Australia's Future Tax System

Final Report: Detailed Analysis

Chapter F: The transfer system

F1. Income support payments

F1–2 Arrangements need to reflect changing realities

The income support system is a crucial social institution. In the future as in the past it will need to continue to be adapted to changing social and economic needs. Changes in workforce participation, the level of unemployment, and the mix of full-time and part-time work all have an influence on the numbers receiving income support.

Working-age income support receipt and employment trends

From 1970 the percentage of the working-age population receiving income support increased steadily for nearly 30 years (see Chart F1-2). There are many reasons for this growth, such as the ageing of the baby-boom cohort, recessions, industry restructuring, the growth of female workforce participation, and increasing rates of single parenthood. Policy has also contributed to this growth, in some cases by allowing people to receive income support while working. In other cases decisions to target payment increases to particular groups has increased incentives for some people to remain on and for others to seek to qualify for higher-rate, non-activity tested payments, such as Disability Support Pension (DSP).

The nature of work has changed considerably over the past 40 years, as have attitudes to women depending on their partners' income. This has been reflected in continued changes to the tax and transfer system. Partners of the unemployed have been required to claim income support payments in their own right. Payments made to women because they were wives of age or disability pensioners or partners of allowance recipients have been closed to new entrants. Payments to single parents, introduced in response to the rising incidence of single parenthood and concerns about poverty in that group, have been adjusted in line with increasing rates of workforce participation of mothers and women more generally. The employment rate of women has increased considerably since the 1970s (from 39 per cent in 1971 to 55 per cent in 2008). The number of people working part-time has also substantially increased — from 15 per cent of total employment in 1978 to 28 per cent in 2008. Women accounted for 70 per cent of part-time employment in 2008.

In the early 1970s, unemployment was very low. Working-age income support largely comprised pensions for war veterans, people with disability, women who were eligible for the Age Pension at age 60, wives of age and disability pensioners, and widows. The proportion of the working-age population on pensions was around 3 per cent. Today the proportion is about 9 per cent, which is over half of all working-age income support recipients.

Chart F1-2: Percentage of working-age population receiving income support and pension payments (1971–2009)(a)

Chart F1-2: Percentage of working-age population receiving income support and pension payments (1971–2009)(a)

  1. Pension payments include: Age Pension; Disability Support Pension; Parenting Payment Single; and Carer Payment.

Source: Annual ABS population figures for people aged 15 to 64 and Australian government administrative data.

After nearly 30 years of growth in working-age income support receipt, the favourable labour market conditions from the late 1990s to 2008 led to a consistent downward trend in the proportion of the population receiving working-age income support. This was largely due to falling unemployment, but in the fours years preceding the global financial crisis the proportion of the working-age population on working-age pensions (particularly DSP and Parenting Payment Single) also started to fall as a result in part of welfare to work measures. This lag between falling unemployment and a fall in the proportion receiving working-age pensions is a result of two factors: first, the small number of people who move off payments such as DSP to full-time work and, second the fact that lower skilled and more marginal workers are among the first to lose their jobs in economic downturns and the last to regain jobs in the recovery phase. The key to preventing people who have a reasonable capacity to work from becoming dependent on income support is to reduce inflows to pension payments. Favourable economic conditions are a pre-requisite, but income support settings can also assist by reductions in disincentives to work, including by making payments conditional on job search for more people.

Payment adequacy and categories

Category-based systems of income support can provide different rates of payment, and conditions, to people in different circumstances. While theory cannot tell us what the rates should be for the different payments, a number of factors can be considered. These include 'community standards', expected duration on payment, incentives to work and the overall coherence of the income support system.

Payments are currently paid at two main rates, with a higher rate for pensions and a lower rate for allowances.3 Student and youth payments are paid at a rate below the general allowance rate unless children are present. Pensions are paid to eligible aged and people with disability, carers and single parents whose youngest child is less than eight years.

Newstart Allowance is paid on the basis that a person is expected to actively seek and accept suitable work, consistent with their ability and availability for work. For most recipients the expectation is for full-time work; however, part-time requirements apply for a person with disability who has a partial capacity to work and primary carers of dependent children aged under 16. Other groups of people are exempted from requirements — for example, they have a temporary incapacity for work, are attending rehabilitation or are in the period of confinement prior to childbirth. Other allowance payments with the same rate structure and means-testing arrangements provide for specific contingencies that limit a person's ability to work, such as short-term sickness or illness, or that limit their availability for work, such as the primary care of a young child. As with single parents with a young child, partnered parents with young children are not expected to actively seek and accept suitable work. This decision is left up to the individual.

The Pension Review considered the adequacy of the Age Pension, Carer Payment and Disability Support Pension. It was not required, however, to comment on the relationship between these pensions and other payments (such as Parenting Payment Single) and allowances (such as Newstart Allowance). In establishing a rate it '… considered that the full rate of pension should provide a basic acceptable standard of living for those who are wholly reliant on it, often for extended periods, without any assumptions about access to private income or assets' (FaHCSIA 2009, p. xii). The Pension Review considered that the level of assistance should move in line with community standards.

The single rate of allowance is currently $228 a week whereas the single rate of Disability Support Pension (including Pension Supplement) is $336 a week, a difference of $108 a week. The difference is $89 a week where a single person receives the higher allowance rate.4

The size of this difference is due to historical differences in policy settings that have allowed this gap to increase over time, but some difference in the level of payments can be justified on the basis of differing needs and presenting different incentives to different groups. If a person is expected to take immediate full-time work whenever they can, it is important that they are much better off taking that work. If a person is never expected to work at all, then incentives for them to do so are irrelevant and the rate of assistance should be sufficient to meet the minimum community living standard. If a person is also receiving family assistance or youth payments for dependent children it is important that the adult's rate of income support provide for a similar standard of living so as to not compromise the assistance for children.

