Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F1. Income support payments

Key points

Current income support policy settings do not adequately reflect changing employment patterns and changes in the composition of the working-age population.

Large differences in payment rates and conditions create incentives to switch to high payment categories that carry greater risk of long-term welfare dependency. Restructuring income support can reduce this risk, but only if it is clear that income support recipients are expected to find work and there is adequate investment in employment-related services.

Restructuring income support within three categories — a pension category, a participation category and a student category — would more appropriately balance payment adequacy and incentives to work and study for people in different circumstances. Pensions would be paid at the highest rate in recognition that people eligible for them are likely to rely on them fully for a long time. Participation payments would be paid at a lower rate to maintain incentives to work. Student assistance for adults would continue to be paid below the participation rate on the basis that it is intended to be supplemented by other means.

The difference in rates between the three categories of payment should be reduced, particularly for singles. To achieve this, rates of payment for the participation and student categories need to be increased to establish appropriate payment relativities. To maintain these relativities over time there should be a consistent approach to indexation across the three payment categories, although achieving this while balancing incentives to work and fiscal sustainability will be a challenge. There should also be a consistent treatment of households of different size and composition based on the current relativities between the single and couple rates of pension.