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Home / New Zealand

When it pays not to work

Simon Collins
By Simon Collins
Reporter·NZ Herald·
16 May, 2008 05:00 PM9 mins to read

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KEY POINTS:

If Krystal Norman thought only for the short-term, she would still be on a benefit today.

Norman, 24, is a solo mum with a 4-year-old daughter, Kitana.

When she started working full time as an apprentice hairdresser on the minimum wage of $10.25 an hour last year, she was no better off than she had been on the domestic purposes benefit (DPB).

"I had extra expenses for travelling," she says. "I worked five days a week and I went to a hairdressing academy in the city on the sixth day, so I had the cost of parking in the city."

Her pay has gone up now to $13.50 an hour and will jump by another $3, plus commission, when she completes her apprenticeship in July. "So there is an incentive for me to be working, but only because of this industry," she says. "For someone trying to get a job at McDonald's it's a base rate of $12, with no perks. There's no incentive."

Working for Families, the $2 billion centrepiece of the Government's social policy, was supposed to help families off benefits by "making work pay". But, as Finance Minister Michael Cullen prepares to deliver his ninth Budget on Thursday, many beneficiaries are still in a "poverty trap" where their only alternative to a benefit is a low-wage job which would make them hardly any better off.

"I think there are a lot of people trapped on the benefit who really don't want to be on it," says a North Shore sole parent who found her part-time job made her worse off than the benefit, until Work and Income agreed to keep paying her a special benefit. Shirley Day, of Hillsborough's Te Manawanui Trust, says most clients with children are no better off in work after they pay for childcare - and are much more frazzled.

Winston Watt, of Papakura's Christian Budgeting Service, advises people to stay on benefits and gain marketable skills so they can get well-paying jobs. "For people to go off the benefit and on to a wage, they need to be looking at more than the minimum wage, otherwise it's marginal," he says.

Working for Families has also exacerbated a second problem - the "marriage penalty", in which a sole parent suffers in lost income if she or he moves in with a partner.

Institute of Economic Research economist Patrick Nolan has calculated that if a mother-of-two who works part-time for $240 a week moved in with a man earning $1000, they would together be $456 worse off a week than if two of them stayed apart.

If the man lost his job, the couple would get $31 less together than the mother could get alone with the children, after tax, rent and child support, because they would lose the "in-work tax credit" and other incentives that Working for Families gives to sole parents who work at least 20 hours a week.

Couples get the incentives only if they work at least 30 hours between them.

Ruby Duncan, of the Baptist Church's Iosis Family Solutions, says this drives some couples to split up and tempts others into "under-the-table arrangements".

"Every family you walk into, it's 'Dad doesn't live here'," she says. "Probably he does, but he has his address at his Mum's place or somewhere so Mum can still draw the benefit."

American economist Nick Johnson, who studied Working for Families on a fellowship in Wellington in 2005, said: "US results suggest that marriage-penalty increases in the range of several thousands of dollars [a year] could result in a decrease in the number of two-parent families - and therefore result in an increase in sole parents - numbering in the thousands or even tens of thousands."

These problems arise because New Zealand combines a tax system which Johnson called "one of the flattest among developed countries", taxing even the first dollar of income, with family assistance which a 2005 Business Roundtable report described as "more tightly targeted than comparable programmes in the United Kingdom and Australia".

New Zealanders moving off the dole on to the low end of the income scale must pay 15 per cent tax (rising to 21 per cent above $183 a week), and lose their benefits at 70c for every dollar earned above $80 a week (30c at first, then 70c above $180 a week for DPB and invalid benefits).

On top of that, they lose accommodation supplement at 25c in the dollar as soon as they go off a main benefit, and the main family tax credits at 20c in the dollar above $673 a week.

In the most extreme cases, there is a dollar-for-dollar clawback of top-up special benefits, temporary additional support and the minimum family tax credit, which guarantees a net income of $355 a week to a sole-parent family working at least 20 hours a week or a two-parent family working at least 30 hours.

It wasn't always this way. Like every other developed country except Turkey, New Zealand had an effective tax-free zone on low incomes until Robert Muldoon scrapped the personal tax rebate in 1978. Like 17 out of 27 developed countries, New Zealand used to have a universal family benefit.

