The large deficits identified above support the repeated calls by many groups for an immediate and significant increase in main benefit rates (Child Poverty Action Group, 2019). Notably, though, a 20% increase in main benefit rates, as many have suggested (including in submissions and during our consultation hui), would still leave many with inadequate levels of income. This is especially the case if meaningful participation in communities is an objective.
Additionally, an immediate increase on its own risks being negated by reductions in Accommodation Supplement, Temporary Additional Support and other payments. Therefore, we have developed a package of changes that significantly improves the adequacy of income support and are broadly based on the deficits shown in the example families research.
"Benefit and tax credit levels have been too low to support families. The need for hardship grants from Work and Income [MSD], particularly for food and housing, has soared over the past few years. Thousands of parents have been forced into debt to meet their families’ basic needs or to pay an emergency bill, or they have relied on charity to ensure children are fed and clothed. The Families Package delivers well under what is needed.”
The main parts of this package of changes are:
The Welfare Expert Advisory Group recommends the package of changes shown in table 2.
|Main benefits – payment rates||
|Main benefits – abatement rates and thresholds||
|Living Alone Payment||
|Working for Families||
|Earned Income Tax Credit||
|Independent Earner Tax Credit||
We considered many variations of packages. Some trade-offs are difficult, and the most significant are discussed in the sections below. The package in table 2 is our preferred option within the information and time constraints we faced. It strikes a good balance between improving incomes for people receiving benefits, making work pay, and the additional costs to government. It also represents a genuine investment in wellbeing.
While this package will substantially improve the incomes of many people, our analysis suggests that it does not result in increases sufficient enough to enable meaningful participation for many families. Further increases would be needed to reach this level and lift more adults and children out of poverty.
Consistent with the principle that a main benefit should cover a greater proportion of people’s costs, the Welfare Expert Advisory Group recommends significantly increasing the rates of main benefits to increase their incomes closer to those required to enable meaningful participation. In summary, these increases are:
The gains from this package for sole parents and couples with children are concentrated in the significant increases to the Family Tax Credit (discussed in the next section).
Further increases to main benefits are prevented by two principles:
In this package, the couple rates of main benefits are maintained at 1.7 times the single rates. In our view, the ideal position would be for couple rates to be double the single rates. However, we have proposed the lower couple rates to keep them within the limits of New Zealand Superannuation (where the couple rate is 1.67 times the single sharing rate). Consideration should be given to addressing this issue across the welfare system.
Couple benefit rates could have been increased to double the single rates, but this would have reduced the amount by which the single rates could have increased, given the constraint of the rates of New Zealand Superannuation. For reasons of adequacy, the choice was made to maximise the increase in the single rate rather than fully remove the partnering disincentive in the couple rate (that is, prioritise improving adequacy for most over individualising the payment rate), though this is a difficult trade-off.
The new couple rate of Supported Living Payment is just below that of New Zealand Superannuation. These changes maintain a higher payment rate of Supported Living Payment, compared with Jobseeker Support, to recognise the likely longer-term nature of receiving Supported Living Payment. Further changes to benefit rates would need to consider changes across the suite of income support payments, including main benefits, New Zealand Superannuation and student support.
The Welfare Expert Advisory Group recommends increasing the rate of Sole Parent Support by less than other benefits for two main reasons. The first is that, in our view, it is preferable to concentrate the increases in support for children through the Family Tax Credit. This means these increases are available to both couples and sole parents, and these increases flow through to low-income working families (potentially better preserving incentives to work). In the example families research, couples with children faced some of the biggest deficits between their incomes and incomes sufficient for meaningful participation in their communities.
The second reason is that these increases to main benefits slightly reduce the financial disincentive to partner within the benefit system by reducing the difference between the sole parent rate of benefit and the couple rate of benefit. Further increases to Sole Parent Support could be considered, particularly if further reductions in poverty are prioritised. However, these would increase the financial disincentive to partner in the benefit system and could reduce financial incentives to work for sole parents.
The Welfare Expert Advisory Group also recommends increasing the abatement thresholds for main benefits (see table 2 on page 99) to improve the adequacy of incomes for people working part-time on low wages and to improve the financial incentives to work part-time.
In addition, the Welfare Expert Advisory Group recommends removing youth rates of main benefits, because there is no evidence that living costs are significantly lower for 16- to 24-year-olds who are living away from home than for people 25 years and over. This includes increasing the rates of Youth Payment and Young Parent Payment to the same levels. These changes also simplify the system.
