Will the Budget slow the growth of Disability Support Pension numbers?

Originally posted at APO (Australian Policy Online)

Last week’s Budget Speech by the Treasurer announced a package of reforms designed to help people receiving a Disability Support Pension to get into work. The package includes a range of measures:

• New participation requirements for disability support pensioners under the age of 35 with some capacity to work;
• Fast tracking new rules that require new disability support pension (DSP) applicants to get employment assistance to try and get back to work before they can apply for DSP;
• More generous rules for existing disability pensioners to encourage them to work more hours; and
• Supporting employers to take on more disability pensioners through new financial incentives.

In the Budget Speech, the Treasurer stated that the initiatives were intended in part “to slow the growth of Disability Support Pension numbers…”. Concern with the growth in DSP numbers has been expressed for some time. For example, in a series of speeches at the CEDA Luncheon in February, the Inaugural 2011 Gough Whitlam Oration on 31 March, and an address on ‘The Dignity of Work’ at the Sydney Institute in April, the Prime Minister indicated that “We have moved beyond the days of big government and big welfare, to opportunity through education and inclusion through participation”, noting that in addition to the unemployed and discouraged job seekers, “there are many thousands of individuals on the Disability Support Pension who may have some capacity to work”.

Similarly, in an address to the Queensland Chamber of Commerce and Industry, the Leader of the Opposition suggested reforming DSP with a more targeted payment for people whose disabilities might not be permanent. He pointed out that Australian disability pension numbers are set to pass 800,000, with more working age people on the disability pension than on unemployment benefits.

Figure 1 shows the trends underlying these concerns. The number of persons receiving unemployment payments has changed dramatically in different periods depending on labour market trends, with a large increase in the early 1980s, a further larger increase in the early 1990s, followed by a more sustained decline until 2007, and a substantial increase following the GFC (but much lower than in the recessions of the 1980s and 1990s).

In contrast, the number of people receiving the Disability Support Pension appears to keep rising throughout the whole period. Indeed, a briefing note by the Parliamentary Library prepared on initiatives in last year’s budget pointed to “the inexorable growth in the DSP population over the past 20 years … No other income support program has seen this level of sustained increase.”

Figure 1: Trends in the number (000s) of recipients of Disability Support Pension and Unemployment payments, 1981 to 2011 

 Note: Figures are at June each year, except Unemployment payments in 2011, which are for March. DSP numbers for 2010 are preliminary. Source: FaHCSIA, Statistical Paper No. 8: Income support customers: a statistical overview 2009 

What explains these trends? Is DSP a welfare payment out of control? Is disability really rising in the Australian community or are people who are really unemployed being “parked” on DSP. Or are individuals manipulating the system  to get more from these benefits? This concern may appear justified because for long-term welfare recipients there are clear incentives to qualify for DSP, as the gap between DSP and Newstart payments is nearly $260 per fortnight, and widening.

To fully understand these trends in DSP numbers it is necessary to consider a range of factors, including population size and the age profile of disability in Australia, the effects of income support policy changes, and the state of the labour market.

Age structure and population size

Over the last 15 years the population of Australia has been growing relatively rapidly. The growth in numbers of DSP recipients is therefore partly a consequence of population growth. What is important from a policy perspective is the rate of DSP support – that is the number of recipients as a per cent of the eligible population. In fact, the rate of DSP receipt as a percentage of the population of working age has been basically stable since 2002, although with a small fall just before the GFC and a minor rise since then.

Disability and receipt of DSP are strongly age-related. In 2009, for example, less than 2% of people aged 16 to 29 received DSP, but this rises with age to 5% of people in their 40s, 9% of people in their 50s and over 14% of people aged 60 to 64 years. Disability rises further with increasing age over 65 years, but after 65 most people are entitled to an Age Pension and DSP is currently no longer relevant.

This age profile is important, because the age structure of the Australian population has also changed significantly in the last 15 years. This is an effect of the ageing of the baby boom generation, conventionally dated to those born between 1946 and the early to middle-1960s. Analysis by demographer Natalie Jackson shows that up until 1996, changes in the age structure of the Australian population had a slightly negative effect on these trends.

By definition, people born in 1946 started to turn 50 years of age in 1996, so in contrast with the earlier period, changes in the age structure of the population became likely to increase levels of receipt of DSP after the middle of the 1990s.

