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Education, Employment and Workplace Relations References Committee - 27/08/2012 - Allowance payment system

SCULLY, Ms Amanda, Principal Consultant, informing you

Committee met at 08:59

CHAIR ( Senator Back ): I declare open this public hearing of the inquiry into the adequacy of the allowance payment system for job seekers and others, the appropriateness of the allowance payment system as a support into work, and the impact of the changing nature of the labour market, which was referred to the Senate Education, Employment and Workplace Relations References Committee on 26 June 2012 for inquiry and report. The committee is scheduled to report on 29 November 2012. The terms of reference for the inquiry can be found on the committee's website and are also available today from the committee secretariat.

Before the committee starts taking evidence, I advise all witnesses appearing before the committee that they are protected by parliamentary privilege with respect to their evidence. This gives them special rights and immunities, because people must be able to give evidence to committees without prejudice to themselves. Any act which disadvantages a witness as a result of evidence given before the Senate or any of its committees is treated as a breach of privilege. Witnesses may request that part or all of their evidence be heard in private. However, I must remind witnesses that giving false or misleading evidence to the committee may constitute a contempt of parliament and of the Senate.

I welcome Ms Scully, from informing you. Firstly, I thank you for your submission and for appearing today. I wonder if you would like to make an opening statement before we go to questions.

Ms Scully : Okay. Informing you is a consulting firm, and the work that we do is to consult in areas that are related to economics. One aim of the firm is to increase the standard of living. We do surveys and specific industry analysis for clients. I am very pleased to have made a submission and to have been invited to speak today. Thank you. The main points of the submission, if I can put them forward, are that a private insurance scheme ends for most people, except low-income earners, the necessity of relying on a public Newstart payment system. Private insurance is relatively low cost and covers involuntary unemployed—those who are ill and also those who are made redundant—for up to six months. People can draw down on that three times from the one insurer. For people who are on low incomes, the weekly payment may be too much and a combination of very low private insurance and the Newstart allowance lifts their income during involuntary unemployment to the Henderson poverty line. The benchmark for standard of living that is used throughout the submission is the Henderson poverty line.

CHAIR: Thank you. I wonder if I might just clarify what your solution would be for people who are long-term unemployed. Are you suggesting that there would be some government contribution, funding or payment of the premium, or would you be suggesting in that case that there would still be a Newstart type of program for people who, if you like, do not have insurance in the first place?

Ms Scully : Insurers currently cover involuntary unemployment for four to six months, so a person who is unemployed for longer than that would then rely on a Newstart payment. So it does not cover long-term unemployed. This solution is not for long-term unemployed; it is for the 64 per cent of short-term unemployed who are unemployed for up to six months.

CHAIR: Before I go to questions, can you give us some indicator of what the typical insurance premium would be for somebody while they are in employment?

Ms Scully : Yes. For cover of $1,000 per month, which is a low insurance rate equivalent to the Newstart allowance, it is $5.84 per week. That is relevant when combining with the Newstart allowance. On its own it gives an equivalent to the Newstart allowance, and after tax it is $3.94, because it is tax deductible.

Senator SIEWERT: I am a little bit confused as to how you would see this operating in conjunction with Newstart. Are you proposing that for the first six months this insurance program would work and that after that Newstart would kick in? Or do you see Newstart and the insurance program working together for the first six months?

Ms Scully : Primarily, the former. For most people who are working the insurance costs are relatively low. For $2,000 a month it is, after tax, $7.42 per week. So for the first six months most people, except those on low incomes, could be independent of a public Newstart allowance system. People on low income may not be able to afford an after-tax insurance cost of $7.42 per week which gives $2,000 a month. Those people would have a combination. The details would have to be worked out to see exactly what it would cost in disposable income for a range of people. For someone on the minimum wage who is paying $5.84—the after tax on a minimum wage is more, of course, because the tax rate is lower, at $4.73—could be prohibitive, but that combined with the Newstart allowance lifts a single person to the Henderson poverty line should they become involuntarily unemployed.

