Reciprocity and respect

After a long voyage from Portsmouth, Edward J. Moore and his wife, Beatrice, disembarked in Sydney in June 1846. The couple stood fretfully on the wharf with neither money nor friends until a stranger appeared. He offered Edward his hand and gave him a secret handshake. The young couple relaxed; they were confident this stranger would help them find shelter and employment in their new country-and their optimism was not misguided.

Moore and his benefactor were "brothers" in the Grand United Order of Oddfellows, one of many "friendly societies" that provided members with companionship and various services, including healthcare, medicines, housing loans, unemployment benefits, and funerals. Members-primarily, but not only, men-banded together because they shared a common occupation (the Brickmakers and Labourers Accident and Provident Society), a religion (the Australasian Holy Catholic Guild), or because they were neighbours (Friendly Society That Meets at Mr Smith's Half-Moon Tavern on Winchester Hill). The societies operated through democratically governed chapters called lodges. The lodges were examples of Edmund Burke's "little platoons," people with a natural affinity voluntarily joining together to benefit their families and communities.

From reciprocity to government welfare

During good times, friendly society members contributed to a mutual insurance fund, which they drew on when circumstances required. Today's needy recipient could easily be tomorrow's donor. Such reciprocity is the basis for the Golden Rule and is universally viewed as equitable and just.

Although friendly societies served admirable purposes, some people criticised their secret handshakes, strange rituals, and exclusionary membership rules. Moreover, friendly societies could never provide for all of the nation's welfare needs. People who were unable to make contributions because of unemployment, a failed business, or chronic illness were largely excluded. So too were those considered not "suitable" for lodge membership. Even at their highest point, the lodges covered only 30% of the population. The remaining 70% were forced to rely on family, charities, or the government when in need of help.

At first, government support was minimal, but, over time, publicly provided welfare expanded, crowding out many charities. Today, the government has co-opted most friendly societies; those that remain functioning look to the government for a substantial portion of their funds. Other nations followed a similar path, but the transition from mutual assistance to public welfare was exceptionally rapid in Australia, where people have historically viewed the government as a "vast public utility" designed to meet all of life's vicissitudes.

Believing that voters despise effortless entitlements, many governments tried to retain some semblance of reciprocity in their welfare arrangements. As the British welfare state creator, Lord Beveridge, famously put it, "Benefit in return for contributions, rather than free allowances from the State, is what the people…desire." Like friendly societies, Beveridge's system required workers to share their risks by contributing to a mutual insurance pool, which could be accessed for assistance when needed. To support people in retirement, the USA and most European countries also created social security systems in which contributions determined the size of entitlements.

The problem with social insurance is the same one faced by friendly societies-how to provide for the needs of those who are unable to make contributions for one reason or another. To ensure that no one was left to starve, governments invoke a social "solidarity principle," which requires all citizens to share the responsibility of looking after society's most needy people.

No country has a purely contributory welfare system; for humanitarian reasons, all nations redistribute some resources to those who have not made sufficient contributions. Such redistribution is unavoidable, but it leads to tensions because the contributory and solidarity principles reflect different conceptions of fairness.

Two ideas of fairness

Everyone is in favour of fairness, but people differ about what is fair. Consider a hypothetical case. After 20 years of work, Stan loses his relatively well-paid job. He lives alone, has some savings, and owns a home. Samantha, on the other hand, lives in rental accommodation. She has worked very little in her life, and she has neither savings nor investments. In addition, she is single-handedly raising a four-year-old child. Both Stan and Samantha are seeking assistance. Who should have precedence?

According to the contributory principle, Stan has the better case. He has worked and paid taxes for years, while Samantha has hardly worked. Giving more significant support to people like Sam provides people with an incentive to work. From the viewpoint of the solidarity principle, Samantha has the stronger case. She has no financial resources and a child to look after. Stan can get by on his savings, at least for a while, while Samantha has nothing to fall back on.

As already noted, no nation concerned with its citizens' welfare would ignore Samantha's plight. However, countries that wish to highlight reciprocity might provide her with a lower level of support than Sam. The Netherlands is an example. An unemployed worker who has made contributions for decades is entitled to a higher unemployment benefit than someone who contributed for fewer years or never contributed at all. Other European countries have similar arrangements, but reciprocity has largely eroded in many English-speaking nations.

Australia is an extreme case. Apart from compulsory personal retirement savings-which receive significant tax subsidies-there is little relationship between what citizens put in and what they take out of the welfare system. Unlike the Netherlands, Australia's primary unemployment benefit does not assign a more significant amount to those with a more extensive work history. Just the opposite is true. Including rental assistance and parenting allowances, Samantha would receive more help than Stan. Depending on the size of his savings and investments, it is even possible that Stan would receive nothing at all.

Australia's welfare system strongly values solidarity. Almost all its welfare programs are means-tested; benefits go only to those in need, giving the country the most redistributive social welfare system in the OECD (a club for rich countries).

Transferring money from wealthier households to poorer ones is an understandable aim, but means-tested programs can produce perverse incentives against working and saving. For example, recipients of assistance who accept a job and start paying income tax may find themselves no better off working than when they were on welfare. By eschewing reciprocity, means-tested programs also produce a social cost-the loss of public support for welfare.