Overall between 1996 and 2009 the proportion of people of working age receiving DSP rose from 4.3% to 5.1%. If the age-structure of the population was held constant at 1996 shares, then rather than there being 5.1% of the population receiving DSP there would be 4.7%. This means that about half of the total increase in numbers was the result of population ageing and in itself unrelated to any changes in the labour market, the incidence of disability or individual behaviour.

Policy change
A series of policy changes from the mid-1990s onwards also had a major impact on the number of people receiving DSP. The most important of these was the increase in the age pension age for women from 60 to 65 which started in 1995, and at around the same time a number of other payments such as Mature Age Allowances, Partner Allowance, Wife Pension, Widow B Pension and Widow Allowance started to be closed.

These changes had a profound impact on the level of receipt of welfare payments as well as which payments people receive. For example, in the mid 1990s the “closed payments” – mainly for women – were received by around 4% of the working age population, but now they are received by only 1%.

As noted, increasing the age pension age has had the largest effect. In 1996 only 3,400 women aged 60 to 64 years received DSP, but 194,000 received Age Pension. In 2009, there were 68,000 60-64 year old female DSP recipients, but 81,000 age pensioners. Women aged 60 to 64 years are the fastest growing group of DSP recipients and DSP recipients are now close to 30% of all the women in this age group receiving social security benefits, whereas in 1996 they accounted for only 1.4% of all welfare recipients in this age group.

But while receipt of DSP in this group has “skyrocketed”, total welfare receipt has plummeted: in 1996 68% of women aged 60 to 64 years received a social welfare payment, while in 2009 was 39%.

So “welfare dependency” for this group has actually fallen significantly – it’s just that more of this (smaller) group are now on DSP. This fall in welfare receipt for older women is also matched by a fall for older men – in 1996 26% of men aged 60 to 64 years were receiving DSP whereas in 2009 it was 16%.

The pension age for women has not yet reached 65 years, so it could be expected that the number of women in this age group receiving DSP will continue to rise. Moreover, the announced increase in the age pension age to 67 years for both men and women, which is to be phased-in between 2017 and 2023 will undoubtedly also mean that the number of DSP recipients will increase as a result. However, given the recent experience with women aged 60 to 64 years it could be expected that the total proportion of 65 and 66 year olds reliant on social welfare payments will fall.

Rather than a picture of spiralling welfare receipt, what has actually happened in the last 15 years is a significant decline in the proportion of the working age population receiving social security benefits; and the decline would have been even greater if not for the structural ageing of population. This decline in welfare receipt has been achieved through reforms starting in the 1990s and reinforced by the very strong labour market growth between 2002 and 2007.

Figure 2 shows that the declines in welfare reliance among people of working age between 1996 and the period just before the GFC were significant for all age groups, but the largest declines were among those where the household reference person was aged 55 to 64 years.

Figure 2: Per cent of households with a head of working age whose principal source of income is government cash benefits, by age of household head, 1996-97 and 2007-08

Note: Principal source of income is 50% or more of total income. Source ABS, Household Income and Income Distribution Survey, 2007-08 

 Welfare reliance in this group more than halved from 38% to 17%, and overall the proportion of working age households who derive 50% or more of their income from benefits fell from 21% to 12%. If a more stringent definition of welfare dependence is used – households who receive more than 90% of their income from government cash benefits – then the decline in welfare dependence among people of working age is even greater – from close to 17% to 7.2%. Moreover, adjusting for changes in the age structure of the working age population would further reduce this to 6.7%.

There are very strong arguments in favour of further welfare reforms, but these are arguments based on improving equity, not constraining out-of-control growth in numbers. The equity arguments are those referred to by the Prime Minister in her speeches this year that the main path to improvements in social inclusion is through increases in employment and participation.

In Australia, about 40% of working-age people with a disability are employed, which is below the  OECD average of 44%. However, the OECD finds that the relative incomes of people with a disability are lower in Australia than in any other OECD country and poverty rates are the second-highest; with most of the explanation for this being lower incomes for those who are not in paid work. So to improve equity, we need to both increase employment and improve benefit rates. The Government has already improved benefit levels for people on DSP (and Age and Carer Pensions), and the package announced last night has been welcomed by welfare groups such as the Brotherhood of St Laurence as balancing increased obligations with improved support services.

However, population growth, continuing population ageing, the ongoing effect of past policy changes and the future increase in the age pension age to 67 years are likely to mean that the numbers on DSP will continue to grow for some years. But this will not mean that these reforms will necessarily fail. To judge the success or otherwise of the Budget, we need to look at age and gender-specific rates of DSP receipt, and we also need to look at the total rate of welfare receipt.