Harder to justify is the fact that rates of pension and allowances are not merely different, but the gap between them is widening. Since 1997 pensions have been increased in line with the greater of indexation to prices and benchmarking to Male Total Average Weekly Earnings —a measure of community standards — and allowances to prices. This has resulted in a growing gap between allowance rates such as Newstart Allowance and Parenting Payment Partnered and pension rates such as DSP and PPS. As economic growth causes real wages to increase, the gap between the two will continue to grow. If the current indexation arrangements remain in place, it is likely that by 2040 a single pensioner would be paid more than twice as much as a single unemployed person (see Table F1-1). A continuous decline in Newstart Allowance against community standards would have major implications for payment adequacy and the coherence — in terms of horizontal equity — of the income support system.

Table F1-1: Single adult Newstart Allowance compared to single adult pension $ per fortnight

  1980 2010 2040 (projected)(a)
A Single allowance rate $51.45 $456.00 $902.05
B Single pension rate $57.90 $671.90 $1,945.40
A/B 89% 68% 46%
  1. Assumes 2.3 per cent per annum CPI growth, 4 per cent per annum MTAWE growth.

Source: Australian government administrative data.

Another measure of community standards — apart from the pension, which is benchmarked to Male Total Average Weekly Earnings — is net (after personal income tax) median income. The OECD considers that a person is in poverty if their income falls below 50 per cent of equivalised median disposable incomes. Using this measure a single person who received Newstart Allowance for the full year in 2007–08 had an income of 31 per cent of net median income.

Measuring poverty by a relative financial measure is always problematic and there is no accepted measure of poverty for policy purposes (FAHCSIA 2008, p. 15). However, poverty analysis can be used with other analyses to identify areas of concern.

Using the OECD poverty measure, the Melbourne Institute estimated that around 12 per cent of Australians were in poverty in 2006 (Melbourne Institute 2009). It is important to note that much of this poverty is not persistent. While in any given year 12 per cent of Australians may be living in poverty according to this measure, most only experience poverty for short spells. Only 7.9 per cent of Australians were below this poverty line for four or more years of the survey. Only 2.6 per cent of the population were below this poverty line in all six years. Among the working-age population the Melbourne Institute analysis indicates that the household types most likely to be in income poverty are single parents (19.4 per cent) and single people (19.5 per cent). The rate of children living in poverty is significantly higher (28 per cent) for those living with one parent, compared with those living with both parents (6 per cent).

Duration on income support

While expected duration is a reason for differences in payment rates, there is the question of whether actual durations on income support are different enough to expected durations to justify large differences in payment rates. It needs to be borne in mind when interpreting actual duration data that it is an outcome of underlying economic conditions, payment conditions, and personal characteristics. The data used in the following analysis cover a period of favourable labour market conditions. Payment conditions also changed during the period, particularly for single parents, which led to transfers to other payments such as Newstart Allowance, Disability Support Pension and Carer Payment.

Age and Disability Support Pension recipients have the longest durations. In the ten years to 2007 Age Pension recipients spent 8.9 years on average on income support and DSP recipients spent 8.2 years (FaHCSIA 2008, p. 33).

Between July 1999 and July 2008 — a nine-year period — an average of 4.5 years was spent on working-age income support by single parents who became eligible for Parenting Payment Single in 1998–99. This compares with 3.2 years for Parenting Payment Partnered recipients and 2.6 years for Newstart Allowance recipients. Average durations are considerably higher for those who were already on income support at the beginning of 1998-99. Parenting Payment Single recipients spent an average of 6 years compared to an overall average for all working-age income support recipients of 4.8 years (see Table F1-2).

Newstart Allowance recipients have the lowest average durations on income support because a large number get work and exit income support within a year. However, differences in average durations between those on Newstart Allowance and PPS and DSP could reduce in coming years because of increased numbers of single parents and people with a partial work capacity who will receive Newstart Allowance following Welfare to Work policy changes in 2006.

About a quarter of current Newstart Allowance recipients have been continuously on income support for over two years, even in the very strong labour market of recent years.

Table F1-2: Average time on working-age income support in the period July 1999 to July 2008

For new recipients in 1998–99 or existing recipients at the beginning of 1998–99(a)

Recipient type Average number of years
in receipt of income support
Average years as a percentage
of the whole period (%)
New Newstart recipients 2.6 29.2
All Newstart recipients 4.4 49.2
New Parenting Payment Partnered 3.2 35.2
All Parenting Payment Partnered 4.9 54.4
New Parenting Payment Single 4.5 50.0
All Parenting Payment Single 6.0 67.3
All New recipients 3.1 34.2
All recipients 4.8 53.0
  1. Excludes time spent on the Age Pension. New recipients are individuals who had previously had at least a 6 week period without income support, or 13 weeks where a previous period of income support was greater than 46 weeks.

Source: Australian government administrative data.

A substantial number of working-age people, including some on Newstart Allowance, spend comparatively long periods on one or more working-age income support payments. These long durations are consistent with the large number of movements between payment categories while on income support, often as the result of commonplace life events such as a change in partner status, a birthday for the recipient or their children, or a move into study or employment.

Table F1-3 shows the payment-to-payment moves of working-age people during 2008. It shows that around 307,500 people transferred between categories in the working-age income support system in 2008 (compared to about 682,100 who exited income support and 870,900 who moved to these payments from outside the income support system). There are a great variety of moves. A large number of people become unemployed and access Newstart Allowance and then move off payment relatively quickly (about 60 per cent have been on Newstart Allowance for less than one year and 24 per cent, or 135,000 people, have been on for more than two years).

