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Government sets welfare trap.



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FOR MEDIA

CRAIG EMERSON Member for Rankin

Government sets welfare trap

6 January 2006

Changes by the Howard Government to sole parent pensions and the way the minimum wage is set will reduce, not increase, the incentive to move from welfare to work. By accident or by design, the Government has set a bigger welfare trap for sole parents.

From mid-2006, single mothers whose youngest child turns eight will be confronted with a drop in income from being moved off the sole parent pension and onto unemployment benefits. Many single mothers who have left school early to have a baby - often unplanned - and who face the prospect of being breached and ultimately losing unemployment benefits, will respond in the rational way. They will have more babies, placing them back on the more generous sole parent pension and picking up the Government’s $3000 baby bonus along the way.

Instead of providing incentive for single mothers to move from welfare to work the so-called welfare reforms will reduce work incentives and perpetuate the cycle of dependency.

By law the sole parent pension cannot fall below 25 per cent of male total average weekly earnings (MTAWE). In a continued tight labour market with acute skill shortages, average weekly earnings will be dragged upwards by earnings growth at the higher end. This will drag the sole parent pension up with it.

At the same time, the minimum wage will rise more slowly under the Fair Pay Commission than it has under the Australian Industrial Relations Commission (AIRC) - a point made by Treasury in documents obtained by The Australian under Freedom of Information legislation.

More than 80 per cent of sole parents who are not working have no tertiary qualifications1. Most of those thinking of moving from welfare to work therefore would be offered no more than the minimum wage.2

1 Harding A, Vu Qn, Percival R and Beer G, (2005), ‘Welfare-to-work reforms: impact on sole parents’, Agenda, Vol. 12 No. 3, p.205. 2

In 2002-03, more than three quarters of working single mothers with children aged 0-14 received the relatively low pay of $10-20 per hour, or an average of $14.75 per hour (Harding et al, 2005, p.206.). Those not in the labour force could expect an even lower pay rate upon entering the workforce.

Very few sole parents would be offered a full-time job and even fewer could take on a full-time job, given their parenting responsibilities. Under the changes scheduled to take effect from mid-2006, the Government expects sole parents to work for at least 15 hours a week once the youngest child turns eight. Suppose they are offered a half-time job (19 hours per week) at the minimum wage.

The Government has announced that the Fair Pay Commission is not expected to bring down a decision before Spring of 2006. This amounts to a wage pause of 15 months from the AIRC’s last national wage case decision. Let’s assume the decision is a rise of $10 a week

in the minimum wage, instead of around $19 a week that has been given in recent national wage cases. Let’s also assume that MTAWE rises at the rates projected by Access Economics in its most recent Budget Monitor, of around 4.7 per cent per annum, as set out in Table 1. And let’s also use the Access Economics projected increases in the CPI in Table 1, which determine movements in the unemployment benefit (Newstart Allowance).

Actual and projected changes in the minimum wage for a half-time job are shown in Figure 1.

Table 1: Projected increases in AWE and CPI

Average Consumer weekly Price

earnings Index

% change on preceding year

2004-05 Outcome 4.3 2.4

2005-06 Estimate 4.9 2.9

2006-07 Forecast 4.7 3.0

2007-08 Forecast 4.7 2.2

2008-09 Forecast 4.7 2.4

Source: Access Economics

Figure 1: Government welfare trap

Half minimum wage, Newstart and parenting payment (single)

270 270

Half minimum wage Parenting payment (single)

250 250 NSA (single with dependent children)

230 230

The result of these projections is that the sole parent pension will soon be bigger than the minimum wage for an employee working half time. (The green line rises above the red line during 2006 and the gap between the green line and the red line continues to widen thereafter.)

By legislating the sole parent pension to grow in line with the growth in average weekly earnings and by slowing down growth in the minimum wage the Government has set a welfare trap for sole parents. The incentive to move from welfare to work will get weaker and weaker over time.

This policy conflict between the setting of the sole parent benefit and the setting of the minimum wage will cause the carrot to get smaller and smaller.

