Returning British Columbia to Prosperity

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Social Policy: Achieving Welfare Reform

Looking back, the 20th century may well be called the age of the welfare state. The century witnessed advances in the size and breadth of state activity (Peltzman, 1980; Meltzer and Richard, 1981; Higgs, 1988). Historically, the state had been concerned with such basic duties as enforcing contracts, maintaining law and order, and protecting persons and property. The twentieth century has seen this rudimentary role of government expanded to include such activities as welfare provision for the poor, unemployment assistance and job training for the unemployed, old age pensions, education for the young, and health care for everyone.

This section focuses on the specific issue of welfare provision. It provides a thumbnail sketch of the economics of welfare and an assessment of welfare provision in British Columbia. Next, it compares welfare results for both Canada and British Columbia with results achieved in the United States. It also presents a summary of some of the constructive reforms undertaken in the US. The section concludes with policy recommendations for British Columbia.

Readers should note that the focus on welfare is not meant to minimize the numerous other social policy areas, such as child care and housing, but rather to focus on the largest single expenditure program within the area of social policy.

Economics of Welfare Provision

The economic concerns about welfare mirror many of those present in the insurance market. Moral hazard is the chief of these (Brown, 1989, Dennis and Erdos, 1992, Murray, 1984). Moral hazard refers to the change in individual behaviour when some type of insurance program is introduced. That is, the presence of an insurance scheme, such as welfare, reduces the costs or consequences of certain behaviour and thus alters the actions of individuals. The effect of such programs is that "the incidence of a certain hazard is greater when its victims are insured against losses from it than when they are not" (Grubel and Walker, 1978). In Unemployment Insurance, Grubel and Walker illustrate how broad, state-provided unemployment insurance schemes actually aggravate unemployment rates rather than reduce them. This is because such schemes reduce the cost of unemployment to individuals and enable them to remain unemployed for longer durations without incurring financial hardship, the natural consequence the insurance relieves.

Similarly, if welfare benefits are higher than minimum-wage earnings then it creates a strong disincentive for anyone to work at the minimum wage, since they can earn more by staying on welfare. There are trade-offs between attempting to create a reasonable safety net while not destroying the incentive to work. This trade-off must be accounted for in the creation and administration of welfare, but is often ignored.

Professor Christopher Sarlo examined the incentive structure present in Canadian welfare provision and concluded that incentives for people to leave welfare in order to seek real, long-term employment are virtually non-existent (Sarlo, 1994). Ironically, attempts to keep these programs affordable to taxpayers by reducing benefits in proportion to earnings by recipients results in a nearly 100 percent effective marginal tax rate for recipients, thereby eliminating or dramatically reducing the incentive for recipients to seek work (Richards and Watson, 1994). Some have also suggested that there is a direct relationship between increases in welfare benefits and growth in welfare caseloads (Law, Markowitz, and Mihlar, 1997). Overall, the modern welfare state is frustratingly inefficient and at the very least promotes a culture of dependency (Hill and O'Neil, 1990).

British Columbia: Where Are We?

Are Welfare Benefits Adequate?

The Fraser Institute undertook to compare welfare benefit levels with the cost of acquiring basic necessities in its 1999 publication The Adequacy of Welfare Benefits in Canada. Table 1 contains data from the study for BC welfare benefits.

In two cases—specifically, single parents with two children and single disabled persons—the total value of benefits conferred to recipients by British Columbia exceeds the cost of acquiring basic necessities. However, in both cases, British Columbia ranks relatively low, tenth and eighth, respectively, in relation to the difference between conferred benefits and the minimum cost of basic necessities compared to other provinces.

In the remaining two cases, namely, a single unemployed person and a couple with two children, the total benefits received are less than the cost of obtaining basic necessities. Again, British Columbia ranks relatively low in both categories in comparison to other provinces. British Columbia's low ranking in all four categories means that the main problem in welfare provision in the province relates to the structure of delivery and the incentives to enter the labour force, as opposed to benefit levels that are set too high.

The Cost of Welfare and Welfare-Related Services

There are two major expenditure areas involving social services in BC: the Ministry for Social Development and Economic Security, and the BC Benefits program. The budget for the Ministry for Social Development and Economic Security is scheduled to increase by 3.2 percent between 1999/00 and 2000/01, from $1.96 billion to $2.03 billion (BC Ministry of Finance & Corporate Relations, 2000b). Expenditures in this ministry account for 9.1 percent of total consolidated expenditures at the provincial level (BC Ministry of Finance & Corporate Relations, 2000b).

The cost for the BC Benefits program and related programs is expected to reach $1.68 billion in 2000/01, up from roughly $1.5 billion in 1999/00 (BC Ministry of Finance & Corporate Relations, 2000b). Expenditures for the BC Benefits and related programs represent 7.4 percent of total consolidated budgeted expenditures for British Columbia.