More people move to Carer Payment and DSP from another income support payment than from outside the transfer system. A similar number move from other payments to Parenting Payment Partnered (29,800) and Parenting Payment Single (34,700) as move from outside income support (32,300 and 39,700 respectively).

Table F1-3: Working-age payment transfers, rounded to the nearest 100 (2008)

  Transfer from(a)
Transfer to ABY AUS CAR DSP NSA OTH PPP PPS YAO YAS Total Inflow(b)
ABY 0 0 0 0 1,400 500 100 100 700 400 3,100 6,746
AUS 0 0 100 0 8,100 200 500 600 0 500 10,000 16,000
CAR 100 200 0 600 10,700 1,500 3,100 3,400 700 400 20,500 16,300
DSP 100 100 1,500 0 34,900 3,400 1,800 4,600 1,300 800 48,400 38,500
NSA 1,300 8,400 6,300 1,300 0 5,500 5,900 17,700 13,800 11,500 71,800 375,500
OTH 0 100 1,300 100 1,900 0 100 400 2,900 2,000 8,900 37,400
PPP 100 300 300 0 8,000 500 0 17,600 2,800 300 29,800 32,300
PPS 100 200 900 100 11,800 300 16,200 0 4,700 400 34,700 39,700
YAO 2,600 0 200 100 0 1,900 200 600 0 48,500 54,200 75,900
YAS 100 0 100 0 3,700 500 100 100 21,600 0 26,200 135,800
Sub total 4,400 9,200 10,700 2,300 80,400 14,400 27,800 45,100 48,400 64,800 307,500  
AGE 0 0 3,500 34,500 8,600 20,800 100 200 0 0 67,600 96,900
OFF 5,000 14,700 9,400 30,800 322,000 38,100 43,300 51,900 74,000 92,900 682,100  
Total 9,400 24,000 23,500 67,700 411,000 73,300 71,100 97,100 122,400 157,700 1,057,200 870,900
         Recipient losses income          Recipient gains income          Recipient income faces little changes
  1. ABY: ABSTUDY; AUS: Austudy; CAR: Carer Payment; DSP: Disability Support Pension; NSA: Newstart Allowance; OTH: Other payments (including Sickness Allowance and Special Benefit); PPP: Parenting Payment Partnered; PPS: Parenting Payment Single; YAO: Youth Allowance Other; YAS: Youth Allowance Student; AGE: Age Pension; OFF: off payment.
  2. Excluding transfers from other payments and people who had not previously been on a payment.

Source: Australian government administrative data.

In 2008, some 57,000 people transferred from Newstart Allowance to a higher-rate pension payment with no requirement to look for work (mostly DSP, Carer Payment or PPS). There were also 17,600 movements from PPS to PPP (a reduction in payment associated with changed partner status, resulting in a drop to an allowance rate and means test) and 16,200 moves in the opposite direction involving a potentially large increase in income support for the primary carer.

There were about 8,000 moves from PPS to a higher payment than Newstart Allowance (DSP and Carer Payment) and about 18,000 from PPS to Newstart Allowance (which can involve a large drop in income). The latter is continuing to increase as a result of the 2006 Welfare to Work policy changes. The death of the person being cared for can result in a large drop in income. For example, in 2008 some 6,300 people (or nearly 5 per cent of people on Carer Payment) moved from Carer Payment to Newstart Allowance. Relatively few people move off DSP. Most people who do move to the Age Pension.

There are also significant numbers of movements between youth (Youth Allowance Other) and student payments (Youth Allowance Student and Austudy), and other higher-rate working-age payments such as Newstart Allowance and Parenting Payments. This most likely reflects movements due to the cessation or commencement of full-time study, for example, (movements between YAS and YAO and between Austudy and Newstart), birthdays (for example; YAO to Newstart Allowance), or the birth of a child (YA to PPS).

From one point of view the large number of transfers between working-age payments shows that the income support system is responsive to changing personal circumstances. However, it also suggests there is a large group of people with a similar capacity to work who receive very different levels of income support.

Finding

Existing categorical differences between pension and allowance rates reflect a range of decisions, including expected duration of payment. However, actual durations for some working-age recipients, even for those on allowances, can be substantial.

The large number of working-age payment-to-payment transfers indicates that large differences in rates of payment can have a large impact on many individuals.

Incentives to work

Paying income support can reduce incentives to work. The higher the payment the higher the potential impact, although this will also depend on differences in responsiveness of individuals to financial incentives.

Labour supply research would support the application of high withdrawal rates to unemployed people without the primary care of dependent children because they are more likely to prefer full-time work and respond less to changes in financial incentives. Research also supports low withdrawal rates for primary carers of young children with a preference for part-time work and for people with disability unable to work full-time because they are more likely to respond to incentives (Dandie & Mercante 2007). Current policy settings largely reflect these findings. The major exceptions are single parents with a youngest child eight or older and people with a partial capacity to work.

Single parents with a youngest child under eight face a 40 per cent withdrawal rate. Age pensioners, people with a disability receiving DSP and Carer Payment recipients face a 50 per cent withdrawal rate. Unemployed people, partnered primary carers, single primary carers with a youngest child aged eight or more, people with disability with a partial capacity to work as a result of a disability, and students face an income test with both a 50 and 60 per cent withdrawal rate.

Single primary carers of young children face participation requirements when their youngest child turns six but remain on a higher pension rate of payment until the child turns eight. Single primary carers with a youngest child aged eight and over with a part-time work requirement face the same income test as a single unemployed person who is expected to look for full-time work. On the other hand, a single parent with a youngest child between six and eight who is also expected to look for work faces the lowest income support withdrawal rate (40 per cent).

