 2003, OECD.

Australia: Selected Issues
Author: International Monetary Fund