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Savings Incentive Scheme



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Savings Incentive Scheme

16 August 2010

The following briefing was comm

issioned on behalf of a non-Government member of

Parliament by the Pre-Election Policy Unit of the Parliamentary Library. The Unit was established to assist non-Government Senators and Members develop polices in the lead-up to federal elections. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

NATSEM www.natsem.canberra.edu.au

16 August 2010

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SAVINGS INCENTIVE SCHEME

NATSEM is a research centre associated with the University of Canberra that undertakes research and analysis specialising in the use of microdata and microsimulation modelling to address ongoing and emerging research agendas and client demand and contribute to and enhance social, economic and business decision making.

Using microsimulation models, NATSEM can estimate the effect of changes in Tax/Transfer policies before these policies are implemented. This provides a powerful tool to Government policy makers, and NATSEM’s microsimulation models have been used extensively in the past by the Government, researchers and lobby groups to model particular Tax/Transfer policies.

It should be noted that NATSEM is a professional independent research agency, with no political or social bias. The results in this report are based on a number of assumptions, and these are central to the results obtained. We would therefore ask that if this report is released, the whole report is made available, so media and commentators can see all the assumptions being made. We would also request that NATSEM is consulted on any media release, to ensure that the results are shown and interpreted correctly.

The policy modelled in this paper is a savings incentive scheme for people aged 18 to 30 on New Start Allowance (NSA) or Youth Allowance (YA) who are long term unemployed (greater than 52 weeks) (LTU). As an incentive to move off government benefits recipients who accept a job of at least 20 hours and remain employed for at least 12 months receive a quarter of their annual previously held benefit from New Start Allowance or Youth Allowance. A further incentive of around 40 per cent of their previous benefits is credited upon 24 months of continual employment1.

This project involves a relatively complex policy analysis covering a range of variables, some of which are difficult to estimate, such as job offer rates and duration of employment assumptions. The extremely tight deadline provided

1 A one year spell of employment would typically receive around $2,500 while a 2 year spell around $4,000.

NATSEM www.natsem.canberra.edu.au

16 August 2010

by the Department of Parliamentary Services (DPS) required NATSEM to provide only a basic analysis with little regard for potential ‘unintended consequences’ of policy change. NATSEM asks that the client respects these limitations and treats the results with due caution.

The incentive scheme is likely to involve an administration cost to the government. NATSEM is unable to provide an estimate on this cost.

METHOD

The modelling used NATSEM’s STINMOD microsimulation model, which is based on 2005-06 and 2007-08 ABS Survey data.

The savings assistance package works as an incentive to take people off welfare and back into the labour force. The incentive is provided only after 12 months of continuous employment and so provides a further incentive to remain employed.

NATSEM used Household Income and Labour Dynamics for Australia (HILDA) longitudinal survey from FaHCSIA to estimate the current transition probabilities of the target group (LTU, aged 18-30) from LTU into employment - both permanent and short term. For the purposes of this modelling, permanent is considered 12 months of continuous employment.

Using HILDA, we can derive estimates of the probability of moving from LTU in one financial year to any spell of employment of at least 20 hours in the next year as 35 per cent. Of those who gain employment, 25 per cent are employed continuously for the entire year. Around 65 per cent of these spells become 2 year spells of continual employment and would qualify for the second incentive payment.

The impact of the policy relates to any improvement of the current ‘baseline’ provided by the historical HILDA data.

Scenarios are developed to capture the potential change in employment prospects for the target group. NATSEM has modelled the impact of increasing the probability of employment from 35 per cent by 5, 10 and 15 percentage points and increasing the probability of continuous employment (where the incentive is paid) by 10 and 20 percentage points. The further incentive after one year of employment is applied to the 24 month incentive. The probability remains at 65 per cent.

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NATSEM www.natsem.canberra.edu.au

16 August 2010

Using STINMOD, the recipients of the incentive scheme are modelled. Their employment status changes from unemployed to employed, they receive a fixed wage of $584 per week2, their NSA/YA payments are removed and any other payments adjust in accordance with their changed circumstances.

The cost of the scheme is a simple multiplication of the incentive (around $2,500 and an additional $4,000 for those who remain in employment for two years) and the number of recipients. The incentive is considered taxable and impacts

on other government payments.

For the purpose of tax payments, two pools are constructed:

1) a full year of recipients with the $2,000 allowance, and 2) a second cohort of recipients (65 per cent of the first pool) receiving the $4,000 payment.

Each year the additional tax benefits would be derived from 2 cohorts.

The benefit savings are based only on the weighted average of the two cohorts - which are very similar.