There are limits on the extent to which incentives to work can be improved by adjusting income support withdrawal rates. One limit is the policy trade-off between designing means tests to target payments to those expected to either work full-time or part-time. The trade-off between the two would be easy if people with different labour force responses fitted into discrete payment categories, for example, if all single parents are paid Parenting Payment Single or all people with disability are paid DSP.

Another limit is the relationship between rates of income support and withdrawal rates on the one hand, and the minimum wage on the other hand. This is important because the potential for impacting on the incentives of large numbers of people increases significantly beyond this point in the income distribution.

Current maximum single rates of payment vary as a proportion of the net minimum wage. The net replacement rate (NRR) compares the after-tax value of income support payments to the amount of after-tax income the person could receive if they worked full-time in a minimum wage job. For example, the NRR of the lower rate of Newstart Allowance compared to the net minimum wage is 46 per cent. By comparison the NRR for the standard single rate of Austudy is 37 per cent, and for DSP it is 56 per cent (see Table F1-4).

The net replacement rates increase if rent assistance or family payments are included. For example, the NRR increases from 50 to 59 per cent for a person on the higher single rate of Newstart Allowance who also receives rent assistance and pharmaceutical allowance.

While all maximum rates of income support are significantly below the minimum wage, the addition of supplements and differences in rates of income withdrawal can mean that some people receive income support while working significant hours. For a single parent with one child receiving PPS, income support (excluding family assistance) is payable up to 149 per cent of the minimum wage. This compares to 78 per cent for the lower rate of Newstart Allowance (see Table F1-4).

Table F1-4: Comparison of working-age income support and Federal Minimum Wage (FMW) ($543.78 a week)

September 20, 2009

Payment Net income
no private income
($ per week)
Net income at FMW
($ per week)
Net replacement
rate(a)
(%)
Transfer Payment
cut-out(b)
($ per week)
Cut-out
(% of FMW)
Single person
Newstart (lower) 228 497 46 427 78
Newstart (higher) 247 497 50 458 84
Newstart, (higher with rent assistance and pharmaceutical allowance) 306 514 59 556 102
Austudy (standard rate) 186 497 37 434 80
Austudy (long-term transferee, with rent assistance) 281 527 53 594 109
Disability Support Pension (DSP) 336 597 56 743 137
Single parent
Parenting Payment, one child (excludes family payments) 290 615 47 809 149
Couples
Newstart single income:          
Primary earner (P1)
Partner (P2)
412 629 65 390 (P1)
733 (combined)
72 (P1)
135 (combined)
DSP/Carer (one earns FMW income) 518 824 63 1137 209
  1. Net replacement rate is income support payment after tax as a proportion of the post tax minimum wage.
  2. Payment cut-out is the point at which the last dollar of income support is paid.

Source: Australian government administrative data.

The eligibility of people at incomes above the minimum wage for income support has been a longstanding concern that has impacted on the structure of the transfer system. However, in recent decades a number of policy changes have sought to extend assistance to some people in work. These include the separation of child income support from the income support system (starting with Family Income Supplement in 1983 and culminating in the present-day Family Tax Benefit) and the introduction of sequential income testing.5 Parenting Payment Single is paid beyond the minimum wage because it is intended to allow some level of part-time work.

It is not clear what effect these differences in relativities to the minimum wage have on employment outcomes — for example, whether they would lead to reduced or increased hours of work. For single parents and people with a limited capacity to work they may lead to increased hours of work, especially if the choice is between no work and some work. For those who are expected to work full-time they may lead to reduced hours of work. There has been no definitive quantitative analysis of this issue in Australia, largely because sufficiently detailed data to support such studies have not been available until recently. Available data on the numbers of people on Newstart Allowance who also receive income from employment show that the proportion with earnings has remained very stable over the past six years at around 20 per cent.

The majority of people who work part-time do so in response to life-cycle events (Productivity Commission 2008a, p. xxii). For these individuals, targeted tax and welfare changes may have only small effects on preferences for full-time work. It is more likely that transition to full-time employment occurs when the family circumstances change — for example, as a child gets older a parent may increase the hours they work. Also, for a substantial number of employees actual hours worked depend on the state of the labour market. At least 10 per cent of young people and working-age males working part-time said they were unable to find full-time work or they accepted part-time work because they liked the job (Productivity Commission 2008a, p. xxiii).

Trends in employment suggest that part-time work has become increasingly important in its own right, irrespective of whether or not it provides a 'stepping stone' to full-time employment.

Finding

There is a case for applying a low taper rate to single parents with primary care of young children. There is scope to improve the rewards for work for people with disability who have a partial capacity to work. As the cut-out points for income support already extend beyond the minimum wage for several groups of income support recipients, increases in rates of assistance or reductions in withdrawal rates would extend these further.

System coherence

The increasing difference in payment rates between pensions available to people of working age, and allowances, will also increase the impact on individuals of such common events as a birthday or relationship change. It also increases the cost to the individual of administrative decisions such as the Job Capacity Assessment (which determines access to Disability Support Pension by judging whether an individual can work more or less than 15 hours a week).

In September 2009 a person receiving Newstart Allowance and working 15 hours at the minimum wage had a disposable income of $338.62 a week. A person receiving the maximum rate of DSP had a disposable income of $335.95 — only $2.67 a week lower — and would not be expected to work. If they worked for 15 hours a week, they had a disposable income $143.16 a week higher than the Newstart Allowance recipient and $140.16 more than the Newstart recipient with a partial capacity to work (see Table F1-5).

Once a person receives a higher payment, there are strong reasons to avoid jeopardising it, and the evidence indicates that few people leave DSP other than to move to the Age Pension. The greater the difference between the high and low payment rates, the more critical it is to ensure that categories reflect real differences between individuals.