The Welfare Expert Advisory Group further recommends removing the initial stand-down periods for main benefits, which mean that people currently face one to two week gaps in income from when their income from work ends to when their benefit starts. These stand downs place (predominantly low-income) people in unnecessary financial hardship, make it harder for people to transition into the system and can discourage people from taking up employment (for fear of future gaps in income if the job ends).
The Welfare Expert Advisory Group also recommends removing the 13-week non-entitlement period for voluntary unemployment. Whether a person has a good and sufficient reason for leaving work is inconsistently considered (as is whether people are offered opportunities to re-comply with the obligations on them). This non-entitlement places people into unnecessary financial hardship for a significant period. A better approach uses the new mutual expectations framework, combined with a substantially improved public employment service, so people are quickly supported to return to good and appropriate work.
Other changes the Welfare Expert Advisory Group recommends to main benefits are to:
The Welfare Expert Advisory Group recommends the introduction of a new Living Alone Payment to contribute to the additional costs associated with not sharing accommodation with another adult. This payment should be $30 a week. This payment will abate after a person’s main benefit has finished abating, at the same rate (70%), and is available to people receiving a benefit and in low-wage work.
The rate is based on the difference between the single sharing and single living alone rates of New Zealand Superannuation (around $30 a week). This payment is unlikely to cover the full costs of living alone (or to financially incentivise this option for those who are able to share), but is intended to contribute to these costs.
While sharing accommodation is a good option for many people to significantly reduce their costs, it is not an option that everyone is able to take. Sole parents may be reluctant to share accommodation with an unrelated adult (if they do not have family or friends who they can live with), and some people, particularly those with serious health conditions or disabilities, may also find it more challenging to find suitable flatmates.
We recognise that this payment introduces further complexity into the welfare system. However, the example families research clearly demonstrates that people living alone (without another adult) are likely to face some of the most significant deficits in their incomes, compared with what is required for both core and participation levels of expenditure. The Living Alone Payment is one way to address this. Other options to increase incomes for these groups could include further increases to Sole Parent Support and/or further increases to housing assistance (in particular, Accommodation Supplement).
The Welfare Expert Advisory Group recommends substantial changes to Working for Families, to improve the adequacy of incomes and the returns from paid work for families with children.
We take the view that the Family Tax Credit should move closer to being universal, available to all except high-income families. The rationale for this is that all of society benefits from the next generation and should contribute to the costs.
To significantly increase support for families with children, Family Tax Credit rates should be increased to $170 a week for the eldest child and $120 for subsequent children. We considered further increases to the subsequent child rate (up to $150 a week) that preserved the current gap between the eldest child rate and the subsequent child rate (of around $20 a week). We do not recommend this, for reasons of fiscal cost and in recognition that the highest additional costs are associated with a first child.
The Welfare Expert Advisory Group recommends that the abatement threshold for Family Tax Credit is increased to $48,000 annual family income so it does not overlap with abatement of main benefits or the Living Alone Payment. We propose the abatement rate is reduced to 10% on income from $48,000 to $65,000 and 15% on income from $65,001 to $160,000. This compares with a flat rate of 25% currently. The Welfare Expert Advisory Group further recommends that the abatement rate is increased to 50% on incomes over $160,000 per year.
The effect of these changes to the Family Tax Credit is to increase the support for low- and middle-income families raising children and improve the returns to work by reducing the effective marginal tax rate for most families. The high abatement rate for better-off families ensures Family Tax Credit assistance is withdrawn rapidly once families reach that level of income. It will mean some high-income families who do claim a Family Tax Credit will face a relatively high effective marginal tax rate over a short range of income.
Overall, these changes will lift a large number of children out of poverty and hardship.
The Welfare Expert Advisory Group also recommends that the Best Start Tax Credit be made universal for all children aged under 3 years. Currently, Best Start is universal for only the first year and abates at 21% above a family income of $79,000 a year for the next 2 years. The separate abatement regime (from the Family Tax Credit and In-Work Tax Credit) creates unnecessary complexity and could result in a small number of families facing effective marginal tax rates over 100%. Universalising Best Start comes at a relatively modest fiscal cost, focuses support to families with young children, and simplifies the system.
The proposed increases to the Family Tax Credit enable main benefit rates to be simplified and enable the repeal of the Child Tax Credit (a grand-parented payment that was replaced by the In-Work Tax Credit) because the higher rates of the Family Tax Credit ensure this group will still be substantially better off.
