Friday, January 28, 2011

Do family benefits provide a welfare pedestal?

The concept of a welfare pedestal has been popularized by Noel Pearson. As a lawyer and passionate advocate for the interests of aboriginal people who live on the Cape York Peninsula of North Queensland, some readers might expect that he would spend his time arguing for more government hand-outs to remedy social problems in aboriginal communities. However, Pearson recognizes that the welfare programs are actually a major cause of the social problems in those communities and his main focus is on finding ways to stop hand-outs from harming his clients. He is not against government help for his clients, he just wants to ensure that it does them more good than harm.

The insight behind the welfare pedestal is that welfare payments can provide perverse incentives by encouraging some people to remain on welfare rather than to seek paid employment. Over the last decade or so, concern about an emerging problem of inter-generational welfare dependency (in non-indigenous communities as well as indigenous communities) has led to some tightening up in the provisions attached to unemployment benefits. It is too soon to claim that the problems associated with unemployment benefits and pretend work schemes have all been resolved, but the problems are now widely recognized and some appropriate remedial action is being taken.

The example of a government program contributing to the welfare pedestal that Pearson gives in his recent lecture, ‘Pathways to Prosperity for Indigenous People’, is family benefits. He suggests:
‘Life on the welfare pedestal in a country that distributes money through a generous family tax benefit system is quite a rational choice’ (The Sir Ronald Trotter Lecture, New Zealand Business Roundtable, 2010).

I had not previously thought of the family tax benefit in that way. I have tended to view the family tax benefit as a kind of negative income tax, providing net benefits for families with low and modest incomes. I was previously aware of adverse incentives resulting from fairly high effective marginal tax rates for people on fairly modest family incomes above the point where the means test begins to cut in (about $45,000). According to the way economists usually look at these things, however, a family with four children obtaining $19,600 per annum from family benefits has no disincentive to obtaining additional income from work of more than $25,000.

In another paper Pearson acknowledges that the absence of punitive marginal tax rates is probably not an important consideration when people in Cape York Peninsula make their decisions about how many hours of the week they allocate to work or leisure. He writes:
 ‘Indigenous parents are having large families at an earlier age. Their welfare payments add up to a significant yearly wage. This income is received without them ever having to make any active decisions about education or work. When they have started receiving family payments, they face this choice: have an income which they are prepared to exist on for minimal work obligations or work longer hours for a limited increase in income and significantly less leisure time.
The behaviour of people in our communities indicates that many of our people do not intend to increase their income by increasing their labour supply. In some remote communities, it has been difficult to find applicants for the real jobs that do exist, despite the fact that the vast majority of people are unemployed’.

Pearson argues that ‘conditions and incentives to make active and beneficial life choices should apply to family payments’ even though he acknowledges that problems arise because such payments ‘are not indigenous-specific schemes’.

That poses a question: If people make the choice to live on generally available family benefits rather than to earn higher incomes, why should we view this as a problem? I see no problem in individuals choosing to live on low incomes. We should respect the choices that some individuals make to live a life of poverty (and of chastity too, if that is their choice). I can’t see why anyone should have a problem with individuals making whatever income/leisure choice that they desire.

I can see a problem, however, in governments providing family benefits to people who do not have adequate regard for the well-being of their children. I think we (taxpayers/voters) should insist that family assistance should only be provided to parents when they meet conditions such as ensuring that their children attend school regularly. Perhaps it would not be too difficult for a prime minister who has a special interest in educational opportunity to find a simple way for such a condition to be applied to family tax benefits across all sections of the community.


Jim Belshaw said...

There is, I think, a problem here not just in the way benefits and benefit conditions mesh, but also in the interactions between these and on-ground conditions.

Take a simple thing like rents. In some Aboriginal communities, rents are very low. That's one reason there is a housing problem. At the other extreme, are city rents. In the middle comes social housing where rents are basically 25% of income.

People on benefits renting in the private market may be eligible for rent assistance. This is paid at the rate of 75 cents in the dollar for every dollar of rent paid above a threshold up to a maxium amount. Both the threshold and maximum amounts vary depending upon household type. Single people get very little, a single mum with three kids a fair bit.

Just pausing here, you can see that the amount of money people actually have in their pocket after rent varies greatly depending on their benefit class, where they live and just who they rent from.

People who want to move into work face increased costs. They may also lose benefits, but this is not a single loss, but one with multiple and complicated thresholds. Social housing, for example, is income means tested. It is no longer, as it once was, to help lower income earners as a general class. If your family income rises beyond a certain and not very high point, you may lose your house.

