1. INTRODUCTION
What follows is not a complete review of the welfare system together with a blueprint for an ideal one. Even if it were possible to draw such a blueprint, radical reform of the welfare system is not a job that can be done in one term of government.
Instead, after a discussion of some of the general problems of welfare policy, we present briefly (section 4) some considerations for long-term appraisal and revision of the welfare system, and then some specific recommendations for piecemeal improvement during the life of the government, consistent with the long-term considerations. In section 5 we group the recommendations that can be implemented soon after taking office (although it will be some time before significant gains are realised from most of them). Section 6 contains recommendations the implementation of which involves more legislative and administrative preparation and must therefore wait until later in the Government's term.
1.1 TERMINOLOGY
In this chapter, "welfare system" and "social security system" are used loosely and almost interchangeably to include all the pensions, benefits and services provided by the Department of Social Security and some of those provided by State and local governments. They do not include the health and education systems often included in a broad definition of "social welfare". For present purposes the boundaries need not be more precisely defined.
"Social security" here bears a somewhat narrower meaning than "welfare", and generally refers to that part of the system that provides cash benefits to the needy.
"Benefit" may mean "any pension or benefit" or "unemployment or sickness or special benefit but not age, invalid or supporting parent's pension". "Beneficiary" may mean "anyone who receives a pension or benefit" or "someone who receives unemployment, sickness or special benefit".
"Pension" and "pensioner" may similarly bear broad or narrow meanings: which is intended should be apparent from the context.
"Private income" means "all income from sources other than social security or welfare".
1.2 OBJECTIVES
We can summarise the objective of the social security system as to help maintain a free, equitable and humane society by alleviating poverty and supporting those members of society who cannot support themselves, without encouraging people voluntarily to rely on social security instead of supporting themselves.
Some people would add the reduction of inequality and promotion of the happiness and personal well-being of members of the community.
We reject the reduction of inequality of wealth or income as an end in itself, although equity demands a certain equality of opportunity and the alleviation of poverty involves some redistribution of income.
We also reject the notion that government should actively be trying to make people happy. The best a democratic government can hope to do is provide the opportunity for the pursuit of happiness; attempts to do more mean in practice deciding in what circumstances people ought to be happy and attempting to impose those circumstances on individuals regardless of their personal preferences.
1.3 TWO APPROACHES TO SOCIAL SECURITY
There are two ways in which social security systems can be worked. The first is to identify categories of people likely to be especially needy or deserving and give benefits to all people in these categories, and the second is to identify all especially poor people and give benefits to them. The benefits can be in cash or in kind or both. (Utopian socialists and politicians facing elections sometimes speak as if there was a third possibility, of giving benefits to everyone regardless: but as any such scheme has to be financed by taxation, if the poor are to gain from it the less poor will find themselves losing more in tax than they gain from the scheme. The overall effect is the same as method two.)
The Australian system relies mainly on a combination of methods one and two. The effect is to identify poor people and provide benefits which depend both on category (age pensioner, unemployed, single parent, etc.) and on financial situation (means test). The principal exception is family allowance, which is pure method one (paid to parents of dependent children regardless of income).
1.4 BENEFITS, PENSIONS AND SUPERANNUATION
The Australian age pension system is run on a "pay as you go" basis from consolidated revenue. No funds are invested to provide income to pay for the system, and no taxes or "pension contributions" are earmarked for it. The aged are simply one of the categories of people eligible for a means-tested benefit.
Despite the structural and administrative similarity, there are important differences between the age pension and other benefits. The basic point is that age pensioners are in principle out of the workforce for good (some part-time work excepted), while unemployment and sickness beneficiaries are in principle only temporarily unable to earn their own livings. Supporting parent's benefit and the invalid pension are intermediate cases. This is relevant to consideration of incentives to seek work or to rely on welfare, and is discussed below.
The totally unfunded pension system and absence of specific "social security" taxes mean that any decrease in the number of poor elderly people lessens the strain on the Commonwealth Budget; so the Commonwealth has an incentive to encourage people to provide for their own retirement. This is the main justification for the various tax incentives to occupational superannuation schemes, and one reason for the Hawke Government's support for the extension of such schemes throughout the workforce. On the other hand, favourable tax treatment for superannuation schemes means less revenue and hence increases the strain on the Budget. The relationship is not a simple one, and the tax concessions cost the Commonwealth most (per capita) in respect of high income earners, who even without them would still be better able to provide for their retirement, and thus would cost the Commonwealth less in pensions, than average earners. (1)
Although occupational superannuation and other forms of provision for retirement are not part of the welfare system proper, then, they do affect it, and there can be a lag of many years between a policy change and its full effect on the Budget. Equally, a sudden change in policy can upset decades of preparation for retirement by hundreds of thousands of people. The major considerations in policy regarding superannuation are equity and honour. Equity demands comparable tax treatment of different sorts of saving, and honour demands that government avoid frequent or sudden policy changes and rapid inflation.