The detailed recommendations at the end of this chapter propose minor changes to tidy up and improve the design and administration of various Working for Families tax credits and to take a more consistent, practical and considerate approach to families with children. In summary, these recommendations are to:
The Welfare Expert Advisory Group recommends that the other two tax credits in Working for Families – the In-Work Tax Credit and Minimum Family Tax Credit – be replaced by a new tax credit, referred to in this report as the Earned Income Tax Credit.
The current Minimum Family Tax Credit significantly increases people’s incomes as they move into part-time work on low wages (20 hours a week for a sole parent and 30 hours for a couple), alongside the In-Work Tax Credit. However, once people are working these hours they see no increase in their incomes as they earn more – they face an effective marginal tax rate of over 100% until they are almost working full-time on the minimum wage.
The current system provides a significant ‘step up’ in income at a particular point, but it also means that people face a significant drop in income (a ‘step down’) if they are unable to meet the hours requirement in a particular week. This can be difficult for people who are working variable hours from week to week. The Earned Income Tax Credit provides no significant ‘step up’ in income at a particular number of hours; instead providing a gradual increase of in-work support.
The Welfare Expert Advisory Group recommends that the Earned Income Tax Credit be set at a maximum $50 a week for a single person or family. Because it can be claimed by individuals with and without children, it should replace the Independent Earner Tax Credit. The new work incentive tax credit is targeted based on family income, rather than individual income, so that only families on relatively low incomes receive it. A significant proportion of recipients of the Independent Earner Tax Credit are low-income individuals who are part of a relatively high-income family.
The Earned Income Tax Credit phases in at 20% once a person or family is earning $150 a week. If they are also receiving a main benefit while they are working, this effectively reduces the abatement rate of the benefit (for example, from 70% to 50% if they receive Jobseeker Support). Once the person or family is earning $48,000 a year the Earned Income Tax Credit is reduced by 15% above this.
For a family with children, this will mean the Earned Income Tax Credit will abate at the same time as the Family Tax Credit for those families earning from $48,000 to $65,000 a year, resulting in a total of 25% abatement above their marginal tax rate, the same rate as they currently face from the Family Tax Credit and In-Work Tax Credit. However, abatement rates will be significantly lower for people no longer receiving the Minimum Family Tax Credit, for people working and receiving a main benefit (as described above), and for families who earn above $65,000 (the Earned Income Tax Credit cut-out point).
Because the Earned Income Tax Credit abates at the same time as the Family Tax Credit, instead of after the Family Tax Credit (like the current In-Work Tax Credit), it is more tightly targeted to families on lower incomes where it is more effective. Particular consideration has been given to improving the incomes of low-income working people, particularly given the scale of the recommended increases to main benefits. This means gains for low-income working people are close to those of people receiving a main benefit, to preserve a reasonable gap between income support and work.
While this recommendation has the same rate of Earned Income Tax Credit for people with and without children, it would be possible to pay a higher amount to families with children (or a lower amount to people without children), to reflect that families with children generally face higher costs associated with work. An alternative would be to pay the Earned Income Tax Credit only to families with children, in which case the Independent Earner Tax Credit could be retained for people without children (and consideration given to reforming it to have a couple-based income test to better target its support).
The recommended package provides considerable gains to many households, as estimated by the Treasury tax and welfare analysis (TAWA) model. The limitations and caveats associated with this modelling are in Appendix C.
For households with children:
For households without children:
For those who are financially disadvantaged:
We estimated the impacts of the recommended changes on the example families used in our research on adequate incomes.
For sole parents:
For couples with children:
For single people without children:
Our terms of reference asked us to consider the impacts on child wellbeing and the Government’s child poverty strategy. This package is estimated to substantially reduce the number of children in poverty and contribute to significant improvement in wellbeing.
The TAWA model can provide estimates relating to only two of the poverty thresholds recommended by the Government Statistician: 50% and 60% of the median income (equivalised across households and before housing costs (BHC)), relative to the median income in that year – referred to as 50% BHC and 60% BHC. Given the importance of housing costs, particularly for low-income people, further work should be done to estimate the impacts on incomes after housing costs. The impacts on children are that the number of children:
Is it important to note that this package also increases the median household income, so these decreases are compared to this higher median income. This analysis highlights the importance of considering both relative poverty thresholds (as above) and constant value poverty thresholds (which fix the median at a certain point in time and increase it with inflation). Both relative and constant value measures are reflected in the Child Poverty Reduction Bill (though there are limits to the measures that can be modelled for estimates of future changes).
