The Policy Institute Australia (PIA) has proposed significant reforms to welfare means testing with the aim of reallocating approximately $21 billion in government spending. The recommendations target four major programs: the Age Pension, aged care, Parental Leave Pay, and the Child Care Subsidy, emphasizing stricter means testing to better direct support toward households with greater need.

Most of the projected savings — around $16 billion — would come from tightening the assets test on the Age Pension and aged care services. The institute highlights the current disparities between asset-rich retirees, particularly those with substantial home equity, and others who rely more heavily on government support. For example, a retired couple owning a Sydney property valued at $5 million may still qualify for a full Age Pension and additional aged care payments, while homeowners with fewer assets may receive less assistance. To address this, PIA suggests including net equity above $500,000 in owner-occupied housing within the assets test and proposes a "Retirement Contribution Scheme" (ReCS). This scheme would allow retirees who are asset-rich but cash-poor to borrow against their homes to cover living expenses, with repayments deferred until the assets are sold.

On childcare subsidies, the institute advises abandoning the government’s current universal childcare subsidy model favored by Prime Minister Anthony Albanese, which offers a 90 percent subsidy regardless of income. Instead, the report recommends focusing support on lower-income families by increasing the subsidy to 95 percent for the first child in families earning up to $133,000, while phasing out subsidies completely at $250,000 income, significantly lower than the existing threshold of $535,000. The approach aims to reduce benefits for wealthier households, which currently receive substantial subsidies, in line with findings from the Productivity Commission that universal subsidies do not effectively prioritize disadvantaged families. PIA also calls for a restructuring of subsidies for second and subsequent children to limit disincentives for families with multiple children in paid care.

In relation to Parental Leave Pay, the institute recommends lowering the household income threshold for full eligibility from $373,000 to $200,000 and removing the current individual income cap, to better target those in greater need of support.

The report reflects concerns about the rapid expansion of welfare programs, noting that growth in assistance has outpaced economic growth and disproportionately benefits wealthier households. PIA chief executive Amy Auster stated that outdated means testing methods have exacerbated inequities, especially amid rising cost-of-living pressures, and that reform could strengthen the social safety net while freeing budget capacity.

While the institute does not prescribe how savings should be deployed, options include tax cuts that may offset reductions in welfare for higher-income families. For example, a family with a household income of $247,000 could see a $5,600 reduction in childcare subsidies but gain up to $4,300 through tax reductions.

The debate over welfare reform also touches on broader fiscal challenges, particularly the growing demands of an ageing population on aged care services. PIA acknowledges that asking asset-rich retirees to contribute more toward their care is politically sensitive but argues it is necessary for budget sustainability. Critics of universal welfare argue that unrestricted benefits add unnecessary costs and divert resources from those most in need, while supporters caution against measures that could undermine social protections.

The Policy Institute Australia’s report calls for a recalibration of welfare programs to ensure that taxpayer funds are used efficiently and equitably, balancing the objectives of fiscal responsibility with social support.