The cumulative result of welfare changes is a pile-up of taxes and clawbacks which has shifted the highest effective marginal tax rates from the top of the income scale to the bottom.

Cutting all tax rates, raising all tax brackets or even abolishing tax on the first $9500 of income, an option Cullen considered and rejected, would all make absolutely no difference to the two sole parents featured on this page, because their extra after-tax income would be clawed back, dollar-for-dollar, by reductions in their special benefit and "temporary additional support".

These top-ups are a measure of how much the standard benefits now fall below the costs of living in Auckland. The standard DPB plus family tax credit for a parent and one child has slid from 85 per cent of the net average income in 1986 to just 52 per cent in 2006.

It seems completely counter-intuitive, but this means the most effective way to make work pay at the bottom of the income scale would actually be to raise the standard benefits so people no longer need the extra top-ups.

A simpler change that would reduce the "marriage penalty" would be to pay the in-work tax credit to all families where anyone works more than 20 hours a week, rather than requiring couples to work 30 hours.

Beyond that, the only ways to make work pay would be to cut the bottom tax rates or the 70 per cent rate at which benefits are reduced with increased income.

Cullen's problem is that either option would leave no room for tax cuts for the middle classes. In an election year when most voters straddle the middle of the income scale, the problems of the poor may be overlooked again.

KRYSTAL NORMAN
Krystal Norman works because she wants to be a good role model for her daughter Kitana.

"When we were at home doing nothing, which I did for a year - it drove me crazy," she says.

She works four days a week as an apprentice at Rodney Wayne Hairdressing, doing a fifth day at hairdressing school. After tax, she earns $346.19 a week.

On top of that she gets $144.76 in family tax credits and a $115 accommodation subsidy on her $250 rent for a two-bedroom house in Te Atatu.

She pays $190 on childcare, but gets $170 of that back in childcare subsidy.

She also gets $39 a week in "temporary additional support", a top-up which is supposed to cover urgent costs for up to 13 weeks but has been renewed repeatedly.

Out of her total net income of $644.95 she pays the rent plus $55 in petrol to get to work, $20 for the net cost of childcare and $17.28 on KiwiSaver, leaving her with $302.67 for all other expenses.

Her alternative would be to get $263.78 on the DPB. She would still get $115 in accommodation subsidy and her temporary additional support would rise to $79.13.

But her family support would drop to $82 a week because both the in-work credit and the minimum family income credit are paid only to sole parents working at least 20 hours a week or couples working at least 30 hours.

Her net income of $539.91, minus the rent, would leave her just $12.76 a week worse off than she is now.

CHERIE DATSON
Cherie Datson's last job was cleaning shampoo bottles in a Glenfield factory 20 years ago.

"I won't go back there," she says. "My self-esteem was shot and that just made it worse."

After tough beginnings, she is finally getting counselling and is studying to be a youth worker. "By next year I'm looking at being able to get into a decent paying job."

She rents a small house in Henderson for $310 a week with her daughter Melina, 14, and son Bryce, 21, a builder's labourer. Bryce pays $100 in board, which does not affect her benefit as long as she has no more than two boarders.

She pays $14.85 a week in child support for two other children who live with their fathers. She gets $302.40 on the invalid's benefit plus $82 in family support and $125 accommodation supplement.

She spends $71 a week on counselling and medication, for which she gets a disability allowance of $54.05 and an ACC independence allowance of $18.73.

She has also been "grandparented" on a special benefit, currently $86.92 a week, which she was receiving when the benefit was replaced by temporary additional support in 2006. This gives her a total net income of $754.25 a week, or $444.25 after paying the rent.

If she worked for 40 hours a week at the minimum wage of $12 an hour, her net wage of $383.44 would be topped up by the $60 in-work credit on top of her existing $82 credit.

Her accommodation subsidy would drop to $120 and her special benefit to $38.84, but her disability and ACC allowances would be unchanged.

She would receive the $14.85 in child support which is now paid to Work and Income by Melina's father, a beneficiary.

Her total net income would rise to $857.81. But she might face transport costs to get to work of about $55 a week, reducing her net income after rent and work costs to $492.81.

She would be $48.56 a week better off in work than she is now.

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