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Don Arthur
13 years ago

Peter – This post does a great job of clarifying the issues. If I understand you you’re saying that the increase in DSP numbers is largely the result of:

1. population growth;
2. aging; and
3. policy changes that shifted women from other payments to DSP.

If this (or a future) government chose to restrict access to DSP and move future applicants and some current applicants onto unemployment payments, would this leave many people worse off?

Would it be possible to offset the impact of pushing people onto lower rates of payment by investing more in welfare to work programs?

13 years ago

Whilst I don’t doubt the data you are presenting here and nor the interpretation, there are still definitely big cultural factors at work. For example, whilst you point to OECD data, I can point to data from Hong Kong, where there are about 43K people on permanent disability or ill health pensions. Since the population there is about 1/3rd that of Australia, this means that about 6 times as many people in Australia are getting these pensions per head of population. I can’t believe that Australians are really that much sicker, so I guess this means that there must be things about Australian culture that stops people with various disabilities working and getting jobs.

13 years ago

Sorry, that link doesn’t appear to be working. It is: http://www.swd.gov.hk/en/index/site_pubpress/page_press/sub_fullpress/topic_373/

13 years ago

so I guess this means that there must be things about Australian culture that stops people with various disabilities working and getting jobs.

Or alternatively that there something about Hong Kong culture that stops people with various disabilities getting disability pensions.

Peter Whiteford
Peter Whiteford
13 years ago


I agree that there are wide variations across countries in the degree to which people identify as having a disability – in low income countries, reported rates of disability generally tend to be lower than in high income countries. (And despite the fact that Hong Kong has a high GDP per capita, household living standards as measured by household consumption expenditure is much lower than in Australia – a topic on which I might post in the future.)

But as desipis suggests, there are also differences in access to disability payments – if you have less generous provisions you will have fewer people on payments. What is likely to happen is that at least some of the difference is that people with a disability in Hong Kong are being supported by their families rather than the state.

13 years ago

Great post and analysis. Only one small caveat I would have, is that if you compare over long ish time periods, peolppe do tend to be healthier at a given age than even 10 and certainly 20 years ago. So the age specific disability rats shod be going down slightly.

I wonder whether the differences between countries might also be the attitude of employers. It is hard to find work as a disabled person in Auatralia. Is that also true in HK?

Dehne Taylor
Dehne Taylor
13 years ago

Peter,as usual, a very sound and thoughtful analysis.
Nonetheless there still remains an argument for constraining out-of-control growth numbers. If you look closely at the numbers over the past decade or so, each time the government has announced a ‘crack-down’ on DSP, new applicant numbers fall off for a few weeks/months. As soon as the grapevine has sussed how the new rules will work and subsequently been softened, due to the usual hue and cry from the welfare lobby, the upward profile resumes its trend. This says, to me, that there are people out there who will claim the benefit if it is easy to qualify for but won’t be bothered if there are too many hoops to jump through.
This is, of course, true for most income support payments but in the case of DSP, especially for males, there may well be a link between the thirty-forty year reduction in labour force participation rates for prime age males and the ability to access DSP.

derrida derider
derrida derider
13 years ago

people do tend to be healthier at a given age than even 10 and certainly 20 years ago. So the age specific disability rates should be going down slightly.

– Jennifer@6

They broadly are, once you take account of the changes to other payments. Though offsetting that modern medicine is getting better and better at keeping sick people alive, as distinct from curing them. Thirty or forty years ago a lot of people now getting disability pension would not have got it simply because they’d have been dead.

So yes, the point of much of this article is that after you allow for the changes to other welfare payments a considerably smaller proportion of the over 50 population now gets a disability pension than was the case 15 or 20 years ago. In aggregate the baby boomers are far more employable than their parents were at the same age – though it’s more their education than their health responsible for that. That education not only means that they’re in demand, it means they earn decent wages to make them want to work too (productivity begets particpation, not the other way around).

Dehne, mate, I think you spent too long in Treasury. IME very bright people but with insufficient respect for ugly little facts that might undermine their beautiful corporate analysis. This meme – rampant in Treasury at the moment – about “constraining out-of-control numbers” is a good example; the whole point of this post is that DSP numbers are most definitely not “out of control”!

