Despite some analysis from other media suggesting single parents might find being on welfare more attractive than working, more than half of sole parents in Australia are in work and are better off as a result.
Australia’s tax and social security systems are designed to collect revenue on a fair basis, to provide a means tested safety net to protect people from poverty, to support the cost of raising children and to encourage work.
The Treasurer recently said that the:
“…ultimate test for any welfare system and any tax system [is that they are] well synchronised when you are better off if you are of working age in this country and you are able to work that you are better off in work than you are on welfare”.
Our analysis shows Australia’s tax and social security systems do meet the goal of ensuring that welfare recipients have a financial incentive to seek work and, if they are working part time, to work more hours.
Does sole parent welfare pay more than work?
We looked in detail at the case of a sole parent with four kids aged 13, 10, 7 and 4, proposed by Sarah Martin, “Parental Welfare Pays More than Work” in The Australian. Martin said that “thousands of parents claiming government benefits are financially better off not getting a job” and that 10% of parenting payment recipients, about 43,200 people, were better off than a median wage earner. However as the Australian Council of Social Service observed, four kids and a single parent is a pretty unusual family structure these days.
Let’s call our sole parent Jane, as more than 85% of sole parents are mothers. If Jane is not in the paid workforce, she would take home A$52,469 in government benefits for the year to raise her family.
Jane does not face a simple choice between welfare or work. Our system is designed to encourage work, so Jane will continue to receive family benefits in work. When Jane’s youngest child turns six, Jane is required by law to seek work (or study) of at least 15 hours a week, to get the benefits.
Financial incentives to work are produced by the net take-home income of a family, after tax paid and benefits received. This is reflected in the Effective Marginal Tax Rate (EMTR), which takes into account tax paid and benefits lost as income from work rises; and the participation tax rate, which is the average EMTR over a range of income given the decision to take up work. The EMTR for Jane for earnings up to A$80,000 is shown in the chart below.
D Plunkett model (September 2016), Author provided
As shown in the chart, Jane can earn A$6,000 with no tax or loss of benefits. The EMTR on her next A$10,000 is 40% and then to the median wage of A$61,300, it is 60%-65%.
Up to the median wage, Jane’s participation tax rate is about 55% so she is financially better off by at least $35 for each $100 earned after benefits phase out and tax is paid. It’s clear that working pays for Jane, even though the EMTR looks quite high.
The “spikes” where the EMTR reaches 100%, are when a benefit ends or Medicare Levy phases in, apply over a small range and do not affect the overall picture. The coloured areas show the income tax on Jane (red), Medicare Levy (green) and withdrawal of parenting payment and Family Tax Benefit A (yellow) as her wage income rises.
More detail about EMTRs and how they are produced by the interaction of tax and transfer systems is in Tax and Transfer Policy Institute Policy Brief 1/2016 by Ingles and Plunkett. It also includes discussion of possible policy responses to improve work incentives.
Net take home pay for each extra day of work
We can show Jane’s net position after tax and benefits, for each extra day of work from one day up to five days (full-time). To do this, we need to assume a wage rate for Jane.
Assuming the median wage of A$61,300 (full time), Jane’s hourly wage rate is approximately A$37. We do not use the “part time inclusive” median wage of A$46,200 adopted by Sarah Martin in The Australian, because that confuses the hourly wage rate and the hours worked.
We also assume a rental housing cost for Jane of A$20,800 or A$400 per week, at the low end for Sydney. Even at this modest rent, Jane would be in “housing stress”, paying more than 30% of her income in rent.
Jane’s net position if she goes to work for one day up to five days is shown below (ignoring childcare and other costs). It shows a total gain from working of A$27,150 a year if Jane works full-time.
Author provided/The Conversation, CC BY-ND
Work pays for Jane even if she only works one day a week. However, Jane does less well from days three to five of work, due to the relatively high EMTRs which apply over the income range of A$30,000 to $60,000.
The poverty line for a sole parent with four kids
The implication of the debate about being “better off” on benefits, is that welfare is too generous. But this needs to be put into perspective.
For Jane’s family with four children aged 4 to 13, the standard Australian Henderson poverty line in June 2016 was A$52,191 (not working) and A$57,373 (working). That means the parenting benefits that Jane receives keep her family just at the poverty line. Working, as you might hope, actually raises Jane’s family out of poverty.
By contrast the poverty line for a single person not in work was A$22,211 and in work, A$27,392. So even after paying income tax, a single person on a median income would be comfortably out of poverty.
Childcare and other costs of working
The Treasurer and article in The Australian noted above are silent on the issue of childcare and the financial costs of working. This is strange because, unless Jane has a relative who can provide care for free, childcare for her four year old and after-school care for her seven year old and 10 year old are crucial for her to work.
The government has reintroduced its childcare reform package from the Budget in the September Omnibus Bill. This is important, but Ministers Christian Porter MP and Simon Birmingham MP insist they will not “add” childcare to “the nation’s credit card” but must fund it by trading off with other social security cuts. This tradeoff includes family benefits, as explained here, which will make many families worse off.
Even with childcare, for a single parent with four kids, parenting is pretty demanding. What if they get sick? How far is work and school from home? How can after-school sport be managed? The financial costs of working such as commuting and clothes, will also be challenging for Jane.
Even assuming that there is a suitable job available, there will be many situations where the financial incentives are not sufficient. Jane needs to weigh up all the costs and benefits when making a work decision.
Authors: Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University