2. THE IMPOSSIBILITY OF WELFARE POLICY
Since the Poor Law of Elizabeth I, the English-speaking world has had four hundred years' experience of central government social security policy. No government has ever achieved a generally satisfactory system and it is not likely that one ever will.
The whole welfare system boils down to taking money from some people and giving it to others. Naturally whose who pay tend to want less taken from them, and those who receive tend to want more. For this reason, and others discussed below, it would not possible to please everyone even if the Government could plan a welfare system from scratch.
In practice, all that can be done is to make piecemeal changes to improve some of the worst aspects of the system. We emphasise that this must not simply mean finding the people who come off worst at present and aiming money in that direction.
2.1 THE PARADOX
The objective described in section 1.2 cannot be achieved. It is self-contradictory. The reason for this, and for the general impossibility of a satisfactory welfare policy, can best be introduced in the form of a Chestertonian or Shavian paradox:
Why do governments, which want less poverty and more wealth, attempt to achieve this end by rewarding the poor and taxing the wealthy?
As a rule, if we want to influence behaviour, we encourage and reward the results we want or the actions that bring them about; and we discourage and penalise the results we don't want and the actions that bring them about. We attempt to modify the incentives so that they push or pull in the direction we want. This method works, usually very effectively, with organisms from flatworms to human beings and from primary school gangs to General Motors. It is applied almost throughout the whole of government's relations with the rest of society, especially in the tax system. It is hardly an exaggeration to say that half the tax legislation provides favourable treatment for activities government wants to encourage and the other half provides penalties for other activities inadvertently encouraged by the first half.
It is necessary here to emphasise that we do not suggest that all of human behaviour is governed by economic, still less pecuniary, incentives. Quite clearly it isn't. We make the more modest, and unassailable, claim that by and large economic incentives have some influence on people's personal decisions.
Despite all this, it is not really possible to apply the lesson of incentives to welfare policy. The reason is obvious: it would mean taxing the poor more heavily than the rich, or penalising them in other ways for being poor (in addition to the natural disadvantages of poverty). This has hardly been suggested except by GBS, who was probably joking.
2.2 COUNTERPRODUCTIVE INCENTIVES
The trouble is that although the "incentive rule" cannot conveniently be applied to welfare policy, incentives do not cease to influence people who receive, or might become eligible for, welfare benefits.
This bedevils the whole of welfare planning. The system is based on giving money or goods or services to people felt unable to afford them for themselves. Alleviating poverty by definition makes it more tolerable and reduces the poor person's incentive to escape from poverty by his or her own exertion. Supporting those who cannot support themselves reduces their incentive to learn to support themselves and encourages those who can barely manage to give up the struggle.
It is important to maintain the incentive for people to work in even low-paid jobs, and to save towards their retirement, incentives which largely disappear when social security benefits offer an equal standard of living. The existence or otherwise of such incentives is also relevant to people's perceptions of the equity of the system.
Provision of benefits to defined categories of people increases the incentives for people to enter those categories, or reduce the incentives for them to leave. The availability of unemployment benefit increases the duration of unemployment and hence the number of people unemployed at any time: by eking out savings it provides an incentive to spend longer looking for the "right" job. The availability of the supporting parent's benefit influences decisions about sex, contraception, marriage, separation or divorce; the fact that the amount is greater than the teenage unemployment benefit provides some incentive for unemployed teenage girls to bear children out of wedlock.
We stress again that to point to the existence of an incentive is not to claim that everyone's behaviour is governed by it. The magnitude of the effect of these counter-productive incentives is open to dispute but is unlikely to be negligible; there is no doubt that they exist.
Means-tested benefits have incentive problems too. If the benefit is cut dollar-for-dollar above an income-test limit, an increase in private income produces no increase in total income. So there is no incentive for the recipients to try to earn their way out of poverty (or rather, the incentive is for them to cheat the system and supplement the benefit with undeclared earnings from the cash economy). If the benefit is tapered more gradually (50 cents in the dollar is used in most cases), there is an incentive to earn but a substantial part of total expenditure goes to people not in the greatest need.
Looking at the problem from a different angle, it can be argued that the lower are social security benefits, the stronger the incentive for the poor to turn to crime as their way of improving their situation by exertion.