Given the time constraints, we had to make a number of assumptions relating to the analysis, which included:

- The base year was chosen to be 2010/11. - All employment and monetary impacts are assumed to occur instantly rather than over a period of some time as would realistically be the case given the 12 month lag between finding a job and receiving the payment.

- The model has only taken into account economic costs and benefits of the proposal, not social costs and benefits. - The job gains relate to an improved labour matching process in account of the savings incentive, and an incentive for job seekers to hold onto a

job for longer, given the incentive applies only after 12 months of continual employment.

RESULTS

Results are provided for 6 scenarios (3 employment rates and 2 employment duration assumptions). The simulated results are provided for the current financial year (2010/11) only. The impact of the policy is assumed to have fully impacted on each financial year.

2 Based on wages paid to those moving from unemployed to employed, aged 18-30 in the HILDA survey, 2007/08 and uprated to 2010/11.

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NATSEM www.natsem.canberra.edu.au

16 August 2010

The scenarios provide projected results only and do not represent forecasts. The scenarios enable the client to better understand a range of possible outcomes. Given the short time-frame of the modelling work there was little prospect for forecasting employment rates or employment duration changes. NATSEM is unable to provide guidance on the relative likelihood of given scenarios.

By way of example, for the 2010/11 financial year, the base case is where 35 per cent of LTU (in the previous financial year) will be employed over the course of the current financial year for at least 20 hours. Of these, 25 per cent hold that job continuously for the full financial year. For all cases, 65 per cent of recipients extend their spell of continual employment from 12 months to 24 months.

Where the incentive scheme lifts the employment rate to 45 per cent and the continuously held employment rate to 35 per cent the scheme offers the following results:

A) 5,965 (from a pool of 37,876 LTU/18-30 year olds on benefits) will receive the incentive;

B) The cost to the Government is $31.4 million;

C) 2,651 jobs in addition to the base case (many recipients would have received a job without the incentive);

D) An extra $11.5 million in tax revenue and $28.6 million in benefits are paid out.

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NATSEM www.natsem.canberra.edu.au

16 August 2010

Scenario Analysis 2010/11 18 - 30 yo, 65% remain employed for >= 2 years Take-up Numbers % LTU offered a job over 12 month period 0.35 0.4 0.45 0.5

0.25 Base 3,788 4,261 4,735

0.35 4,640 5,303 5,965 6,628

0.45 5,965 6,818 7,670 8,522

Cost of Scheme ($millions) % LTU offered a job over 12 month period 0.35 0.4 0.45 0.5

0.25 Base 19.9 22.4 24.9

0.35 24.4 27. 9 31.4 34.9

0.45 31.4 35. 9 40.4 44. 8

Additional Employment % LTU offered a job over 12 month period 0.35 0.4 0.45 0.5

0.25 Base 473 947 1,420

0.35 1,326 1,988 3,314

0.45 2,651 3,50

2,651

4 4,356 5,208

Tax Increase ($millions) % LTU offered a job over 12 month period 0.35 0.4 0.45 0.5

0.25 Base 2. 0 4.1 6.1

0.35 5.7 8.6 14.3

0.45 11.5 15.1 18.8 22.

11.5

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Benefit Decrease ($millions) % LTU offered a job over 12 month period 0.35 0.4 0.45 0.5

0.25 Base 5.1 10.2 15. 3

0.35 14.3 21.4 35.7

0.45 28.6 37.

28.6

7 46.9 56.1

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NATSEM www.natsem.canberra.edu.au

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Relevant Parliamentary Library Publications Parliamentary Library, Budget Review 2010-11, Research Paper, 26 May 2010, No. 17, 2009-2010, http://www.aph.gov.au/library/pubs/RP/2009-10/10rp17.pdf

M Thomas, A review of developments in the Job Network, Research Paper, 24 December 2007, no. 15, 2007-08, Parliamentary Library, http://www.aph.gov.au/library/pubs/rp/2007-08/08rp15.pdf

© Commonwealth of Australia 2010

This work is copyright. Except to the extent of uses permitted by the Copyright Act 1968, no person may reproduce or transmit any part of this work by any process without the prior written consent of the Parliamentary Librarian. This requirement does not apply to members of the Parliament of Australia acting in the course of their official duties.

This work has been prepared for the Pre-Election Policy Unit of the Parliamentary Library in response to requests from non-Government Members and Senators to support them in developing policies in the lead-up to the Federal election. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

Feedback is welcome and may be provided to: web.library@aph.gov.au. Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library’s Central Entry Point for referral.