Senator SIEWERT: For those on low incomes, how would you see that operating? Would you do some sort of means test so that, if you are on a very low income and could not afford the insurance scheme, you would automatically go to Newstart, but below some particular income level?

Ms Scully : Yes. Newstart allowance at $244.85 for a single person is below the Henderson poverty line. The Henderson poverty line is a measure that is relative to average household income. For a single person that is $470 a week, whereas the Newstart allowance is $244 a week.

Senator SIEWERT: I think I have phrased my question poorly. I am looking at the operation end of it. You were saying that for people on low incomes the rate may be too high and, therefore, they would not be able to afford the private insurance. I am looking at the mechanics of it. You were saying that the two payments could combine. If you are on a higher income you could afford the private insurance, but if you are on a low income and cannot afford it there would be some sort of income means test to say, 'You don't pay private insurance: you just receive Newstart.'

Ms Scully : That is not the aim of this submission. The aim is that people who are involuntarily unemployed have a higher standard of living than currently, and that equates to the Henderson poverty line.

Senator SIEWERT: I would suggest to you that the last thing those on low incomes will be paying for is insurance in case they become unemployed. There is a whole hierarchy of things that they will be paying for before that. What happens to those who cannot afford to pay for this insurance?

Ms Scully : That is an area that is open; it is not entirely solved. The after-tax cost for a person on the minimum wage, for $1,000 a month, is $4.73 per week, which may be too much for someone earning $606 a week.

Senator SIEWERT: So this is not to the benefit of those people. If it is $1,000 a month it is about the same as Newstart. Those people are no better off.

Ms Scully : For low-income people, the proposal in the submission is to combine that with Newstart and make the insurance payment allowable income during involuntary unemployment. It does not affect the government payment system in any way, other than the insurance cost being tax deductible. That is the proposal. An alternative to an individual paying is that it becomes a levy on employers.

Senator SIEWERT: In terms of case studies overseas, where have you seen this operating effectively?

Ms Scully : Levying an employer to pay severance payments is common in America. There are papers from very senior academics in support of severance payments equating to unemployment benefits.

Senator SIEWERT: For a period of time?

Ms Scully : Yes. Quite a bit of work has been done in America since the 1980s on the issue of whether insurance payments affect someone's return to work when they are unemployed. Studies have been done for payments much higher than this. One payment was 61.5 per cent of the pre-unemployment salary, which is not the case with these; they are still very much below that. In Australia, people can, of their own volition, take out employment insurance. I am aware that in America it is common for employers to pay for that.

Senator SIEWERT: Depending on which figures you read or analyse, 60 per cent of unemployed people are unemployed for over six months. There are issues around barriers to finding employment. This proposal could potentially deal with a cohort of people such as the short-term unemployed. What about those who are long-term unemployed?

Ms Scully : This does not address that. I kept it within the bounds of what insurers currently insure for.

Senator SIEWERT: Thank you.

Senator GALLACHER: Are you familiar with income protection insurance?

Ms Scully : Yes.

Senator GALLACHER: The normal place for that is in an employment agreement and it can then be offered by brokers or by industry super funds. They traditionally have exclusions on certain criteria. Mental illness, stress and those sorts of things are usually not covered. How do you get around the issue of insuring someone who just does not want to work, who just wants to have six months off?

Ms Scully : From the point of view of the insurer, private insurance does not cover voluntary unemployment. If they were they involuntarily unemployed, I guess the insurer would not know.

Senator GALLACHER: How is your $5.84 or $3.94 predicated? Who do you buy it from?

Ms Scully : That is from TAL, previously Tower Limited, which is an Australian insurer. It varies according to age and health. That is for a person of middle age: I asked for someone about 40.

Senator GALLACHER: And they are simply buying unemployment insurance?

Ms Scully : They are buying it for unemployment, illness and redundancy. Redundancy can be taken care of anyway. It includes illness that is a cause of being unable to work, and involuntary unemployment. They are the figures that I have included. Other insurers include other benefits, but those three were the things that this insurer covered.

