09 December 2012

Being partnered is not much of a bonus

[Warning: A commenter has suggested this post is boring enough to provoke actual self-harm]

Considering the amount of attention paid to the findings of the recent Senate enquiry into Newstart allowance (and similar) payment rates, it's perhaps surprising that the introduction next year (from 20 March) of an income support bonus has received little coverage.  The bonus provides up to $175 a year to a member of a couple and up to $210 a year to a single person.  This is in addition to the usual CPI based rate increases.

It's not a straightforward increase in rates, however, and the chosen approach seems to me to be particularly unfair to some couples.

The bonus is only provided to people who are on the eligible income support payments on a particular test day.  There are two of these a year - 20 March and 20 September - and a person on payment on a test day will get half of the yearly bonus amount as a lump sum.  So, if you are on a payment on both test days in a year, you get the full amount.  Not on payment on a test day?  Tough - no bonus for you.

Providing this extra assistance as a rate increase instead of a test-day based bonus would, of course, cost more.  That's because all recipients would have an increase (albeit comparatively small on a fortnightly basis) instead of those who happen to be there on the test day.  There's also a small extra cost associated with the fact that an increase in rates also leads to an increase in the income point at which entitlement to payment is reduced to zero under the income test (the cutout point).  Given the size of the bonus, delivering it as a standard rate increase wouldn't have done much in this respect, as is shown below.

Chart 1

The dotted red line shows the assistance and increase in the cutout point if the bonus was delivered as a standard rate increase over a full year.  This is based on the higher single rate of Newstart allowance, paid to singles with dependent children, older long-term recipients and members of a couple who are living apart due to ill-health, or imprisonment of one of them.  As you can see, the two methods - bonus and increase - provide the same gain over a year until private income exceeds a little over $25,000 a year.  The extra assistance stemming from the increase in the cutout is pretty trivial.

That suggests for singles the main savings from choosing the bonus approach come from the test day system.

If we look at couples, however, it's quite a different story.  Again, there are savings to be had from the test day approach, but there are also some that stem from the so-called sequential income test that's applied to most social security benefit couples (there's a bit of an explanation of sequential income testing in an earlier post of mine here).

An increase in rates would have given couples the full benefit of the (combined) $350 assistance package on offer regardless of the distribution of private income within the couple.  Delivery via a bonus means that for single income couples in particular, the assistance is half what it would (should?) have been over quite an extended income range.  You can see this in Chart 2 below.

Chart 2

Here we can see a marked disparity between the entitlements delivered via bonus system versus a standard rate increase.   Whereas singles received over a full year almost identical amounts regardless of delivery approach, couples are clearly disadvantaged by the bonus method.

There is no disadvantage for couples where income is equal (ie, a 50:50 private income split), or where one of the couple is a pensioner.  For the rest, the closer the private income split is to 100:0, the more disadvantaged the couple becomes relative to singles and 50:50 couples.

Maybe this is a carefully thought out design, or maybe it just indicates what can happen if you whip some kind of paltry increase up at the last minute in the face of continued criticism.  You choose.


I forgot to mention that the Bill introducing the bonus is currently before Parliament.  Details are here.


  1. Wow, stumbled across this and got to say this is as boring as it gets, why is this even here? I now feel like I want to upper cut myself in the face until Im unconscious. Cheers Dave you big brain you,

  2. Try this one and see if you decapitate yourself before reaching the end: http://ravebydave.blogspot.com.au/2012/06/taking-it-out-of-neutral.html