Interestingly, expenditures are expected to increase while the number of caseloads are expected to decrease by 4.2 percent (Ministry of Finance & Corporate Relations, 2000a). The overall increase is due to several initiatives, including as a 2 percent increase in income assistance rates effective July 2000 ($23 million), the re-instatement of the flat-rate earnings exemption ($30 million), and before-and-after school child care programs ($14 million).

A more precise method than government budgets by which to assess government expenditure information is through Statistics Canada's Financial Management System (FMS). The FMS is a standardized system of accounting that allows for easy inter-provincial comparisons. According to the most recent FMS information, British Columbia will spend $3.9 billion in the area of social services in the fiscal year 1999/00. Of that total, $1.8 billion is specifically designated for social assistance programs. This represents a 26.4 percent increase in real expenditures on social assistance since 1991/92, but a 14.1 percent decline since peaking in 1994/95 (see Welfare Figure 1) (Statistics Canada, 2000a).

According to FMS data, expenditures on social services represent 15.2 percent of total provincial expenditures, ranking behind only health care and education. Expenditures on social assistance represent 7.2 percent of total expenditures, up from 6.8 percent in 1991/92, but down from their peak of 8.6 percent in 1993/94 (Statistics Canada, 2000a).

Welfare Administration

In Retooling the Welfare State, Professor John Richards attributed the near 110 percent increase in the number of welfare recipients between 1991 and 1996 to "poor management." In 1991, BC's newly-elected New Democratic Party (NDP) made it policy for employees of the Ministry of Social Development and Economic Security to "serve clients, not police welfare use" (Richards 1997: 160). There was a subsequent relaxation of requirements and eligibility rules that increased the number of individuals receiving welfare benefits.

Since 1995, the NDP government has begun to tighten requirements and eligibility for welfare benefits. The ministry has hired additional staff, including investigators, eligibility officers, and verification officers, in order to facilitate this process and reduce the level of fraud (BC Ministry of Human Resources, 1998a).

In addition, in 1996, the British Columbia government introduced the BC Family Bonus Act, which extends child benefits to low-income families (BC Ministry of Human Resources, 1998b). By creating a broader benefit program for low-income families, the government removed one disincentive for welfare recipients to move into the workforce; they can now do so without losing child benefits.

Welfare Caseloads: Are We Improving?

As depicted in Welfare Figures 2 and 3 as well as in the data presented in Welfare Table 1, of the three 'have' provinces, only Alberta has been successful in materially reducing its welfare levels over the last decade. Both Ontario and British Columbia have higher levels of welfare beneficiaries, whether measured by absolute numbers (Welfare Figure 2) or as a percentage of the population (Welfare Figure 3).

Much of the reduction in the number of welfare beneficiaries has occurred because of favourable economic conditions and reductions in unemployment. In fact, a major concern for the BC government is the possibility of an economic downturn that would almost inevitably erase some or all of the gains achieved thus far in reducing welfare use (BC Ministry of Finance & Corporate Relations, 2000a).

Welfare Figure 3: Welfare Beneficiaries as a Percent of the Population, illustrates the major difference in the number of welfare beneficiaries between Alberta and both British Columbia and Ontario, as well as Canada as a whole. It also illustrates, to a certain extent, the cyclical nature of the gains achieved in all jurisdictions.

Workfare

One of the keys to managing the trade-off between providing benefits and maintaining work incentives is to require work in exchange for receipt of benefits. Interestingly, much of the historical data regarding the provision of welfare-like programs prior to government provision shows that most privately-financed programs insisted that welfare recipients work if they were able to do so (Olasky, 1996). Also, a host of studies examining results in the United States have concluded that strong work requirements for those able to work assist in moving people from welfare to work (Rector and Youssef, 1999; Shafer, Emes, and Clemens, 2001 (forthcoming)). Unfortunately, British Columbia has not implemented any type of workfare program. It is essential that those able to work be required to do so, and that those willing to work but requiring additional assistance are given that aid, in order to help move British Columbians on welfare into productive work.

Canada–US Divide: Putting
Canada in Context

It is useful to place the larger Canadian welfare experience in context, particularly with respect to the dramatic reforms enacted in the United States in 1996. The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 revolutionized welfare provision by the states. Like Canada, welfare provision in the US is decentralized such that its administration and management are carried out by the individual states. The PRWORA effectively ended welfare provision as an entitlement, and returned a great deal of autonomy and control to the states.

The results of the reforms have been positive. Buoyed by a growing economy and a robust labour market, the US has seen its welfare caseload plummet. With only 2.3 percent of the US population receiving welfare benefits in 1999, the US has achieved a reduction in welfare dependency not equalled in the last 30 years (Welfare Figure 4).