In short, any action at all in social security policy involves a mass of trade-offs and side-effects, not all of which will be foreseen.
3. WELFARE AND THE BUDGET
Expenditure on welfare and social security excluding health services now amounts to about $21 billion a year, equivalent to 28 per cent of the Commonwealth budget or more than 8 per cent of GDP. Welfare programmes contribute largely to budgetary problems, not least because automatic indexation of benefits to the Consumer Price Index and unwillingness to court unpopularity by restricting eligibility for benefits mean that governments have exerted little control over the magnitude of expenditures on existing programmes. Any attempt to end or reduce expenditure on a particular programme is resisted by a coalition of welfare workers, beneficiaries, the welfare lobby, and government MPs in marginal seats. Similar coalitions exert continual pressure for new or expanded programmes.
The result is the well-known ratchet: welfare expenditure goes up, but not down. After correcting for inflation, for every $100 spent in 1965-66, about $250 were spent in 1975-76 and $400 in 1985-86. These figures represent approximately 4.6, 6.8 and 8.3 per cent of gross domestic product respectively. The Fraser Government found the welfare ratchet irreversible. The Hawke Government, with the over-70 income test and the pension assets test, showed a willingness to make the system more equitable even if this meant annoying some of its beneficiaries: but the deal struck with the NSW right wing over exemptions for home-owners demonstrated the limits of its courage, and it has not succeeded in stemming the growth of welfare expenditure.
As discussed in the introduction to this volume, Australia risks an economic crisis of severity comparable to the Great Depression. To delay this crisis, and reduce its impact, one of the most important things governments can do is to put an end to the rapid increase in their indebtedness by balancing their budgets. If taxpayers' real disposable incomes are reduced by tax increases and wage increases that do not keep up with price rises, it is only fair for welfare recipients to bear some of the burden. See policy recommendation in section 5.3.
4. LONG-TERM POLICY DIRECTIONS
4.1 "MACRO" POLICY
There is reason to doubt the effectiveness of government welfare systems in helping people out of poverty, rather than in making poverty marginally more comfortable (and hence reducing the incentive to escape from it). The work of Charles Murray and others in the USA suggests that progress in reducing poverty (black and white) effectively ended at the same time as the massive expenditure on the "Great Society" programmes of the 1960s began, and that the position of some disadvantaged groups has worsened since, in spite of, or because of, the amount of money spent. (2) This work has not passed unchallenged, but the doubts it raised remain, and there is no obvious reason why it should not mutatis mutandis be relevant to Australia.
Corresponding Australian research is needed. If Murray's hypothesis, that the welfare system increases poverty more than it reduces it, applies here, then obviously a complete revision is required, perhaps resulting in a drastic reduction in many government welfare programmes. Before this can be contemplated, a drastic change in public opinion would have to take place. This can be expected to follow, slowly, public awareness of the research and its findings. Among our proposals for immediate action below, we recommend sponsorship of research that will enable a proper evaluation of the Australian welfare system.
Whatever the results of such research it is likely some large government welfare system will survive indefinitely. As long as it does, there will be sectional interest groups which will press for more expenditure to favour themselves without regard for the effect on the community as a whole. To counter this pressure, others must continually press for changes to increase equity and efficiency in the welfare system and in the economy generally, and to encourage self-reliance and mutual assistance in the community.
4.2 "MICRO" POLICY
In welfare as in most other areas, the Commonwealth government can usually choose whether to act directly by itself to provide services, or indirectly by ensuring that the desired services are provided by non-government organisations or by individuals.
There is now no doubt that private-sector organisations (commercial or non-profit) in competitive environments can in general produce and deliver goods or services more efficiently than government or private organisations that face no competition. (3) Consequently, in revising the welfare system, particularly where the delivery of services is involved, government should always prefer the small to the large, the dispersed to the centralised, the diverse to the uniform, and the competitive to the monopolistic. Proponents of monolithic government provision should bear the burden of proof. (4)
Several times in this chapter we have said that some further desirable reform will become practicable as labour market conditions improve, and this is almost the refrain of the whole volume. The policies we present elsewhere (5) will in the medium term and with a minimum of suffering achieve sustainable full employment; that is, a state of affairs where anyone who wants work and who is not physically or mentally incapacitated can find it with little difficulty. Some of these jobs will only be worth a very small wage. It is preferable for government to supplement such wages via refundable tax credits (replacing today's Family Income Supplement) than by minimum wage laws and other restrictive practices to condemn people to idleness and total dependence on government. Unemployment benefit should then provide a very low and unattractive standard of living. Those who are genuinely unemployable will almost all be physically and mentally incapacitated and should be eligible for a kind of invalid pension, not unemployment benefit.
