The changes I'll be focusing on are:
- the removal of the "grandfathering" provisions that have so far prevented single parents who have been on parenting payment (PPS) since before 1 July 2006 from being subject to the so-called age-8 transition; and
- the relaxation of the Newstart allowance income test for single parents with the principal care of at least one child aged under 16.
The age-8 transition refers to the rule that's been in place since 1 July 2006 - PPS is only payable to a person who has the care of a qualifying child aged less than 8 years. When that child turns 8 entitlement to PPS is lost and the person will need to take up some other type of income support payment, typically Newstart allowance (NSA). Depending on the individual's circumstances NSA may not be the only option - other possibilities include Austudy payment, disability support pension or carer payment.
With the exception of the grandfathered group referred to above, single parents have been undergoing this transition from one type of income support to another when their youngest child turned 8 for over six years now. The typical PPS to NSA transition involves a significant reduction in the single parent's disposable income because (a) the maximum rates of payment are lower and (b) the NSA income test is rather tighter than the PPS one. The combination of these two elements means that the reduction depends on the amount of the single parent's private income.
Here's a fairly bare-bones chart that shows the amount of the reduction under the current rules. I say bare-bones because there are many other factors that can affect the outcome, including the person's accommodation arrangements, child care arrangements, child support payments and the extent to which the person makes use of pensioner concessions. I've not included those.
The chart shows the total reduction and also the bits of the tax-transfer system that make it up.
This example is a two child single parent. You can see that the maximum loss of around $9,600 a year (about $184 a week) is experienced by those parents earning a little over $25,000 a year. Those parents who weren't working at transition have a loss of around $3,450 a year (approx $66 a week), reflecting the difference in the maximum rates of the assistance package.
The 2006 changes to PPS eligibility that resulted in this transition were intended to increase the workforce participation of single parents. It seems odd then (to put it mildly) that the way they were implemented actually delivers greater financial losses to those parents who work.
From 1 January 2013 the age-8 transition will also start to apply to the previously exempted grandfathered group. Quite a few of those have youngest children aged 8 or more so there will be a large block of parents subject to the transition in addition to the usual rate of movement between the payments. However, the transition from PPS to NSA will be made a little easier for working parents due to the relaxation of the NSA income test.
At present, once the NSA income test starts to bite it reduces payment at a rate of 50 cents for each dollar, increasing to 60 cents in the dollar for income in excess of $250 a fortnight. Under the new arrangement both these taper rates will be replaced by a 40 cents in the dollar regime. This has two effects:
- the losses at the age-8 transition will not be as large for working parents; and
- most "principal carer" single parents already on NSA who are working will get an increase in their NSA payment (see my earlier post on this if interested in the amounts).
Here we can see the relaxation in the NSA income test taper rate has reduced the maximum yearly loss from around $9,600 (as per Chart 1) to around $6,200 (obviously, there's no change for those not working). Interestingly (in a perverse kind of way), in private income range of approximately $15,000 to $35,000, the almost $5,000 reduction in income support is nonetheless associated with an increase in tax liability. That's because PPS recipients have access to the senior Australian and pensioner tax offset (SAPTO) which reduces their tax liability. No more PPS means no more SAPTO which means a bigger tax liablity.
The increased medicare levy at higher incomes is a result of the loss of a similar concession in the medicare system.
I mentioned earlier that the rationale in 2006 for the introduction of the age-8 transition was to increase workforce participation. That same rationale is being used for the removal of the grandfathering provisions today. The loss of income at the transition supposedly provides a bit of stimulus or incentive to increase hours worked in order to make up that loss. However, the problem in the 2006 arrangement - that it penalises most heavily those who are already working - is present in the January 2013 system. This means that in order to recover their financial loss, those who are working at the transition have to earn more than those who weren't.
Just how much extra is needed is the subject of the next chart.
This one might need a bit of explanation. It's showing how much private income PPS and NSA recipients must have in order to acheive equal disposable incomes. For example, if we look at a PPS recipient earning $10,000 a year we can see that under the current (September 2012) arrangements, the NSA recipient has to be earning about $27,000 a year to get the same final income. Come January the NSA recipient needs to earn about $20,000 to match a $10,000 earner on PPS, or in other words, they have to double their working hours to stay where they were.
The dotted reference line is what would be required if both the PPS and NSA schemes were the same. It's only there to make it easier to see how much extra has to be earned to achieve "parity" - it's the amount by which the September and January traces exceed the reference.
This chart is focusing on the private income levels, however, it's perhaps a bit scarier if this changes to hours worked. The next chart considers people earning the National Minimum Wage (NMW).
If we look at a PPS recipient working 15 hours at the NMW we can see that, post-transition, they currently need to work about 35 hours a week to keep the same level of disposable income. With the relaxed NSA income test, from January this falls to about 28 hours - still nearly double. Even with the relaxed income test, PPS recipients working 23 or more hours per week at the NMW will have to work full-time and add a second job to stand still financially - they have to work more than 38 hours a week. A full-time NMW PPS recipient will need to up their hours from 38 to 50 a week.
In contrast, a non-working PPS recipient can maintain their income post transition by working around 6 hours a week. Again, working PPS recipients are really copping the brunt of this change.
Earlier I mentioned that these results were for a bare-bones case. However, it's difficult to ignore the fact that many single parents will need to make use of childcare, so my final chart is an attempt to bring in that element. In this case I've assumed that both the PPS and the NSA recipient are making use of outside-school-hours-care (OSHC).
I confess I've cheated though, because I've calculated it as if each hour of employment was associated with a childcare requirement. I'm assuming that a person working full-time would use the maximum allowable OSHC of 25 hours a week, and less hours worked is proportionally less hours of OSHC, down to zero usage at zero hours worked. The reality is rather different, particularly given the sessional nature of childcare provision.
This chart is just looking at the January situation, with and without childcare factored in. For the childcare I've assumed an OSHC cost of $6.50 per hour. The main point is that over much of the range covered here, factoring in childcare adds around another 4 hours a week of employment to cover the loss of income. So, for example, a PPS recipient working 15 hours a week and not using childcare would need to work about 28 hours a week post-transition. If they were a child care user, they'd need to work about 32 hours a week (more than double).
Ultimately, the chart gets a bit silly, because there's no extra childcare provided once the 25 hour limit is reached, at least in my modelling. However, the single parent working more than full-time is still going to need some kind of child care, particularly as we get up toward the 50 hours a week employment at NMW needed to replace 38 hours of pre-transition income.
One of the (many) perplexing elements of this set of policies is the fact that although the transition occurs at age 8, PPS recipients are required to look for work, etc, when their youngest turns 6. This "activation" strategy is apparently pretty successful and as a result many PPS recipients are in employment by the time their child turns 8. On the face of it that might seem a good result, but when combined with the PPS-NSA transition it can be argued that all the system has done is set these people up for a giant fall due to a design that appears to punish workers.
As I tried to point out in an earlier post (here), transitions are inevitable given that children eventually grow up. But surely we can design them better than this.