Forcing people to repay welfare ‘loans’ traps them in a poverty cycle – where is the policy debate about that?

The National Party’s pledge to apply sanctions to unemployed people receiving a welfare payment, if they are “persistently” failing to meet the criteria for receiving the benefit, has attracted plenty of comment and criticism.

Less talked about has been the party’s promise to index benefits to inflation to keep pace with the cost of living. This might at least provide some relief to those struggling to make ends meet on welfare, though is not clear how much difference it would make to the current system of indexing benefits to wages.

In any case, this alone it is unlikely to break the cycle of poverty many find themselves in.

One of the major drivers of this is the way the welfare system pushes some of the most vulnerable people into debt with loans for things such as school uniforms, power bills and car repairs.

The government provides one-off grants to cover benefit shortfalls. But most of these grants are essentially loans.

People receiving benefits are required to repay the government through weekly deductions from their normal benefits – which leaves them with even less money to survive on each week.

With rising costs, the situation is only getting worse for many of the 351,756 New Zealanders accessing one of the main benefits.

Our whittled down welfare state

Broadly, there are three levels of government benefits in our current system.

The main benefits (such as jobseeker, sole parent and supported living payment) pay a fixed weekly amount. The jobseeker benefit rate is set at NZ$337.74 and sole parents receive $472.79 a week.

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Those on benefits have access to a second level of benefits – weekly supplementary benefits such as an accommodation supplement and other allowances or tax credits.

The third level of support is one-off discretionary payments for specific essential needs.

Those on benefits cannot realistically make ends meet without repeated use of these one-off payments, unless they use assistance from elsewhere – such as family, charity or borrowing from loan sharks.

This problem has been building for decades.

Benefits have been too low for too long

In the 1970s, the Royal Commission on Social Security declared the system should provide “a standard of living consistent with human dignity and approaching that enjoyed by the majority”.

But Ruth Richardson’s “mother of all budgets” in 1991 slashed benefits. Rates never recovered and today’s benefits are not enough to live on.

In 2018, the Welfare Expert Advisory Group looked at how much money households need in two lifestyle scenarios: bare essentials and a minimum level of participation in the community, such as playing a sport and taking public transport.

The main benefits plus supplementary allowances did not meet the cost of the bare essentials, let alone minimal participation.

The Labour government has since increased benefit rates, meaning they are now slightly above those recommended by the advisory group. But those recommendations were made in 2019 and don’t take into account the sharp rise in inflation since then.

Advocacy group Fairer Future published an updated assessment in 2022 – nine out of 13 types of households still can’t meet their core costs with the current benefit rates.

How ‘advances’ create debt traps

When they don’t have money for an essential need, people on benefits can receive a “special needs grant”, which doesn’t have to be repaid. But in practice, Work and Income virtually never makes this type of grant for anything except food and some other specific items, such as some health travel costs or emergency dental treatment.

For all other essential needs – such as school uniforms, car repairs, replacing essential appliances, overdue rent, power bills and tenancy bonds – a one-off payment called an “advance” is used. Advances are loans and have to be paid back.

There are several issues with these types of loans.

First, people on benefits are racking up thousands of dollars worth of debts to cover their essential needs. It serves to trap them in financial difficulties for the foreseeable future.

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As long as they remain on benefits or low incomes, it’s difficult to repay these debts. And the Social Security Act 2018 doesn’t allow the Ministry of Social Development (MSD) to waive debts.

Contradictory policies

Another problem is that people on benefits have to start repaying their debt straight away, with weekly deductions coming out of their already limited benefit.

Each new advance results in a further weekly deduction. Often these add up to $50 a week or more. MSD policy says repayments should not add up to more than $40 a week, but that is often ignored.

This happens because the law stipulates that each individual debt should be repaid in no more than two years, unless there are exceptional circumstances. Paying this debt off in two years often requires total deductions to be much higher than $40.

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The third issue is that one-off payments can be refused regardless of the need. That is because there are two provisions pulling in opposite directions.

On the one hand the law says a payment should be made if not making it would cause serious hardship. But on the other hand, the law also says payments should not be made if the person already has too much debt.

People receiving benefits and their case managers face the choice between more debt and higher repayments, or failing to meet an essential need.

Ways to start easing the burden

So what is the fix? A great deal could be achieved by just changing the policies and practices followed by Work and Income.

Case managers have the discretion to make non-recoverable grants for non-food essential needs. These could and should be used when someone has an essential need, particularly when they already have significant debt.

Weekly deductions for debts could also be automatically made very low.

When it comes to changing the law, the best solution would be to make weekly benefit rates adequate to live on.

The government could also make these benefit debts similar to student loans, with no repayments required until the person is off the benefit and their income is above a certain threshold.

However we do it, surely it must be time to do something to fix this poverty trap.