The problem will remain of those whom society has most badly failed: young, from a poor, broken home, having left school after ten years of modern education ignorant and almost illiterate, and having survived for years on unemployment benefit. He or she is unemployable in today's labour market. In a free market, his or her services would not be worth a living wage at first. If unemployment benefits are cut as full employment is achieved, and very low market wages supplemented to some extent by government, it will be both easier to find work and harder to live without it: the incentives will be pointing the right way.
Before then, the work-for-dole proposal outlined in section 5.2 below will have had some effect.
5. IMMEDIATE ACTION
Most significant changes to the social security system require major legislative and administrative effort and simply cannot be done quickly and well. The major reforms we propose are found in the next section, Medium-Term Action. The following proposals can be got under way quickly although their immediate importance is mainly symbolic.
5.1 EVALUATE THE SYSTEM
As described in section 2 above, there is reason to suspect that the current system increases rather than reduces the extent of poverty. The evidence is certainly not yet sufficient to justify radical change to the extent and objectives of the system, but some research is justified.
The Government should encourage and commission research |
This should be done in the first instance not by Royal Commission or parliamentary or departmental inquiry, but by funding research in university and independent think-tanks. (The Hawke government has set a successful precedent for this sort of thing.) After two years or so of this the time may be ripe for a more formal inquiry leading to a Report or Green or White Paper.
5.2 UNEMPLOYMENT BENEFIT
5.2.1 "Dole Cheats"
There is abundant anecdotal evidence of deliberate abuse of the welfare system. Almost everyone in Australia knows someone who is cheating or has cheated the system. (6)
Tighten the administration of the unemployment benefit. |
This can be done immediately on taking office. As there are no reliable figures on the extent and cost of the problem, the Government should in the first instance simply assume an overpayment rate of 5 per cent, and direct the CES and Department of Social Security to achieve a corresponding saving within a year or justify its failure to do so.
5.2.2 School-Leavers' Unemployment Benefit
The Australian social security system is unusual in neither demanding a qualifying period of employment for eligibility for unemployment benefit nor placing limits on the time for which it is paid. Most countries do both.
It would be unjust to limit the duration of benefit when the availability of jobs is limited by government- and union-imposed labour market rigidity, and this should only be done in association with labour market reform. But there is no reason to provide unemployment compensation to people who have never been employed.
In this context, "gainful employment" should include post-secondary education and vocational training but not school.
The availability of unemployment benefit to young school leavers gives an incentive for young people to leave school and enter the workforce earlier, with less education and fewer skills than might otherwise be the case.
Give six months' warning that unemployment benefit will only be paid With fair warning, raise the minimum age for unemployment benefit to |
This will affect the plans of a significant number of potential school leavers, their families, and education authorities, so ample warning should be given. The amount will depend on the position of the election date in the school year. The policies presented in the Labour Market chapter, including a means of opting out of the compulsory arbitration system, will increase the availability of jobs for young people by freeing them from excessive award wage provisions and thus make them more attractive to employers relative to other workforce participants. (7)
5.2.3 Work for Dole: The Corvée
At the time of writing (late 1986), it seemed that almost everyone agreed that a "work-for-dole" scheme would be a very good idea. The principle had even been endorsed by an ACTU committee, although its proposal was "work-or-education-or-training-for-dole" and this was linked with other corporatist proposals for government-ACTU-big business control of the economy.
It would be a big job to implement a large-scale work-for-dole scheme in a short time. Among the problems:
- Finding things to use the labour for. Setting the unemployed to digging and refilling holes in the ground may make them fitter but does nothing for anyone else. Setting them to useful work is much to be preferred, not least because it provides the nation with an increased return on what it spends on unemployment benefit, but it would not be easy to devise useful projects to occupy hundreds of thousands of unemployed.
- Assigning unemployed people to jobs. Even though little account should be taken of individuals' preferences -- work-for-the-dole is not a holiday camp -- it is sensible to attempt to match individuals' abilities and the work they have to do. This is true in order both to make the best use of work-for-dole labour and to give unemployed individuals relevant work experience.
- The extent to which work-for-dole labour can be used in the private sector. The private sector is usually much better than the public sector at spotting useful opportunities (and the range of these would be widened by the availability of cheap work-for-dole labour). On the other hand, the problems of assigning work-for-dole labour, dealing with complaints about work conditions, unreasonable supervisors, and so on seem likely to be exacerbated by the often tricky interface between public and private sectors.