By forcing single mothers onto the much lower Newstart Allowance - that increases only in line with inflation instead of the faster-rising average weekly earnings - the Government is making staying on welfare much less financially viable. (The red line remains well above the dotted line.)

Yet the actual reward from moving from welfare to work is weaker for sole parents on Newstart Allowance. First, the income-free area before they start losing government payments is much smaller: $31 a week for Newstart instead of $76 a week for sole parent pension. Second, the rate at which Newstart is phased out with earned income is greater than the phase-out rate for the sole parent pension: 50 cents in the dollar, rising to 60 cents at earned income of $125 a week, instead of 40 cents for sole parent pension. Third, the income-free area for sole parent pension rises with the number of children but it does not in the case of Newstart.

150

170

190

210

1996 1997 1998 1999 2000 2001 2002 2003 200 4 2005 2006f 2 007f 150

$pw

210 $pw

190

170

f - forecast value

The size of these disincentives is easily measured. Sole parents forced onto Newstart will face effective marginal tax rates of 65 cents and 75 cents (50c benefit withdrawal rate plus 15c marginal tax rate, rising to 60c withdrawal rate plus 15c marginal tax rate). Both of these are much higher than the top marginal income tax rate of 48.5c.

If a single mother moves from welfare to work under the new system, she will lose most of what she earns, through loss of benefits and tax paid. If a single mother with one child were offered a part-time job paying $242 a week, she would lose $148.35 of it to the government, keeping only $93.65 a week. Transport, clothing and other work costs would be around $30 a week, reducing her reward from working to $63.65 a week. And if the single mother is in public housing, she would lose a further $23.40 a week in higher rental payments from earning an income, taking her reward from work to just $40.25 a week. And that doesn’t take into account the cost of child care.

Under the new system, single mothers are expected to work for as little as $2.10 an hour or for nothing after taking account of the cost of child care! Those single mothers who are not public housing tenants would be expected to work for $3.35 an hour,

before taking account of child care costs.

If a single mother moves from welfare to work she will be no better off and could easily be worse off. But if she stays on welfare she will receive a cut in benefits of $29 a week by being placed on Newstart instead of sole parent pension. The Government has made the carrot smaller and the stick bigger. It’s pretty brutal stuff.

When placed in this difficult situation, those single mothers who could expect to earn no more than the minimal wage owing to their education level and lack of work experience are likely to behave rationally and have more babies. This would make them eligible again for the more generous sole parent pension and for the Government’s $3000 baby bonus.

Already more than half a million families, or 22 per cent of all families, are sole parent families. The Government’s so-called welfare reforms will ensure more of Australia’s children are born into sole parent households, with all the welfare dependency and financial hardship this entails.

If the Government seriously wanted to provide incentives to move from welfare to work, instead of increasing disincentives, it could keep single mothers on the sole parent pension while applying some form of work test. Single mothers would then be much better off from moving into paid work than they would be under the miserly pay rate they will confront under the system that comes into force from mid-2006.

In an appalling piece of public policy the Government has not only weakened the incentive for single mothers to move from welfare to work it has also weakened their incentive to study. The level of income support for single mothers studying while on Newstart is lower than when they are on the sole parent pension. Study incentives for single mothers must be restored immediately by providing the level of income support for study that is available to single mothers who are on sole parent pension.

In its modifications to the welfare package announced towards the end of last year, the Government reinstated income support back to the rate of the sole parent pension or selected beneficiaries - including foster carers and distance educators. The Government should at

the very least extend this treatment to a broader category of sole parents - those studying and those working a minimum of, say, ten hours a week.

Further, the Government could remove tax on the private earnings of single mothers by providing a specially tailored Low Income Tax Offset - called a Sole Parent Tax Offset (SPTO). For example, if the Government provided a SPTO of $1920, sole parents would pay no tax unless earnings exceeded $12,500 a year. This is the minimum wage for a half-time worker.

A variation would be a SPTO of $975, which would effectively provide a tax-free threshold of $12,500 on private earnings, though the government income support payment would remain taxable.