Canada, too, experienced federal reform of the welfare system in 1996, albeit indirectly. The replacement of the Canada Assistance Plan (CAP) with the Canada Health and Social Transfer (CHST) represented a step forward in allowing for flexibility and greater provincial control of social service provision. The only federally-man- dated requirement under the CHST for welfare provision is that residency requirements cannot be used to determine eligibility. Thus, the CHST's implementation allowed for much greater experimentation and innovation in the delivery of welfare and related services.

Unfortunately, Canada has not experienced a similar decline in its welfare rolls. The peak rate of welfare dependency (Welfare Figure 4) in Canada (10.8%) occurred in 1993, the same year as it did in the United States, but was nearly double the US rate (5.5%). As Welfare Figure 4 shows, Canada is still well above its low use point for the last 30 years. Also, Canada now maintains nearly three times as large a percentage of people on welfare as does the United States. Clearly, the combination of a robust economy coupled with serious welfare reforms have benefited US society, particularly those formerly on welfare. Also, the beneficial effects of those reforms are likely to continue after the strong economic growth has ended.

Innovation and Experimentation: US Experience

[Note: This section on US welfare reform is based largely on the work of Chris Shafer, Joel Emes, and Jason Clemens, contained in their forthcoming 2001 study, Surveying US and Canadian Welfare Reform. The study will be available on the Fraser Institute web site: www.fraserinstitute.ca.]

A plethora of innovative welfare programs have been developed across the United States in the past decade. Due to space constraints we will focus on three of these reforms.

Private Sector Involvement

Wisconsin

This example focuses on Wisconsin's use of private companies to deliver welfare. Wisconsin contracts with private, for-profit companies for such things as determining eligibility, case management, and other related welfare services. In fact, nearly 70 percent of Wisconsin's welfare caseloads are handled by private companies (Dodenhoff, 1998). One of the many innovations of the Wisconsin Works (W-2) initiative is creating the proper incentive structure for contracted companies. Wisconsin remits a flat fee to contractors for the administration of contracted services. The companies must cut costs if they are to generate profits for themselves because the state places strict service and quality stipulations on these private companies, which prevents them from simply refusing to serve clients. In fact, contractors face severe penalties of up to $5,000 per welfare case for a "failure to serve." As a result of innovation, the cost of administering welfare in Wisconsin has declined by at least $10.25 million in just two years, with no adverse delivery affects (Dodenhoff, 1998).

New York City and America Works

The partnership between America Works and New York City proves that private welfare providers can actually improve the quality of service welfare recipients receive. The City of New York contracts with America Works to place long-term unemployed people into stable employment. The contract is based on performance: America Works receives 18 percent of the total per capita contract value when the person is initially placed, 70 percent after four months of stable employment, and the remaining 12 percent after an additional three months. In other words, America Works only gets paid if it is successful in placing the hardest employment cases in stable, long-term employment.

Such contract terms have forced the company to consult with employers and innovate to create a uniquely successful orientation, job- and life-skills program. The results are striking. The Manhattan Institute estimates that 88 percent of case loads handled by America Works remained employed after three years. A further benefit is the large reduction in cost. The National Center for Policy Analysis estimates that America Works places welfare recipients in stable employment for roughly one-sixth the cost of the comparable government programs. That is, America Works is able to place people in work for roughly $5,500 (US) per person, while comparable programs operated by the state cost roughly $29,000 (US) per person (NCPA, 2000).

>Faith-Based Provision

Faith-based welfare provision has been adopted by a variety of states including Texas, Mississippi, Michigan, Ohio, and Maryland. These states have either contracted with or decentralized to faith-based organizations for the direct delivery of welfare and welfare-related services. One example of the strength of such programs is the Family Pathfinders Program in Texas. The program uses local community volunteers such as business leaders, civic activists, and members of religious congregations to create small teams to aid specific families. The teams provide job training, housing assistance, child care, life skills training, transportation, and moral encouragement and support to help welfare families make the transition from welfare to work. The data available as of June 1999 indicate overwhelming success. Of the 527 program participants, 399 or 76 percent were off of welfare, and 287 or 55 percent were employed (Family Pathfinders Program, 1999).

Role of Private Charities

The provision of welfare by the state requires a very delicate balance between compassion and "tough love," so that families receive the help they need to get back on their feet, but are never trapped into long-term dependence on the state. There is mounting research regarding the efficacy of private welfare provision in maintaining this balance. Much of the research investigates the level of success and breadth of coverage achieved prior to the advent of the welfare state. For instance, Dr. Marvin Olasky in his book the Tragedy of American Compassion (1992), documents how private charities, many of them religious, provided welfare more successfully and at lower costs than the state. In fact, Dr. Olasky argues that private charities are much more effective than the state because they are better equipped to discern need, balance the provision of assistance with dependency, and provide compassion.