- Trade union resistance. This is likely to be especially strong if work-for-dole labour is available for profit-making private-sector use.
- Human rights. Care must be taken to avoid "work-for-dole" being presented as "work or starve" or "forced labour", and made to sound almost as bad as totalitarian countries' labour camps; this tactic could be used by enemies of democracy to blur the distinction between democratic and totalitarian society.
- The unemployed must still be able to look for jobs.
- As the economic and labour market policies proposed elsewhere take effect, unemployment will fall. Any large scale work-for-dole scheme must be temporary.
- Implementation of the policy recommendations in section 6 below will temporarily increase the administrative burden on the welfare bureaucracy, which would have to be expanded to cope with a large work-for-dole scheme at the same time. Such expansion is difficult to reverse when the need for it passes.
For these reasons the Government should only introduce a modest work-for-dole scheme.
Legislate to provide that people who claim unemployment benefit may |
The old word corvée is as good as any to describe this obligation: it refers to the feudal and post-feudal obligation of certain residents in a district to perform certain services with no or little remuneration: road-mending was the most common. Refusal, or unsatisfactory performance, of the corvée would be grounds for termination of benefit (subject to the usual administrative safeguards). Corvée workers should be paid travelling expenses only (on top of unemployment benefit) and where necessary should be provided with protective clothing etc.
No attempt should be made to get the corvée going on a large scale in a short time. Rather, the principle should be enacted and publicised without delay, and the minimum administrative machinery set up as soon as possible. It should then be left to local government, community organisations, and State and Federal government departments, preferably at local or regional level, to take advantage of this cheap labour as the opportunity arises. The one way in which they should be encouraged to do so is as follows:
Wind up the Community Employment Program in an orderly fashion, |
At first only a tiny proportion of the unemployed would be involved. Even later, the scheme would not ordinarily occupy any unemployed person for more than two or three days a week or for several weeks after months of unemployment. This is partly so as not to make job-hunting impossible and partly to make dole payments and corvée hours together correspond to a reasonable rate per hour, thus denying credibility to any claims of "slave labour".
The most important aspect of the corvée is formal reflection in the social security system of the community's belief that if you are able-bodied and of working age society does not owe you a living.
5.2.4 Training and Work Experience
In recent years there have been several taxpayer-funded schemes besides CEP intended to help unemployed young people gain skills and work experience, or at least to demonstrate governments' concern, by subsidising employers who take them on. Ironically, they are often demanded by trade union leaders and others who deny that high junior award wages contribute to youth unemployment. All run into typical welfare problems of counter-productive incentives, and are either expensive to administer or open to abuse. For instance, a scheme that subsidises wages for the first six months gives employers an incentive to sack subsidised workers after six months and take on new ones. These schemes cost a lot in relation to the little lasting good they do, and should be wound up. The freer labour market policies advocated elsewhere will before long make them unnecessary.
If some interim substitute is felt to be politically essential, one possible approach would be simply to exempt unemployed people from the work test and the corvée for a limited period after a certain time out of work, if they could find an employer willing to take them on for work experience or training. The exempt period might be four weeks after a year's unemployment plus a week for each three months thereafter. Each unemployed person should only be entitled to one exempt period. The effect would be to subsidise a short period of employment, or the first few weeks of employment, of the long-term unemployed. The cost of this would only be the payments to people who would have got a job then anyway.
A similar approach could be taken to unemployed people who want to start their own businesses. At present, once they set up in business they fail the work test and lose unemployment benefit, even if initial earnings are negligible. The Commonwealth should not get involved in helping unemployed would-be entrepreneurs with capital -- that should be left to financial institutions which are better at assessing proposals -- but continuation of unemployment benefit for the first few weeks of a new venture's life would be big help to its cash flow. The cost of this sort of scheme would also be small, and it would even make a profit if enough of the businesses it encouraged lasted well beyond the initial period: the extra benefits paid in the first weeks would be more than offset by the long-term savings.
5.3 INDEXATION
Automatic indexation of pensions and benefits is intended to protect beneficiaries from inflation. It has two disadvantages: it limits the government's discretion in budget-making, and (unless an appropriate index is chosen) may produce inequitable results.
In present conditions, when it is vital for the government to reduce the deficit (see section 3 above and other chapters), it should not tie its hands by promising to index pensions and benefits. If other real disposable incomes are falling, welfare recipients must share the burden.