This package also substantially reduces the number of adults in poverty.
The impacts on adults are that the number of adults:
The fiscal cost of these changes is estimated to be around $5.2 billion a year when fully implemented.
We expect these short-term costs will generate longer-term benefits in genuine wellbeing. In fiscal terms, such wellbeing benefits would see lower health and justice costs over the longer term, along with an improved economy with higher participation in the skilled workforce. However, attaining such benefits would require that significantly higher levels of income support are embedded in the social security system and maintained over the long term.
Significant costs from the current inadequate levels of income support payments cannot be ignored. The poverty and hardship they create place a significant burden on the most vulnerable members of society, including poorer mental health for adults and poorer outcomes for children in the short and long term (across a variety of areas, such as cognitive development, school attainment and social, emotional and behavioural development).
Put simply, much larger fiscal, economic and societal costs await us over the horizon – and into future generations – should we choose to do nothing now.
Time has been insufficient to explore the myriad complex interactions in the income support system as a result of the recommended changes and to fully assess the impacts of this package on incentives to work. Further work would be required to systematically address the interactions in the system to avoid unintended impacts and to better understand the impacts on incentives to work. It is important to note that this package has assumed current eligibility settings for payments are largely maintained. There was insufficient time to address other eligibility settings, such as residence periods.
Some of the problems with the current system have come about because the relative value of payments has not been maintained. This is clearly demonstrated in chapter 2, particularly in figure 3 on page 37, which shows the decline in the relative incomes of benefit recipients compared with wages. The increases in income that we recommend need to be maintained, to ensure people’s incomes when they are not working remain adequate and do not gradually reduce compared with the incomes of people who are working.
A key principle is the importance of the child in the welfare system. Welfare should be designed so that child-related payments follow the child and can be apportioned with shared care.
How child support is paid and treated in the welfare system should change significantly to align it with the recommended values and principles.
The Welfare Expert Advisory Group recommends that all child support collected by Inland Revenue is passed on to the carer of the child, including people receiving Unsupported Child’s Benefit. The purpose section of the Child Support Act 1991 should be amended accordingly. The main benefit system is about providing for the cost of the adults, and money intended for children should not be withheld by the Government to offset those costs. We consider this recommendation is likely to encourage more liable parents to pay knowing that it will be passed on to support their children.
The child support that is passed on to carers should be treated as income for benefit abatement in the same way as wages. Similarly, it should not be treated as part of the paying parent’s income. Child support received is already counted as income (and a reduction of income when paid by a liable parent) for the Family Tax Credit. This reflects that child support is a transfer of income from one parent to another.
With child support being passed on, carers would have more of an incentive to apply for child support if that is in their child’s best interests. For this reason, and consistent with the move to a less punitive and more child-centred system, the Welfare Expert Advisory Group recommends removing the sanction for sole parents who do not apply for child support and the compulsory requirement to apply for child support. This is an area where we heard a lot from submitters – the penalty on sole parents around child support were seen as unfair and should be repealed (section 70A in the Social Security Act 1964).
Unsupported Child’s Benefit is different from main benefits, and we recommend there still be a requirement to apply for child support. The Welfare Expert Advisory Group recommends that people, such as grandparents, receiving Unsupported Child’s Benefit also receive any child support collected, but that the role and level of Unsupported Child’s Benefit payments be reviewed to account for the changes recommended to both the Family Tax Credit and child support. Similarly, the child expenditure table in the child support formula should be updated to account for the recommended changes to the Family Tax Credit.
In light of removing the compulsion and penalties for sole parents, we would still encourage and expect that, if a carer does not already have a voluntary arrangement in place or a good reason for not applying, they would apply for child support. We would expect the relevant agencies to also make the child support application process easy and ensure child support is collected from liable parents and promptly passed on.
The Welfare Expert Advisory Group recommends:
Shared care and split care of children should also be recognised in a wider range of payments, for example, Childcare Assistance and Accommodation Supplement. During consultation people raised concerns, for example, that the practice of allowing only one parent in a shared care arrangement to receive Childcare Assistance was inequitable, put further strain on the relationship between parents, and defeated the purpose of encouraging people back to work.