Dehne Taylor
Dehne Taylor
13 years ago

Haven’t looked at the numbers lately but to me (and many others) the issue is why are 1 in 4 or 1 in 5 Australians of working age on some form of income support (regardless of whether it is DSP or some other payment).

Peter and DD, haven’t the numbers/facts with me but if you look at when the Howard Government announced welfare reform there was a distinct fall-off in DSP applications until the welfare lobby ‘clarified’ with government how it would work.
DD, You’ll be pleased to know that I’m undergoing re-education by currently living in a socialist paradise (and Peter’s old hunting ground), Paris.

Paul Frijters
Paul Frijters
13 years ago


what an effort!
There were a couple of points I thought of as i was reading your post:

1. The main comparisons in Figure 2 are a little unfair in that you are comparing the trough a cycle (1997) with the 2007 peak. A fairer comparison would have been to compare with 2009 or 2010. Since about 300,000 unemployed and DSP were added in that period (worth about 3-4% of the working age population) that would reduce your bottom line a lot and would make you more worried about continued high welfare dependency.
2. Full-time employment hasnt gone up much even in the boom. Rather, part-time has increased which is more associated with a degree of welfare, exchanging full-time welfare dependency for a more shared part-time dependency. Also, what has happened to those who do not chow up in these numbers but who have lost their jobs? Are their families and communities taking care of them, are they on a program outside the ones included here, have they divorced from the working partners and hence diluted the pool of households, etc.
3. The increase in life expectancy means that a lot of welfare is added at the end of life since there are more years to enjoy age pensions and the like. Hence another question in terms of valid comparisons is whether we should really be looking at 15-65 year olds over 30 years or whether we should be looking at a sliding age window, in which case the welfare dependency issue seems bleaker than you suggest.
4. I wasnt entirely convinced that Figure 2 wasnt generated by a couple of further ‘tricks’. The huge reduction in dependency between 15-24 year olds, in the face of increases in university-places and continued high rates of teen pregnancy, made me wonder whether there has been some re-classification of types of welfare or whether the ‘50%’ cut-off rate has been reached by lots of part-time working students. Changes in family composition can of course also play tricks on the ‘heads of households’ basis of the sample.

derrida derider
derrida derider
13 years ago

the issue is why are 1 in 4 or 1 in 5 Australians of working age on some form of income support

– Dehne

Well, apart from it being closer to 1 in 6 now, don’t forget a few things:

1) a good slab of these are students

2) As Paul notes, “on income support” is not the same as “dependent on income support. More recipients than ever are actually working. You could certainly design a system that avoided this, but only by either greatly complicating the tax system with a raft of refundable credits paid through PAYGO (the EITC writ large) or making it so such work does not pay. Making part time work less worthwhile will reduce the numbers on payment a little but will likely actually increase expenditure because those left on payment will all be fully dependent on it.

3) After many years of working closely with the welfare and tax systems my belief is that the problems are more with our human capital systems than our welfare systems, and that human capital systems went backwards under the previous government and are not going forward very fast under this one.

4) Australia’s workforce participation rate is anyway at an historic high since the country was founded, and is well above the OECD average.

5) We spend way, way below the OECD average on welfare.

Dehne Taylor
Dehne Taylor
13 years ago

1 in 5 or 1 in 6. We are still talking about 2 million people of working age (and students on YA are less than 20% of this total)
Interesting to note that more people than ever are working who receive welfare, given that high EMTRs were attributed (wrongly, in my view)to not making working worthwhile under the previous regime and yet EMTRs have increased in a number of places under the present rules.
Don’t disagree that human capital is important, but you can’t just look at the supply side. The reduction in welfare dependency growth over the past 5-10 years is not all due to an improving economy, demonstrating that sticks (and carrots) do work.
Averages are often a furphy (for example the average of James Packer and my income bears no relevance to either of our incomes!). More to the point, we know the EU welfare systems are unsustainable and are being reformed to cope with ageing pressures. Under this scenario, if Australia decides not to undertake any further welfare reform, our spending would move closer to the OECD average. Not many would regard this as a laudable outcome.

Labor Outsider
Labor Outsider
13 years ago

Very nice post. To my mind, the critical question (about DSP) is whether we should be satisfied, that in an environment where aggregate welfare dependency has declined significantly, that the proportion of the population receiving one particular payment, has remained stable.