Even in "normal" times it is probably preferable for the real value of pensions and benefits to be under the control of government. Public acceptance of indexation (and politicians' reluctance to face difficult decisions) may mean that this is a counsel of perfection, although if other recommendations in this volume are accepted inflation should before long return to the levels of the 1960s. If indexation is politically unavoidable then consideration should be given to using an index other than the CPI, which in principle is not an appropriate one, because:
- It is based on average household spending patterns. Poor households can be assumed to have different spending patterns (higher proportions on food and cigarettes and lower ones on holidays, for example). Likewise, old and young people have different spending patterns: the old spend next to nothing on baby food and nappies, for instance. If relative prices change, the CPI will not be an accurate guide to the cost of living faced by the poor or by the old.
- It does not take into account changes in national income or in community living standards. If earnings (especially after-tax earnings) do not keep up with the CPI, indexation maintains the standard of living of pensioners and beneficiaries while that of the rest of the community declines. In such circumstances, equity suggests that welfare recipients should bear a share of the burden.
COL should be developed by the Policy Coordination Unit (PCU) of the Ministry for Community Services and the Australian Bureau of Statistics. PCU should study the cost and benefit of having two or more tailor-made COLs for various categories of pensioner and beneficiary, and/or having a special rent index associated with COL to use as a guide to adjusting rent allowance. The definition of COL must make compensation for one-off price effects of changes to indirect taxes a matter for government discretion, not part of the automatic indexation system, perhaps by allowing the Minister to disallow part of any increase. Ideally, when inflation is under control, automatic indexation should be replaced by pension adjustments at government's discretion.
If necessary to eliminate the deficit, the Government should reduce the CPI should be replaced for pension and benefit adjustment by a new |
6. MEDIUM-TERM ACTION
6.1 SIMPLIFICATION OF TAX AND SOCIAL SECURITY
The present income support system has grown over the years as new entitlements and restrictions have been added in response to stimuli ranging from widespread hardship to an imminent election. One person or one family can be eligible for several different benefits each of which is subject to different conditions and a different income or assets test. The result is a system which is not easy for the educated to cope with and which can be a nightmare for those with no experience of or aptitude for dealing with bureaucracies, one that rewards the cunning and handicaps the naive.
One of its least satisfactory features is the interaction of pension and benefit means tests and income tax. It takes very little income apart from welfare payments for the recipient to have to pay income tax too. This can leave people with low incomes facing extremely high effective marginal tax rates as each dollar of extra income reduces pension or benefit by 50 cents and is itself subject to 25 or 30 cents tax. Matters are further complicated by the way the tax and welfare systems use different assessment periods, definitions of income, and income units (family or individual).
The result is that the government often pays a pension with one hand and collects tax from the pensioner with the other. Some pensioners pay more tax than they receive in pension and are net taxpayers; most are net beneficiaries. As indexed pensions and benefits have increased faster than tax thresholds, people with no income except the pension would have become liable to pay tax if government had not further complicated matters by introducing special pensioner and beneficiary tax rebates.
There have been many proposals for integration of the income tax and social security systems, most incorporating some form of Guaranteed Minimum Income by means of refundable tax credit. This sort of thing is also known as negative income tax. The trouble with these is that if the GMI is enough to replace most current pensions and benefits, it needs high marginal tax rates on middle incomes to fund it; if tax rates are kept low, only a small GMI can be afforded and supplementary benefits will be needed for the really poor. Any but a very small GMI seems likely to have significant incentive effects, particularly on people's willingness to work. In either case there is the formidable legislative and administrative task of simultaneously revising income tax, pensions and benefits.
The proposal below avoids these problems. It simplifies the situation of pensioners and beneficiaries, without prejudicing either tax reform or subsequent integration of the tax and welfare systems.
Remove pensioners' and beneficiaries' income tax liability and use a |
The proposed scheme is outlined in the box below, and described in more detail in the Appendix to this chapter. Details of administration, and the precise rates and thresholds, would need to be decided by the Government in the context of its budgetary problems. At any given total net expenditure, the scheme will favour the poorest pensioner and beneficiaries over those with significant private incomes. The actual rates and thresholds determine the difference in cost between this and the present scheme (apart from the future savings from simpler administration). They also determine who gains and who loses (poor pensioners, less poor ones, well-off pensioners, the taxpayer ...) The scheme was proposed by Dixon and Foster. (8)
Outline of Means Test and Income Tax Arrangements
|
6.2 PENSIONABLE AGES
Women are now eligible for the age pension at 60 while men are not until they reach 65. This form of sexual discrimination is no longer justifiable. (The benefit to women in terms of income redistribution is the greater because of their longer life expectancy.)