Further research by Dr. David Beito has investigated the success of mutual aid societies and unions in providing social services to their members. Like the work of Olasky, Dr. Beito concludes that private organizations were able to provide social services that are comparable to those provided by the welfare state, but more effectively and more efficiently (Beito, 2000).

An article published in the October 2000 issue of Fraser Forum (Clemens, 2000) investigated whether Canada has the necessary charitable infrastructure for private charitable provision of welfare. After comparing like-sized religious and welfare-oriented charities with the number of welfare cases and recipients, the article concluded that the western provinces and Ontario do have a large enough charitable sector to experiment with private charitable provision of welfare.

Welfare Policy Recommendations

(1) Introduce strong sanctions and immediate work requirements.

British Columbia should immediately institute work requirements for eligible welfare recipients coupled with material financial penalties for non-compliance. Those willing but currently unable to enter the work force should be given additional resources in order to facilitate their entry to it.

(2) Implement time limits for the receipt of benefits.

A specific time limit, similar to the ones included in the US reform initiative of 1996, should be included as part of a broad-based reform of welfare in British Columbia. Specifically, individuals should be precluded from receiving welfare benefits for more than two years in any given five-year period. This type of flexible cap on receipt of public assistance would reduce the number of people who choose welfare over work as a rational decision. People with disabilities that prevent them from working should, of course, be excluded from such restrictions in recognition of their different circumstances.

(3) Adopt a diversion strategy prior to welfare provision.

Implement a program focusing on diverting potential welfare recipients away from welfare by focusing on sources of familial support, charitable organizations, lump-sum payment programs, and/or employment opportunities.

(4) Introduce full-check sanctions.

Tough sanctions, including reduction and/or elimination of benefits based on non-compliance should be introduced along with other reforms.

(5) Monitor the relationship between total welfare benefits and the minimum wage.

One of the particularly difficult areas of welfare provision is to maintain incentives for recipients to re-enter the workforce while providing sufficient resources to prevent impoverishment. That is, as the state continues to provide welfare benefits, it must be extremely careful to maintain work incentives. Specifically, the total value of welfare benefits must be compared with the value of working full-time at minimum wage. If there is a large discrepancy that favours welfare, then there is little incentive for anyone to move back into the workforce.

(6) Adopt a comprehensive measure of welfare benefits.

In order to measure the relationship between the incentive to return to work versus remaining on welfare, the province must maintain a comprehensive view of welfare income that includes all non-cash transfers and benefits.

(7)Promote and facilitate experimentation.

British Columbia, and indeed all of the provinces, should pursue successful initiatives undertaken in the US. British Columbia must focus on providing the best outcomes for welfare recipients, that is, dealing quickly, precisely, and compassionately with the problems of welfare recipients rather than continuing to concern itself with the nature of the service provider. In other words, if for-profit companies or non-profit charities can provide better welfare programs than the government, then the province should embrace rather than preclude such experimentation.

(8) Reduce administrative costs.

The British Columbia government should establish a specific target of not less than a 10 percent reduction in the cost of administering welfare and welfare-related programs. This objective could be achieved in one of two ways: consolidate government services across the province into more comprehensive, multi-service provision centres; or, use contracts with for-profit companies and non-profit organizations for various administrative and program aspects of welfare provision.

(9) Adopt a Basic Needs definition of poverty.

In order to truly understand the problem, we must first measure it appropriately. British Columbia should, therefore, immediately adopt a basic needs assessment to define poverty and, subsequently, calculate welfare benefits. Professor Christopher Sarlo's ground-breaking work in this area provides a way to assess the cost of basic necessities.

Fraser Institute Policy Contacts:

Fred McMahon, Director of Social Affairs Centre
Phone: (604) 714-4569
E-mail: fredm@fraserinstitute.ca

Jason Clemens, Director of Fiscal Studies
Phone: (604) 714-4544
E-mail: jasonc@fraserinstitute.ca

Joel Emes, Senior Research Economist, Fiscal Studies
Phone: (604) 714-4546
E-mail: joele@fraserinstitute.ca

Recommended Readings

[Note: For complete publication data, please see the list of references.]

David Beito, From Mutual Aid to Welfare State: Fraternal Societies and Social Services, 1890-1967.

Marvin Olasky, The Tragedy of American Compassion.

Lisa E. Oliphant, Four Years of Welfare Reform: A Progress Report.

John Richards and William Watson, eds., Helping the Poor: A Qualified Case for "Workfare."

Chris Shafer, Joel Emes and Jason Clemens, Surveying US and Canadian Welfare Reform. (Forthcoming)

Arthur Seldon, ed., Re-Privatising Welfare: After the Lost Century.

Jeffrey J. Sikkenga, Transforming Welfare: The Revival of American Charity.

Michael Tanner, The End of Welfare: Fighting Poverty in the Civil Society.

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