Table F1-5: Disposable income of income support recipients working 15 and 20 hours a week at Federal Minimum Wage ($14.31 an hour)

$ Per week, 20 September 2009

Gross earnings No work (0) 15 hours a week (214.65) 20 hours a week (286.20)
DSP 335.95 478.78 514.55
Newstart 228.00 335.62 355.35
Newstart PCW(a) 231.00 338.62 358.35
  1. Partial work capacity greater than 15 hours a week.

Source: Australian government administrative data.

A similar issue arises for single parents at the boundary of Parenting Payment Single and Newstart Allowance when their youngest child turns eight. For example, a single parent receiving PPS and working 20 hours a week at the minimum wage (about $14,900 a year) would have a participation tax rate of 27 per cent. On the birthday of their child, this would increase to over 50 per cent (see Chart F1-3). Even though they may be working to the expected level of 20 hours a week, their income would fall by $118 a week or $6,136 a year.6

Chart F1-3: Single parent(a) participation tax rates(b)

20 September 2009

    20 September 2009

  1. A single parent receiving Parenting Payment Single has a youngest child less than eight years of age. A single parent receiving Newstart Allowance has a youngest child eight or older. In this example the parent has two children.
  2. The participation tax rate is the average effective tax rate from no work to the level of yearly private income.

Source: Australian government administrative data.

Finding

Large differences in rates of payment and means test taper rates across categories can currently produce very different outcomes for working-age people with similar capacity to work. These differences can create disincentives to work or incentives to move to non-activity tested payments.

Another aspect of the current structure of income support that creates horizontal inequities is the large variation in the ratio of single to couple income support payments. Chart F1-4 compares levels of income support for singles and couples without children for various payment types. For students on Austudy without dependent children it is 50 per cent, whereas for allowance recipients the ratio is 55 per cent for those without dependent children. It is 66.33 per cent for pensioners (excluding PPS). Rates of payment for those on Youth Allowance and Austudy without children are considerably less than the adult allowance rate.

The Pension Review found that the relativity of the rate of pension for singles living by themselves and couples is too low. For single pensioners who share accommodation the existing relativity was found to be broadly adequate. A relativity of between 64 to 67 per cent was seen as more appropriate than the current relativity. A relativity approaching 67 per cent was found to be appropriate for singles living by themselves with 64 per cent reflecting the average needs of single pensioners.7

Following the recommendations of the Pension Review, on 20 September 2009 the Government increased the single rate of pension and established a new ratio between single and partnered pension rates. The new ratio sets the single pension at 66.33 per cent of the combined couple pension rate. This is consistent with the modified OECD equivalence scale,8 which suggests that a ratio of around 67 is appropriate where the policy goal is to provide a single person with a standard of living equivalent to a member of a couple. The new ratio was applied to the base rate of pension and the new pension supplement, but not to rent assistance.

Renting privately (and receiving rent assistance) is the predominant housing tenure for Parenting Payment Single recipients (45 per cent) and Newstart Allowance recipients (37 per cent). Given that renting involves higher costs, the level of rent assistance is particularly important in achieving adequate levels of after-housing income (that is, after rent costs) for working age recipients reliant on income support (see Section F5 Housing assistance). There are also significant proportions that own or are purchasing a home. Therefore the adequacy of rates of income support with and without rent assistance is very important.

Chart F1-4: Adult single and couple relativities (no children): primary income support payments (20 September 2009)(a)

Per fortnight

    Per fortnight

  1. The same base payment is payable for Austudy singles and members of a couple, ABSTUDY (for students 16–20 years who are living away from home or independent with no children and couples with no children) and Youth Allowance (for singles with no children not living at home and couples with no children). The rate of Newstart is the lower rate paid for single people under age 60.

Source: Australian government administrative data.

Working-age households may also include children. Chart F1-5 includes Family Tax Benefit B (FTB B) as a payment for parents not children. FTB B significantly increases the amount of assistance provided to parents (single and couple) and also the amount provided to single parents relative to couples. Having a child increases adequacy of payments for single parents compared to partnered parents to 69 per cent for both Austudy and Newstart Allowance recipients (see Chart F1-5). Rates of payment for Youth Allowance, Austudy and Newstart Allowance recipients with children are broadly equivalent, with point in time differences due to bi-annual rather than annual indexation. However, rates of payment for people on Youth Allowance and Austudy without children are considerably less than the adult Newstart Allowance rate. The relativities between single and couple parents also vary considerably; from 69 per cent of allowees to 80 per cent for a single parent pensioner (such as DSP) compared to a DSP and Newstart allowee couple. The relativity for a single parent (PPS) compared to an allowee couple is 78 per cent.

Chart F1-5: Adult single and couple parent relativities: Primary income support payments and Family Tax Benefit Part B (20 September 2009)(a)

Per fortnight

    Per fortnight

  1. Excludes FTB A, but includes FTB B as a payment for a parent (in respect of child aged less than 5).
  2. Either Austudy or Newstart parents.
  3. Single DSP recipient and DSP-Newstart couple.
  4. Pensioner single and pensioner couple.
  5. Single parent (PPS) and PP-Newstart couple.

Source: Australian government administrative data.

The increase in assistance for parents through payments such as FTB B since 1997 reflects a priority to target assistance to families with children.

Among other things, these differences reflect the higher pension levels of assistance for single parents with a young child compared to the amounts available under other payments, and the availability of FTB B in addition to primary income support.

Expenditure data are not sufficiently disaggregated to enable reliable estimates of what singles in a variety of circumstances need to spend to achieve equivalent living standards to members of a couple in the same circumstances. The evidence base available to make these judgements is therefore not strong.