The concept of compulsory retirement should also be questioned. With a growing proportion of healthy old people in the population and a falling number of working people per pensioner or beneficiary, the community should not deny itself this source of often skilled labour.
Equalise pensionable ages for men and women. |
This cannot be done overnight without injustice to people now approaching retirement. The change should be phased in slowly, raising the age for women from 60 to 65 over five years after five years' notice.
6.3 EQUITY BETWEEN HOME-OWNERS AND OTHERS
As discussed in the Housing Chapter, many features of the tax and social security systems discriminate against people who rent their homes. Rent assistance to pensioners and some beneficiaries partially redresses the balance but only for the poorest. The assets test has a higher threshold for non-home-owners but as it excludes the value of the pensioner's home altogether the effect is still to favour people with valuable houses over less wealthy people whose assets take other forms.
The assets test's withdrawal rate ($20 per week per $10,000 of assets over the threshold) is too steep to be balanced by any likely after-tax return on assets. It was presumably intended to force people with assets-test-limited pensions to live to some extent on their capital. The provision for payment of full pensions to people with substantial assets, with the amount over their entitlement treated as a loan repayable from the estate, eases the effects of this on people whose assets are "lumpy" and illiquid.
This principle of "loan" pensions having been established, it should be used to bring pensioners' homes into the scope of the assets test.
The Government should encourage the development of ways to enable |
Most of these involve State rather than Federal responsibilities. Among them are:
- Reverse mortgages, where instead of the mortgagor receiving a lump sum repayable in a fixed number of instalments, he or she receives a fixed number of instalments of income repayable in a lump sum, with the mortgaged property as security.
- Reverse annuity mortgages, in which the flow of income continues until death.
- The French vente en viage (translatable as "sale while living") in which the property is sold but the former owner retains possession until death (death of the survivor, in the case of married couples).
These will provide competitive, commercial alternatives to the Government's pension-as-loan scheme. We should also not forget that pensioners' heirs will have an incentive to supplement their incomes in order to maintain the net value of the estate.
When these financial alternatives are available, the assets test should be revised to include the value of pensioners' homes. At present, the thresholds for home-owners (single people or married couples) are $50,000 less than for renters. The renters' thresholds should apply to home-owners, and half the value of the home be counted as an assessable asset. This would mean that houses worth less than $100,000 would still be exempt, and that the pension would be reduced by $10 per week for every $10,000 over that (half the rate for other assets).
Aspects of equity between home-owners and tenants are also discussed in section 6.6 (Family Income Supplement) below and in section 2.4 (Rent Assistance) of the Appendix to this chapter.
6.4 THE PENSIONER HEALTH BENEFIT CARD
The pensioner health benefit card (PHB) is issued to pensioners whose income apart from the pension is less than $65 per week ($106 for a married couple, $20 extra for each dependent child). It gives access to a wide range of Commonwealth, State, and local government fringe benefits. Its value varies with the needs and lifestyle of the holder, but has been estimated by the Social Welfare Policy Secretariat at up to $30 per week for some holders, and of the order of $10 per week for the average holder. Concessions from private-sector organisations (cinemas, golf clubs, etc) can substantially increase this value for the lucky few.
Pensioners whose income is above the cut-off point are not eligible for the card, so that a $1 increase in weekly income can result in the loss of $10 or more of fringe benefits (and more for a family). This is a significant poverty trap and should be eliminated.
As well as the PHB card proper, there are several other types of health or concession card issued to various categories of pensioner, beneficiary, and former invalid pensioner, and low income earner.
The Government should abolish all cards except the PHB, and provide |
There are two ways of doing this:
- The simpler is to offer the card to all pensioners at the same price, and to protect the poorest by increasing the pension by the same amount. In practice the price would be withheld from fortnightly payments, if the pensioner wanted the card; some would no doubt prefer the money. Ideally the price would reflect the average cost to the Commonwealth of providing the relevant fringe benefits. This method could easily be introduced at the same time as the welfare/tax simplification described above. If introduced separately, it would be necessary to adjust the income test threshold(s) and/or clawback rates to prevent the change from increasing expenditure too much.
- The other way is to give the card to low-income pensioners and to offer it to higher-income pensioners at an income-related price.
Either way, if the change is not to increase expenditure, some pensioners who now get the card for nothing will have to pay something for it, either by receiving a means-tested pension increase less than the price of the card (the first method), or simply in cash (the second).
The Health Care Card for low income earners can be retained as at present or, preferably, abolished and its value cashed out into the Family Income Supplement.