So the family in social housing may face three benefit hurdles: those attached to the primary benefit; those attached to rent assistance; and those attached to social housing.

The effects of changes to welfare conditions may be quite variable between people depending on who they are, where they live. They can also have quite perverse effects.

This is not to argue against your main point, simply to say that generalised arguments may mislead. For example, I have seen very little in the way of argument and analysis based on the detail of Commonwealth benefit payments taking on-ground conditions plus any other benefits into account.

Winton Bates said...

Hi Jim.
I agree, asistance with housing is certainly a relevant consideration that may under some circumstances provide a strong disincentive to seeking paid employment.
Special medical benefit provisions for low income people on various pensions may also be a relevant consideration.
It would be easy to become overwhelmed by all the complications, so I think it is important to try to focus on the big picture to see if there are some general principles that should apply.
My starting point is that I accept the argument for provision of a fairly generous safety net for those most in need in the community. We can afford to help them, so we should do so. (I would prefer people who can afford to do so to provide that help voluntarily - but that might be pie in the sky).
I think benefits should be means tested rather than provided universally to avoid disincentives associated with high tax rates.
However, means tests also involve disincentives. Benefits should be reduced gradually as income rises to avoid high effective marginal tax rates.
From that perspective, the family benefits scheme didn't look too bad to me until I started reading what Noel Pearson was saying about it. What he seems to be implying is that even if you fix up all the disincentives associated with all the other welfare schemes (presumably including housing and health as well as pretend work)you
will still be left with people choosing to live on family benefits rather than seeking paid employment.
So, that gets me to the point where I think we need some careful thinking about the main objective of family benefits should be.
My view is that it should be about ensuring the welfare of children rather than providing family income support.

Jim Belshaw said...

I know where you are coming from Winton. My problem is that I'm not so sure that you can articulate general principles without looking at the detail and going back and forward between the principles and the details.

Take your view that it should be about ensuring the welfare of children rather than providing family income support. How do you separate the two? Then what are the flow on effects?

Staying with social housing rents, family tax benefits are counted as part of income for rental purposes; 25% goes to rent. If FTB is to be limited to just to welfare of children, does this mean that they cannot be included in rent?

Beyond this, FTB is already related to some degree to welfare of kids in that it is meant to cover additional costs associated with those kids - extra food, clothing, rent, education etc. The amount paid actually varies with the age of kids. It provides extra income, but in this sense is not really an income benefit as such.

I suspect that the only way to really quarantine FBT so that it is only spent on kids is by defining just what the money can be spent on. I also think that that's likely to get very messy and administratively costly.

Winton Bates said...

Jim, I would certainly want to avoid defining in detail what the funds are to be used for.
I was suggesting school attendance as one criterion. There would no doubt be complications involved, but school attendance is supposed to be compulsory. So someone must be responsible for recording school attendance.
I don't claim to have given a great deal of thought to what should be done if a child isn't attending school regularly. If the community is really serious that school attendance should be compulsory, then if the parents don't ensure that the kids go to school regularly then perhaps custody plus family benefit should be transferred to someone (other relatives nominated by the parents in the first instance perhaps) who can make that assurance.
I hope someone in Canberra is giving a lot of thought to the issues involved. The impression I get from reading Noel Pearson's lecture is that his concerns about family benefits have not being taken seriously by the government.

Jim Belshaw said...

Hello Winton. First, an explanation.

In 2009 I did some contract work with the NSW Aboriginal Housing Office including rental policy. A little earlier, I did some work with the Office of Community Housing again with a focus on rental policy including project managing the introduction of CRA based rents.

During this time I spent a lot of time just digging into benefits. You had the misfortune to strike an area where I have a special interest. Sorry.

On NP, I will try to check facts and come back. We already have an issue in that problems in specific Aboriginal communities lead to specific responses that are then generalised regardless. The results can be unfortunate.

Winton Bates said...

No need to be sorry, Jim. I appreciate your interest.

Chudex's said...

The writing that heavy but very useful for me. I just imagine what if the country I was born and raised there also tax made by many developed countries ... I'm sure the people of Indonesia is not a wasteful society and the home buying or wrote about something just because of social jealousy because every furniture and expensive items purchased will be taxed each year. very perfect.

Winton Bates said...

Thanks for your comment, Chudex's. I hope Indonesia manages to avoid the mistakes that Australia has made in developing its tax-welfare system.