However, budget standards research using normative judgements of expenditure needs implies that working-age income support recipients have broadly similar economies of scale in consumption as age pensioners. That is, a single working-age recipient living alone needs much the same proportion of working age recipient couple's payment as a single age pensioner does of an age pensioner couple's payment. For example, using after-housing cost budget standards to remove sensitivities around housing cost assumptions, a single 35 year old renter would need 66 per cent of the income of a private renter couple. This compares to a single 70 year old homeowner requiring 68 per cent of the income of an aged couple who are homeowners (DSS 1998, p. 491). Given these sensitivities, and also the contestable normative judgements needed to construct budget standards, these results cannot be treated as definitive. They are, however, broadly in line with overseas research that uses alternative approaches to derive equivalences.

Equivalence research cannot indicate whether couple rates of payment are adequate or not in themselves; rather, it indicates whether current single rates are likely to be inadequate compared to couple rates.

Given the new single-to-couple ratio for pensions (and the consistency of that ratio with comparable overseas measures like the OECD modified scale) there is a case for making similar changes to the single-to-couple ratios for working-age payments, particularly for singles living by themselves. A lower relativity can be justified where it is expected that single people will share housing, as might be the case for students or some other singles without children.

Finding

There are large variations in the relativities between single and couple rates of payment in the working-age income support system. These are not based on analysis of the amounts of income that single people need to achieve the same standard of living as members of a couple. Available evidence supports the same relativity for working-age income support payment rates as is applied to pension rates.

Single and partnered parents

Single and partnered parents are significant groups within the income support system. Parenting Payment consists of two different rates and conditions of payment. In part this is because income support for single and partnered parents has evolved from different payments.

Until September 2009, PPS was paid at the same rate as other pensions (Age and Disability Support Pension and Carer Payment), with the same income test. PPS recipients did not receive the 20 September 2009 pension increase, and nor was the income withdrawal rate increased from 40 to 50 per cent. As a consequence PPS is now a different category of income support payment. PPS has payment rates that are less than other pensions, and the lowest income test withdrawal rate in the income support system. Along with other pensions it is benchmarked to wages, although it is benchmarked to 25 per cent of Male Total Average Weekly Earnings (MTAWE) rather than 27.7 per cent that applies to other pensions.

These differences in payment conditions combine to produce large differences between the payment outcomes for PPS and PPP recipients, and also between PPS recipients and single parents with older children, who do not qualify for PPS but instead must claim another income support payment, generally Newstart Allowance.

Chart F1-6: Single/couple parent relativity (20 September 2009)(a)

Per fortnight

    Per fortnight

  1. Single to couple relativity including: income support payments, FTB Part B and relevant supplements such as Pharmaceutical allowance. The base payment of a single parent with a child less than 8 years is 70 per cent of total couple base payments (or 60 per cent of total couple base payments if the child is over 8 years).

Source: Australian government administrative data.

Chart F1-6 shows the relativity between income support payments for single parents (who receive PPS with a child aged between five to seven years of age, and Newstart Allowance when their child is eight to 15 years) and for couples. The relativity between assistance for these two categories (including primary payment, supplements for pharmaceuticals and telephone concessions, and Family Tax Benefit Part B) falls from 78 per cent to 69 per cent when the child turns eight.

One reason for providing a relatively high level of income support for single parents is because they have a higher risk of poverty. This argument is supported by a range of evidence including self-reported measures of financial stress (for example, could not pay bills or rent on time) and hardship (for example, pawned or sold something, went without meals or were unable to heat the home). Single parents had a higher rate of financial stress than couples with dependent children and single people under 65. However, they had lower rates of multiple hardship than single people under 65 and a similar, albeit slightly higher, rate than couples with dependent children (FaHCSIA 2008, pp. 16–17).

Another argument for a higher level of income support is that single parents face higher direct and indirect costs because they have no partner in the household to help with child rearing and other household tasks. The argument for a higher payment for single parents is strongest when they are caring for young children.

The direction of recent policy for single parents has been two-pronged: to increase their employment through limiting access to the more generous pension package of assistance to single parents with young children, and to introduce participation requirements for parents (both single and partnered) with school-age children . These changes, introduced in 2006, have contributed to significant reductions in the number of parents with school-age children who receive income support. There has also been a small reduction in the number of single parents of pre-school-age children receiving income support.

While the employment rate of single parents has increased, there is still a sizeable gap between their employment participation rate and that of partnered mothers, especially while the children are young (see Chart F1-7). Where there is a child younger than four there is a 25 percentage point gap; for a child aged over four and up to sixteen the gap is 8 percentage points. There is no gap between employment rates of single parents and partnered mothers when the youngest child reaches 16 years of age.9 These differences may to some extent reflect selection biases (as indicated by lower average wage rates and education levels for single compared to partnered women). When single parents do work they have higher median hours of work than secondary earners in couple families. However, it is also the case that Australia's assistance to single parents is among the most generous in the OECD (Whiteford 2009, p. 49). Also, Australia has the fourth-highest joblessness rate in the OECD for households with children, and this joblessness is concentrated among single-parent families (Whiteford 2009, p. 57). Another policy consideration is the growing evidence that long periods out of the workforce reduce the probability of eventual employment and harm both single parents and their children.

Chart F1-7: Employment rate of mothers in couples and single parents

Panel A: Mothers in couples

Panel B: Single mothers

Panel B: Single mothers

image

Source: ABS (2009g).

Despite the increasing workforce participation rate of single parents, Australia still has one of the lowest levels in the OECD (see Chart F1-8).

Chart F1-8: Employment rates of single mothers in OECD countries

2007

    2007

Source: OECD 2007, OECD Family database, LMF3 Maternal employment by family status.

Finding

Single-parent employment is increasing but it still falls well short of rates for partnered women and is low compared to most other OECD countries.

People with disability

Working-age people with disability can receive a number of different income support payments. The largest number — 757,000 — receive the Disability Support Pension, with a smaller number on Newstart Allowance.