That in turn depends on what proportion of the stock of current DSP recipients could be “activated” more strongly than is currently the case (or put another way – the proportion that is or could be employable). Unfortunately, we can’t really answer that question using aggregate data such as this. It requires more of a microanalysis of the relevent population.

My priors tell me that, in addition to the labour demand factors that are relatively well known, that various reforms influencing the supply side (tax/transfer changes, activation policies, etc) have also influenced welfare and employment patterns (the international empirical evidence is fairly persusasive that such factors matter). However, there isn’t a lot of good empirical analysis of the relative impacts of the two sets of factors in Australia, in part because there are few good natural experiments that can be drawn on to tease them out. Another important issue is, having gone as far as it has gone already, whether futher policy changes targeting the supply side would have much more than a marginal impact on employment rates of different groups.

My own analysis of the HILDA data, while not a natural experiment, showed, using logit models, that “between 2002 and 2006, the concentration of ‘low employment’ characteristics decreased among people who are only marginally attached and those not in the labour force, suggesting that the strong employment growth was especially beneficial for these groups.” The paper (it is a 2010 RBA RDP) was not able to address or determine the relative importance of demand and supply factors over the period.

More generally, I’m inclined to agree with a point that DD has made often (and is implied by Peter also) that Australia could move in the direction of more generous income support (and better risk sharing) without signicant negative effects on labour supply, as long as those changes were well designed. Of course, changes to the tax-transfer system in that direction would also have implications for Australia’s system of determining minimum wages.

The OECD has some very good work on this sort of thing and I myself have an OECD working paper that looked at the Luxembourg labor market (small country but quite a dysfunctional income support system on many levels) from the perspective of looking at ways to deliver their equity goals more efficiently.

James Rice
13 years ago

As others have said: what a fantastic post!

Peter Whiteford
Peter Whiteford
12 years ago

A few comments:


1. I stopped at 2007-08 because that is the most recent published data from the ABS. The next survey (2009-10 I believe) comes out later this year and I will certainly update when it is available. I started at 1996 -97 because it has a number of advantages – it is the period of the coalition government, and it just follows the first retirment of the baby boom generation, and the raising of the age pension age for women. Also I think that the peak of the recession was earlier around 1993. While welfare receipt has presumably gone up since 2007, I doubt that it will be anywhere near as bad as the recession of the 1980s and 1990s. Also the working age population is now close to 15 million, so 300,000 extra welfare beneficiaries is an increase of closer to 2 percentage points.

2. I think that there are now more people being supported by their partners than in the past – one of the striking things about the pre-2008 boom was the growth in two-earner families. This means that an increase in unemployment is likely to be associated with a lower increase in welfare receipt than in the past – but this is still a real reduction. As far as I am aware all government welfare programs are included – in fact I am 100% certain of it.

3. I’m not sure that I understand what you mean by a sliding age window – are you saying look at longer periods rather than snapshots? What is available from HILDA suggest to me using this perspective that things have also improved particularly since 2003 or so.

4. Increasing divorce and teenage births should increase the number of households and the proportion dependent on welfare, I think. 15-24 year olds are included in the working age population, but I think that there are not very many of them heading a household at this age, but most of them live with their older parents.

Paul Frijters
Paul Frijters
12 years ago


thanks for the reply. Makes it a bit clearer. To summarise, figure 2 is driven by:

1. Less students being head of a household and instead staying at home, which decreases the percentage of heads of households of that age range with more than 50% government support.
2. The economic boom from 1997-2007 which reduced the number of middle-aged people on welfare support for over 50% of their income.
3. The gradual concentration of welfare and income in households, which means fewer households have more than 50% of welfare support but they are presumably more dependent than before (i.e. less income earning), whilst the market income earners now all live together.
4. The increase in the eligibility age for the old-age pension which reduced the number of old women on old age pension.
5. The abolition and increased entry barriers to various welfare programs (mature Age allowance and Widow allowance), which is partially driven by the increases in life expectancy and hence the reduced number of widows younger than 65.

In terms of whether or not we should worry about spiraling welfare costs, I think it would have been cleaner to use proportions of individuals in age ranges who receive welfare rather than percentages of household heads with above 50% dependency (that really introduces a lot of things that muddle the analysis, particularly since figure 1 is based on individuals). Also, I dont really see what any of these factors have to do with the recommended changes at the end of your post (increases in welfare levels and continued welfare reform).

David Walker
12 years ago

Peter W, you’re a class act. As are the combined ranks of previous commenters on this post.