Senator McKENZIE: On that question from Senator Gallacher, is geography ever a variable included in these sorts of products?

Ms Scully : Not that I am aware of.

Senator GALLACHER: I understand and am familiar with income protection as is contained in employment agreements and is offered by superannuation funds. How does this insurance you are suggesting differ from that?

Ms Scully : This insurance could be part of all agreements, voluntarily. It could be levied, similar to the Medicare levy, on all employees or employers. Although the main points of this have been directed towards employee payment. Were employers to pay it the outcome would be similar for the individual, except they are not initially paying for it. Or there could of course simply be encouragement, through a campaign, to take out private unemployment insurance. In the submission a levy similar to the Medicare levy is put forward.

Senator GALLACHER: Setting aside all of the political implications and problems surrounding this issue, there is $1.4 trillion in industry superannuation funds as we speak. That basically arose as a three per cent wage increase that was forgone by workers. Given the size of the workforce and the buying power of the workforce in terms of insurance, what you are suggesting is mathematically okay. It is certainly going to be an option. But there are enormous political difficulties in getting there.

Ms Scully : Okay. Your point is that in terms of the size of it—

Senator GALLACHER: Buying $2,000 worth of insurance, as you say, does not cost a lot of money.

Ms Scully : No.

Senator GALLACHER: And if you are in employment and you are contributing towards that and there is a massive pool of it and they buy it from a big enough insurer then it obviously works. Theoretically.

Ms Scully : Yes. And for a large number of people the rates could be less than what is quoted here. If many more people were being insured the rate may be less.

Senator GALLACHER: Going back to the 64 per cent, I think they are the only ones you are really addressing?

Ms Scully : Yes.

Senator GALLACHER: Why do you think they spend only six months out of a job? Is it because Newstart is sufficiently low to generate the activity necessary to move back?

Ms Scully : It is because that is the period of time the insurers who I spoke to insure for—for four to six months. There were no payments after six months. In a large scheme I am sure some of those things would be negotiable, but that is their current cut-off point. Also, any individual can access insurance from that insurer three times during their working life.

Senator GALLACHER: I think the department tells us in their submission that 60 per cent of people move off Newstart after 12 months. Do you know where they go?

Ms Scully : They get employed, I suppose!

Senator GALLACHER: Hopefully. That is the most important place!

Ms Scully : I do not know all of the details of where people go. The figures that I have used come from a document called Income support customers: a statistical overview, which is put out by the department. In there the figures suggest that it is maybe a little bit more than 64 per cent.

Senator McKENZIE: My question concerns the Henderson poverty line and whether you use any other methodologies or measures other than the Henderson poverty line?

Ms Scully : I did not choose any other measures. The reason I chose the Henderson poverty line is for its longevity. It was reviewed in 1973. It is a relative measure rather than an absolute one, so it considers poverty to be relative to the rest of society. Also, the Henderson poverty line is maintained by the Melbourne Institute of Economic and Social Research and compiled for an individual. It is based on average household earnings, but it is then translated for an individual and works on that percentage.

Senator McKENZIE: It was last reviewed in 1973?

Ms Scully : It was last reviewed then, but it is updated every quarter. Also, I did intend to say that the figures for the Henderson poverty line I put in my submission were incorrect. There is an error in there that I can alert you to. The figures were old.

Senator GALLACHER: Can you indicate the page of your submission?

Ms Scully : It is table 1 on page 5. Looking at the figures on the right, yours would read $414.10 whereas it is now $470.36.

Senator GALLACHER: That is for a single?

Ms Scully : Yes. And for a single parent with two children the figure you would have is $641.94 and it is now $730.90. That is before housing. The housing ones are also incorrect, for which I apologise. They are actually $381.55 and $604.61.

Senator GALLACHER: So they are not very different?

Ms Scully : No, not significantly.

Senator GALLACHER: The others are.

Senator McKENZIE: The number you have given us is for two children. Is there then a subsequent per child add-on?

