Susan St John: Australian welfare shows the way

It would be better to focus on a realistic minimum individual hourly rate than a sometimes skewed Living Wage.

Opinion

Monday's editorial in the Herald "Living wage could miss its family target" suggested that the living wage concept is poorly targeted.

The problem arises because two issues are conflated: earning a wage that is enough to live on for the individual, and having enough money to support a family.

Back in the 1930s, as described in Brian Easton's book Wages of the Poor, legislation required the court to set the basic wage in terms of the needs of a man, his wife at home and three children.

This was soon seen as a very inefficient way to provide an adequate income as it over-compensated single workers and under-compensated those with large families.

It also loaded the costs of supporting families on to the employer instead of spreading these among society at large.

In the post-war period, the family benefit and tax deductions for children became the preferred way to assist with these costs. Eventually all weekly per child family assistance was paid to the mother and became the established way of providing societal support for raising children.

In New Zealand such assistance is now called Working for Families and pays $152 a week, ($7904 a year) to a working family with one child under 13 and more to larger families. For example, the caregiver of a five-child family on $36,300 gets $440 a week (including $90 of the In Work Tax Credit regardless of whether she works or not). This is an extra annual after-tax amount of $22,880 if all the children are under 13, or more if the children are older.

The living wage campaign has focused public attention on the need for low wage rates to be increased. But the Living Wage of $18.40 an hour was determined for a family with two children and two adults, one working full time, one part-time. This signals a return to the thinking of the 1930s. It would be better to focus on a realistic minimum individual hourly rate and ensure that Working for Families provides adequate extra income support when there are children.

As the editorial infers, if a family on an income above $36,300 makes an extra $1000 gross a year, it loses $215 of Working for Families.

With tax and ACC this is like having a tax rate of 41 per cent.

If the family gets an accommodation supplement as well, the overall rate of claw-back from extra income is 66 per cent.

The New Zealand problem is that the threshold for receipt of the maximum Working for Families was frozen in 2010 and is being reduced over time to $35,000, while the rate of clawback is gradually increasing to 25 per cent.

The editorial goes on to talk about the need to reduce the gap between New Zealand and Australia. A better understanding of the level of the minimum wage and what Australia actually does for families is required.

In Australia, the adult minimum wage is A$16.37 ($18.43) an hour with a loading of 25 per cent for casual employment. Not only is this well above our $13.75 an hour, but the first A$18,000 of income is tax-free and GST is still only 10 per cent.

Second, and herein is the lesson for New Zealand, their equivalent Working for Families tax credits for children (called Family Tax Credit A and B) are more generous and treat all children the same regardless of the employment status of the parents.

Unlike New Zealand, all aspects of its programme have been indexed from the late 1980s.

This has resulted in annual increases to the threshold for the abatement of such payments, so that the threshold for Family Tax credit A is now A$48,837 and the abatement rate is only 20 per cent.

Better still, for middle income families the abatement only continues until the payment is reduced to $27 a week a child so that there is a quasi-universal benefit at that point.

Only when family income reaches A$94,316 (plus A$3,796 a child) is this payment reduced at a rate of 30 per cent. Family Tax Credit B is given without reduction for sole parents, and for couples abates only against the care giver's income. As well, there are special tax credits for newborns, annual school kids bonuses ... and on it goes.

So what do comparisons look like? A one child family in Australia with a caregiver at home gets A$178 a week up to the threshold of A$48,839.

In New Zealand, even disregarding the effect of the exchange rate, at this income level the working one child family is getting only $101 a week.

Let's support the concept of the living wage by all means, but it is better to achieve it by both a higher minimum wage and a more generous, better designed system of children's tax credits.

• Susan St John is Associate Professor, co-director Retirement Policy and Research Centre.

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