Loss of public support for welfare

Redistribution produces a rivalry between those eligible to receive benefits and those that pay for them. The result is a spiteful climate in which critics denounce the legitimacy of welfare recipients' claims while those receiving benefits, and their political representatives, zealously protect their entitlements. This "we" versus "them" dichotomy has corrosive effects that extend well beyond just deciding who should receive welfare. For example, resistance to resettling refugees and to immigration is due, in part, to the (incorrect) perception that most immigrants receive assistance without making a corresponding contribution to society.

It is true that critics of welfare routinely exaggerate the extent of fraudulent claims. It is also true that, rather than a cost, immigration probably creates a net gain for an economy. Still, the ubiquity of negative opinions suggests that public support for welfare is tenuous and grudging. Government "crackdowns" on welfare "cheats" do nothing to improve public attitudes toward welfare; they just reinforce the idea that cheating is widespread. Such negativity is worrying because more people will require assistance as the population ages. Unless attitudes change, we can expect public resentment and discontent to grow.

Contrary to what some critics argue, the call for reciprocity is not a right-wing plot to cut welfare. As Beveridge understood, the best way to change negative attitudes is to introduce reciprocity into the system. In the UK, where the issue has been widely debated, all sides of politics and the trade unions have supported increasing reciprocity. The former UK Labour leader, Ed Miliband, promised that Labour would be the party that rewards "contribution, not worklessness."

Reintroducing reciprocity

Research has repeatedly confirmed that people are more likely to contribute to the general welfare when they know others are also contributing. There are four ways to introduce reciprocity into the welfare system: mutual obligation requirements, universal basic income, personal welfare accounts, and income-contingent loans.

Mutual obligation requirements. Mutual obligation requirements such as requiring welfare recipients to look for work are probably the easiest way to introduce reciprocity into a means-tested system. It is also possible to vary entitlements with work history providing lower benefits to those with long histories of unemployment.

Universal Basic Income (UBI). Lately, UBIs have sporadically appeared in the news. Advocates view a UBI as an economically efficient replacement for the current multitude of separate means-tested welfare programs. There are several arguments in favour of a UBI. Because everyone would be entitled to a UBI, there would be no need to assess whether claimants are eligible and require no policing to investigate cheats. The result would be lower administration costs. UBIs would also eliminate the stigma attached to welfare and eliminate the perverse taxes that trap low earners into welfare dependency. They would add a much-needed subsidy to low paid jobs, boosting consumption among low-income people and lifting economic growth.

Despite these virtues, a UBI has drawbacks. If it is too large, it could provide a disincentive to work. Also, despite the savings that arise from eliminating bureaucracy, a UBI would be very expensive to implement. It would undoubtedly require higher marginal tax rates, which means that, after taxes, most workers would see little benefit. The combination of high costs and minimal benefits caused Swiss voters to reject a UBI when it was put forward in a referendum. For our present purposes, the most troubling aspect of the UBI is the absence of reciprocity. Under a UBI, there is no link between contributions and benefits. Moreover, unless the UBI is very generous, targeted means-tested welfare programs will still be required.

Personal Welfare Account (PWA). Some writers have recommended PWAs as an alternative to the UBI. Workers would pay a share of their income into a PWA, which would receive favourable tax treatment. When needed, benefits would come from one's PWA. On retirement, people could use any money remaining in their PWAs to supplement their pension. In this way, PWAs give contributors the flexibility to adapt to life's vicissitudes. Think tanks from all sides of politics support PWAs, but they do have a downside. PWAs will lead to the accumulation of large sums, and governments have often shown themselves unable to allow a cache of money to remain unmolested. An alternative that highlights reciprocity, but is resistant to government plundering, is the Income Contingent Loan (ICL).

Income-Contingent Loan (ICL). In Australia and England, ICLs are used to fund university fees. Students borrow money to pay their fees and repay their loans through the tax system once they reach a certain income threshold. ICLs could also fund parental leave, unemployment assistance, and most welfare benefits. Instead of grants, recipients would receive ICLs. In effect, the government acts as a piggy bank, helping people to smooth the ups and downs of life. Most borrowers will repay their loans when their circumstances permit, but some may never be able to repay their loans in full. The entire population shares the risk of non-repayment.

Many details would have to be worked out in designing ICLs for social welfare: who is eligible, how much can be borrowed, what interest rate will be applied; the threshold for repayments; and many more. Whatever the final design, the reciprocal nature of ICLs (today's borrowers are tomorrow's payers and vice versa) would be explicit. What is less clear is how to introduce a contributory element. One possibility is to assign a risk rating to borrowers, with better risks permitted to borrow more. Given their reliance on reciprocity, the introduction of ICLs would be likely to produce a positive change in the public's attitude toward social welfare.

Whatever method is chosen-and combinations are possible-ensures that social welfare arrangements reward contribution, provide protection to all citizens, promote social cohesion, and encourage positive attitudes toward welfare. Reciprocity is the bedrock of morality and the foundation of strong a society.