Ms Scully : Yes. The Henderson poverty line is calculated for singles, couples, couples with one, two, three and four children, and single parents with one, two, three and four children, and for persons in the workforce and persons outside the workforce. These are for persons in the workforce.

Senator McKENZIE: Are there any other measures that are relative?

Ms Scully : None that I know of.

CHAIR: Like Senator Gallacher, I just think of this as income protection insurance really. I am not wrong in making that assumption, am I?

Ms Scully : No. Yes, it is.

CHAIR: In terms of eligibility, you mentioned in response to a question earlier that it only cuts in with involuntary unemployment. So how would the insurer be satisfied that the change in the person's employment status was involuntary? Would it require some documentation from the employer to say the person has been made redundant or dismissed or whatever? Is that how it would trigger the payment?

Ms Scully : I do not recall the detail of that. I do not know the detail of that. I do not know whether a written statement is required.

CHAIR: I am just thinking back to the days when I used to take out income protection insurance myself and I am querying whether or not it would only cut in once any accrued annual leave was used up. If someone involuntarily ceased their employment, they would get that as a termination payment anyhow, wouldn't they? So that is how it would work. I asked Ms Allan on Friday afternoon—at an indecent hour—to see if she could get some information for me, because witnesses had made comments about it, on how low Australia is on the OECD table. I know we are to get some more information from the Parliamentary Library today, which I will obviously circulate, but this is what Ms Allan reported that she got from the gentleman in the Parliamentary Library: 'He said that in essence the claim that Australia has the lowest unemployment benefit in the OECD is a bit misleading. This is because it is not comparing apples with apples. Most OECD countries that have unemployment benefits fund this from an insurance scheme that all workers must contribute to. They are not funded from taxpayers and, for this reason, they can be more generous. Australia can only reasonably be compared with New Zealand and the United Kingdom, where unemployment benefits are funded by government from general taxation revenue and not by workers who are levied.' Of course, we have had the discussion as to whether it would be employees who would pay the levy or whether the employer would pay it. That is not inconsistent with the evidence you are giving us.

Ms Scully : That is right, yes.

CHAIR: I hope today to be able to find out more information as to what other OECD countries do. I think it is most important that we get some feedback on the accuracy of that statement that Australia is very low. You have not, in your evidence or your submission to us, spoken about relativities between unemployment allowances and pensions. I know it has not formed part of your submission, but do you have any view for the committee in terms of whether or not you think the two should be in some way parallel or whether the allowances should be closer to the pension, or is it something you have not addressed your mind to?

Ms Scully : I did not address that. I considered simply people who were working, rather than the interaction with other payments. I did not address that.

CHAIR: So your thesis, if I could summarise it, is that, for those who effectively are not fortunate enough to get back into employment relatively quickly, perhaps a mixture of some form of income protection insurance to cover them for a period of time linked with Newstart to top it up and then Newstart continuing after the insurance cover ceases.

Ms Scully : In this submission, there is no consideration of the income of people after six months or the period of time that the private insurance ceases whether it is only private insurance or private insurance combined with Newstart for people who are low income. After six months, I have given no consideration to that level of income.

Senator SIEWERT: But, Chair, this is a critical point: one of the strong concerns is people falling into and staying in poverty, the long-term unemployed. The 60 per cent of people or more that are on for 12 months or longer still face complex and multiple barriers to employment that then do not have any support, so we are in the same situation after six months.

Ms Scully : For those people, that is true, except for six months they have received a better quality of life than otherwise. For the 64 per cent of short-term unemployed who find work, their standard of living during involuntary unemployment is much better.

Senator SIEWERT: So my proposition to you is that that group of people, either stream 1 people who find work within that first six months or the stream 1 people that are already getting a lot of help to find work—I am not dissing them at all but I am very concerned about the long-term unemployed—are facing multiple barriers to employment. I hear what you are saying about that first six months, but after that first six months that group of people, if there are not other things done to help them find work and overcome their barriers, are back in a similar situation that they are in now.