The employment rate of people with a disability in Australia was 39.8 per cent in 2003. Australia is ranked 19th of 27 countries in an OECD comparison and is below the OECD average of 43.0 per cent. No country has high employment rates for people with a disability, although a number of OECD countries — such as Finland, Denmark and Switzerland — have achieved rates above 50 per cent (see Chart F1-9).

The employment rate in Australia fell by 2.1 per cent between the mid-1990s and mid-2000s, while 15 of the 23 countries as defined by the OECD over the same period either increased or remained steady. The employment rate of people on DSP is even lower, with less than 2 per cent leaving DSP each year to return to work, and only 9.1 per cent reporting earnings (September 2009). Of these, a quarter is in supported employment through Australian Disability Enterprises.

Chart F1-9: Employment rates of the working-age population with disability in OECD countries

Mid-1990s(a) and mid-2000s

    Mid-1990s(a) and mid-2000s

  1. Data not available for the mid 1990s for four countries.

Source: OECD (2009c), 'Sickness, disability and work: keeping on track in the economic downturn', Background paper, p. 12.

There are many possible reasons for Australia's relatively poor performance for people with disability, including lack of employer demand, labour market restructuring, and the absence of work requirements associated with income support for most people with a disability.

A person can remain on DSP for a very long time. Of the 740,000 people on DSP in December 2008, 53 per cent had been on it for more than 10 years. Also, although disability increases with age, there are large numbers of younger people receiving DSP. Sixteen per cent of recipients are under 35 years of age, 16 per cent are 35–44, 26 per cent are aged 45–54 and 42 per cent are 55 and over.

The proportion of the Australian working-age population on DSP in 2007 was 5.4 per cent. Australia is ranked 14th of 28 countries in an OECD comparison (based on 2007 or latest available year). While Australia is currently lower than the OECD average of 5.8 per cent, our position is likely to deteriorate further with the increased flow of women onto DSP as other payment options with similar rates of payment become less available.

The largest source of growth in the DSP in the past decade has been by women. In that period, the number of women receiving DSP increased by 63 per cent, while the number of working-age women rose by only 17 per cent. Women now make up 44.2 per cent of DSP recipients, up from 35.4 per cent 10 years ago. A major reason for the growth is the increase in the Age Pension age for women and the closure of alternative dependency-based payments, including wife and widows' pensions and Partner Allowance. There is also evidence of significant flows of single parents onto DSP when eligibility to PPS is lost; however, this effect is expected to lessen over time as the Welfare to Work changes to PPS eligibility and take effect. Women are claiming DSP at an earlier age and remaining on payment longer.

To be eligible for DSP, which is paid at a higher rate and with a more generous income test than Newstart Allowance, a person must satisfy two tests administered by a job capacity assessor. The impairment test requires that a person's condition is diagnosed, treated and stabilised. It uses evidence from a health professional on the level of a person's impairment against a set of tables. The test for continuing inability to work requires that a person's impairment must prevent them from achieving at least 15 hours a week of work at full award wages within two years after rehabilitation and/or retraining.

As pointed out by the OECD (2009c, p. 17):

The inherent problem with most public disability schemes is that entitlement is not determined according to a reliable and valid assessment of a person's labour market competitiveness. Instead, a medical practitioner with minimal or no training in the complex task of assessing how various injuries and ailments reduce labour market competitiveness, is required to estimate globally whether a person is unfit for work, including into the future … The result being that significant numbers of people with partial work capacity and who are not wholly uncompetitive in the labour market, become deemed unable to work.

Australia has sought to address this problem by moving away from a purely medical model of assessment, replacing medical officers with allied health professionals under the Better Assessment changes of the early 2000s, and by introducing Job Capacity Assessments under the Welfare to Work program introduced in 2006. It was thought that allied health professionals who have experience in finding employment for people with disabilities would have a better insight into work capacity. There is some evidence, however, that decisions about DSP eligibility decisions continue to give greater weight to impairment than ability to work.

Previous efforts to address deficiencies in the test for continuing inability to work have failed. Changes in 1995–96 to require decision-makers to think more broadly about 'any' work and on-the-job training had no impact on DSP inflows. Similarly, the expected reduction to the DSP inflow under Welfare to Work was not realised.

A key deficiency of the DSP claiming process is that the continuing inability to work test is assessed before most claimants have had any retraining or rehabilitation. Around half of people granted DSP come onto payment from employment without having tested their capacity to be retrained for work, and many of those who were on activity-tested payments had a medical exemption from activity test requirements. The job capacity assessment therefore requires a prospective assessment or prediction about a person's future capacity to work, with little information about the likely benefits of an employment intervention.

Finding

Employment rates of people with disability are relatively low and few people on Disability Support Pension (DSP) report earnings or leave DSP for work. DSP should continue to be an important part of the income support system for people whose disability precludes substantial work. However, it is important for the wellbeing of people with moderate disabilities that the work test associated with access to DSP is effective in identifying people who could be assisted into substantial part-time or full-time employment.

Indexation

Indexation is used to maintain the real value of policy settings — such as rates of payment — over time. This can also include maintaining the value of assistance relative to broader community standards, rather than just the purchasing power of payments.

The choice of indexation arrangements has important consequences for the sustainability of the income support system, in terms of community acceptance, in terms of incentives to work, and in fiscal sustainability.

Prior to 1997, income support rates automatically increased in line with price increases. Governments provided additional ad hoc increases to improve the real value of payments either in pursuit of a policy goal, to align assistance between groups or to improve relativities between groups of recipients. For example, ad hoc increases were made in order to achieve and maintain the single rate of pension at 25 per cent of Male Total Average Weekly Earnings, with these increases also being paid as ad hoc increases to partnered allowance and single allowance recipients with children. Other ad hoc increases improved the single rate of allowance.