6.5 FAMILY ALLOWANCE
Family Allowance is not a particularly efficient way of helping the needy, but there are many worse, among them the income tax rebates it superseded. Family Allowance costs about $1.4 billion a year. It is paid to all families with dependent children, usually to the mother. It is not taxable and not indexed. An income test introduced in December 1986 cuts the allowance for children 16 and over of families with total income over $39,000 per year.
Family Allowance should be tapered to direct expenditure more |
For pensioners and beneficiaries, this can be achieved by abolishing Family Allowance for them as such and increasing the dependants' allowance in the pension accordingly. (If it is thought necessary to continue to pay direct to the mother, this amount, or some set proportion of the family's benefit, could be deducted from the total family benefit and paid separately.)
For other families, the most attractive long-term solution is to integrate Family Allowance into a system of family-based refundable income tax credits as part of a radical reform of the tax system (see the Tax Reform chapter). Until then, the Hawke Government's income test should be maintained and perhaps tightened.
6.6 FAMILY INCOME SUPPLEMENT
Family Income Supplement was introduced to assist low-income workers with families who would otherwise find themselves financially worse off in work than out of it. It is subject to an income test and the amount payable varies with the number of dependent children. It is only payable to people who do not receive other pensions or benefits (except for Family Allowance).
Family Income Supplement serves a useful purpose as it helps maintain the incentive to work rather than be entirely dependent on benefits. For part of the income ranges for which it is paid, however, FIS overlaps with income tax. This means that FIS recipients can face very high effective marginal "tax" rates, which are probably especially undesirable here as their disincentive effects can be expected to have more serious results on workers than on pensioners and beneficiaries. It also means that government is taking money from FIS recipients in tax and returning it to them as FIS, which is usually inefficient and undesirable.
In the Housing chapter we recommend the termination of Commonwealth support for State housing programmes, with resulting large budget savings.
Continue FIS in its present form. It will be needed until labour market Some of the saving on housing (9) should be used to increase FIS, which |
If the income tax is reformed, the opportunity should be taken to abolish FIS as such and consolidate it into a system of refundable tax credits.
6.7 SUPPORTING PARENTS BENEFIT
In most ways this is more like a pension than a benefit. It was introduced only in 1974, and a rapid increase in recipients was to be expected in the early years as eligible people took up the benefit. But rapid increase has continued since and it has become clear that the existence of the benefit has facilitated the separation of many married couples and has encouraged parents, usually men, to avoid their obligation to support their children.
The American evidence discussed in section 2 above suggests strongly that AFDC, the US equivalent to Supporting Parents Benefit, has increased, not decreased, the number of children in poverty. Research is needed here.
In the meantime, there are various possible courses of action to reduce the number of what might better be called Supported Parents. Sharply reducing the rate of the benefit would make it less attractive but would also cause unacceptable hardship. One proposal is to require new applicants for the benefit to (1) identify the other parent (usually the father) and (2) authorise the Commonwealth to recover maintenance from him or her. Exceptions would have to be made where an applicant could satisfy the authorities that the father was unknown to her.
Amend the Family Law Act to prevent judges taking cognisance of the Direct the Social Security Department rigorously to enforce the Improve the enforcement of maintenance awards by establishing a |
A milder version will suffice for the time being, as the large majority of benefits are paid in respect of children born during real or de facto marriages.
Fewer than half of all awards are paid in full. Knowledge that maintenance will be paid in full may encourage judges to give more careful consideration to the equity of their awards.
ENDNOTES
1. See D. Dixon, "Costs and Benefits of Occupational Superannuation Tax Concessions", Economic Papers, December 1985, pp 38-54.
2. See especially C. Murray, Losing Ground: American Social Policy, 1950-1980, New York, Basic Books, 1984.
3. The matter is discussed in section 3 of the Government and Administration chapter.
4. See also R.J. Wood, The Future of the Welfare State, 1991.
5. See especially the Labour Market and Trade and Industry chapters.
6. Many techniques are explained in P. Sawyer, Dolebludging -- a Taxpayer's Guide, Kenthurst, Kangaroo Press, 1986. Sawyer's argument is that "we don't have a welfare system at all, but a structured method of making structured payments to people willing to tell the right stories". The book should be read by everyone interested in the welfare system, although not everything in it should be believed.
7. For the reasons for high teenage unemployment, see R.J. Wood, "Teenagers and the Labour Market" in Wages Wasteland: a Radical Examination of the Australian Wage Fixing System, Toowoomba, 1990.
8. For citations see the Appendix to this chapter.
9. See the Housing chapter.
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