Ms Scully : I accept that, and it covers everyone for six months whether you end up being long-term unemployed or find a job in six weeks. There is that six-month period for everyone. I have not addressed it in my submission at all, but there may be other ways of increasing the employability of people within that six-month period. It is not costed in but there is a little more income for people to address that if they need to.

Senator SIEWERT: Have you looked at the issue around insecure work? There is a larger cohort of people that are in secure and temporary work. How would you see this system interacting with that circumstance?

Ms Scully : It gives a person, if it is levied, more security, were they in between employment. Currently, insurers will insure people for three periods through their working life. That may or may not be sufficient but it offers more income security.

Senator SIEWERT: My concern is: if you are cycling in and out of temporary or insecure work, are three periods going to be enough?

Ms Scully : I do not have the answer to that.

CHAIR: Staying with that for a moment: did I understand you to say that a person can effectively access this type of policy three times in their working lives?

Ms Scully : Yes, with the one insurer.

CHAIR: For my clarification again: if a person activates the insurance six months cover and gets employment within the first two months, what happens to the funding for the next four? Do they advise the insurance company they are now back in work again and therefore they do not continue to get it?

Ms Scully : Yes. Otherwise they could be charged.

CHAIR: Yes. So, in other words, you could almost see the benefit where, if there are three periods, it ought to be 18 months perhaps and if in fact they get employed within the first couple of months, that four months ought to be a credit for them, should it not, against future needs—in line with Senator Siewert's question about being in and out of casual work?

Ms Scully : That is not infeasible, and an insurer may look at that. But I am not an insurance—

CHAIR: I am really just asking for clarification.

Senator GALLACHER: What is your view about the $62 that people on Newstart are allowed to earn? If that were to be $250 how would that affect your proposal?

Ms Scully : It does not affect my proposal. My proposal is about people having surety of income at least for that six-month period. Are you—

Senator GALLACHER: I am asking whether the $62 is an impediment. I struggle to understand where you would get four hours work to the value of $62 anyway. I think it would be more like $80. How do people actually get $60 worth of work?

Ms Scully : If people are to work it does not affect this system, except of course—

Senator GALLACHER: I am sorry; I am not making myself very clear. The proposal is that people can buy insurance for six months. They can earn $60 while getting Newstart. From your experience is it your view that, if they were able to earn $200, would that be more attractive than the insurance scheme that you are proposing?

Ms Scully : I would consider the insurance scheme more attractive were it an insurance scheme plus Newstart for low-income earners or simply an insurance scheme for people on moderate or better incomes. That equates to $2,000 a month for a single person is sure income for six months; whereas with Newstart and employment, the employment is not sure income. Personally I have no objection whatsoever to people earning more.

Senator GALLACHER: I suppose it gets back to the Chair's point that if you bought insurance for six months you are probably going to want to get six months out of it, and that might preclude you from taking some employment—which would be to the detriment of the taxpayer. If they are only going to make $2,100 in the month, why would you bother? The taxpayer is then funding the Newstart and the insurance is funding the other $250 and all of a sudden we are institutionalising people taking an allowance which is designed to get them into work and supplementing that with insurance.

Ms Scully : For people on low incomes that could be an issue. In fact, $3,000 a month is more than a person on a minimum wage earns. Were someone on the minimum wage to earn $2,000 from insurance and Newstart, that could be an issue because it is getting to a higher percentage their pre-unemployment income. But for all others, it is still below the work that was done primarily in America on the influence of unemployment insurance on return to work or income protection on return to work. The work done by Mortons was with an insurance payment of 61.5 per cent of the pre-unemployment wage. That is not the case for any of these that I put forward, except for people on the minimum wage. That is where it could have an effect, but for all other people it does not have an effect.

I simply thought that people should have some standard of living, whether they are employed or not. Some of the studies found that the effect of work was more prevalent in older people and had a very minimal effect on unskilled people, which is contrary to this argument that is often put forward and contrary to intuition. There was not a significant effect on unskilled workers. There was some effect but a small effect. The main effect was on older people.

CHAIR: Thank you very much, Ms Scully. We appreciate you appearing today.