Since 1997, pension rates, but not allowance rates, have also benefited from legislated benchmarking of rates to community living standards, as measured by increases in the a wages measure (Male Total Average Weekly Earnings).10 Given budgetary pressures as a consequence of population ageing there is a need to ensure that the measure used for indexation appropriately reflects changes to community living standards. A measure that overstates such change will not be fiscally sustainable and could compromise the integrity of the tax and transfer system.

For those recipients expected to work, applying this factor could change the relationship between rates of income support and the minimum wage if the minimum wage grows slower than wages in the broader community. The Pension Review report (FaHCSIA 2009, p. 68) notes that faster payment growth for pensioners:

may raise questions about the rewards for work as the incomes available to those on income support grow relative to earnings … pensioners receiving a part rate of pension can already have a higher disposable income than low-income taxpayers who are funding pension spending through their taxes.

Reflecting changes in community standards is important but cannot be achieved solely through automatic adjustments. For example, changes in community living standards as measured by wages are relatively easy to reflect with automatic adjustments. Slower shifts, such as changes in the composition of households and the nature of workforce participation, can be more appropriately dealt with through separate government decisions. As the Pension Review report noted (p. 66), 'it is hard to see a rationale for such changes to impact on the rate of the pension'.

A regular review of payment amounts, for example at five-yearly intervals, would enable these non-wage drivers of community standards to be reflected in income support payments. Such a process may of course alter the relativity between pension and allowance rates of payment. The last adjustment to Newstart Allowance, apart from increases related to price indexation and compensation associated with the GST, was an increase of $2.95 (or 2 per cent) in 1994.

When different components of the tax and transfer system are indexed differently, the relationship between them can change over time. An important example is the widening disparity between pension and allowance rates, resulting from the additional benchmarking of pensions to wages while allowances are indexed solely to price changes. Chart F1-10 compares the real rates of these payment types over time, including projections of future growth. It shows that the gap between these payment types is larger today than it has ever been, and will continue to widen if current settings are maintained.

Chart F1-10: Pension and allowances over time(a)

2009 prices

    2009 prices

  1. Projected values assume no policy change.

Source: Treasury estimates.

The gap presents people with strong incentives to test their eligibility for a pension, and not to jeopardise their pension entitlements by taking up work. It also places increasing pressure on the assessment process for DSP, particularly from people with weaker employment prospects.

Differences in indexation are also producing changes in the relativity between income support for single parents and couples. Chart F1-11 shows that if current indexation arrangements continue, by 2030 a single parent with a youngest child aged five to seven will receive the same amount of assistance (income support and FTB-B) as an unemployed couple with a child of the same age. The ratio was 65 per cent in 1990 when automatic indexation was extended to family payments, 67 per cent in 1997 prior to MTAWE applying to PPS rates and not partnered allowance rates and 78 per cent in 2009.

Chart F1-11: Disposable income of single parent with one child
compared with a couple with one child(a)

$ Per week, 1990 prices(b)

$ Per week, 1990 prices(b)

  1. Single parent receiving maximum rates of Parenting Payment Single and a couple receiving maximum rates of Parenting Payment Partnered and Newstart Allowance.
  2. Projected values assume no policy change.

Source: Australian government administrative data and Treasury estimates.

Indexation arrangements have also brought about a decline in the real value of the free area for allowances — the amount of income that a person can have before payment is withdrawn. In 1986 the allowance free area — the amount that a person can have before their payment is reduced — was 31 per cent of the lower single rate of allowance. By 1995 this had fallen to 20 per cent and is currently 14 per cent. This is because the free area has not been indexed. It is difficult to see a rationale for these outcomes, other than that the cut-out point for Newstart Allowance is higher in real terms in 2009 than in 1986 and 1995 following reductions in the income withdrawal rate in 1995, with a further reduction and an increase in the income level at which the higher withdrawal rate applies in 2006.11

Finding

Different indexation for pensions and allowances is creating an ever-widening gap between pensions and allowances that can create inequities between assistance for individuals in similar circumstances as well as disincentives to work.


3 Since September 2009 Parenting Payment Single, although a pension, is paid at a lower rate. Also Austudy is paid at a lower rate than the main Newstart Allowance rate.

4 The higher single rate of allowance is paid to recipients aged 60 and over, after nine months of continuous income support receipt; and to other singles with the care of children, including those with greater than 14 per cent of the care of a child aged under 16 or a Youth Allowance recipient aged under 18.

5 In sequential income testing, once a person's income has reduced their own payment to zero, any excess over that point ('partner income excess') is applied to the other partner. This is achieved by an income test on partner income excess.

6 20 September 2009 rates.

7 FaHCSIA 2009, pages 50–51. In the 2009–10 Budget the Australian Government announced that it would establish the new relativity at 66.33 per cent from 20 September 2009.

8 The OECD modified scale assigns a value of 1 to the household head, 0.5 to each additional adult and 0.3 to each child. So a single person would receive 66.7 per cent of the combined couple rate.

9 ABS 2006b, 5 per cent sample.

10 Prior to 1997 pensions and partnered rates of allowance and the higher rate of Newstart were increased periodically by ad hoc decisions against a benchmark of 25 per cent of MTAWE. Legislation introduced to provide for automatic indexation against this benchmark in 1997 did not link increases for partnered rates or the higher single rate of Newstart allowance.

11 Prior to 1980 unemployment benefit was withdrawn dollar for dollar over a permissible earnings limit. From 1980 onwards income was first withdrawn at 50 per cent and then at 100 per cent. In 1995 the 100 per cent withdrawal rate was reduced to 70 per cent, and in 2006 it was reduced to 60 per cent.