Almost 50 cents of every dollar spent by governments in Australia goes on social spending – either social security or health and community services. This week’s tax forum must reform the system, as the taxation and transfer systems are the two main ways governments reduce inequality and poverty.

The Henry Review and the Harmer Pension Review between them provided the most detailed analysis of Australia’s social security system looking not only at the interactions between the two systems, but also analysing specific social security policy issues in their own right.

The Henry Review recognised that: “A 21st century tax and transfer system should reflect the commitment to Australian values of fairness and support for those who are disadvantaged, but do so in a way that is efficient, sustainable, simple and transparent, and internally consistent”

Although it concluded the broad architecture of the transfer system was well suited to these goals, reflecting effective targeting of support to low income households, the Report identified a number of weaknesses: the system is overly complex, can treat those of similar means differently, and can result in people making choices that potentially undermine long-term wellbeing. Henry noted that setting payment levels and the design of payments could be improved to provide incentives to participate in the workforce.

Many issues raised by the Henry Review are long-term and should be debated and analysed comprehensively before reforms are introduced.

Other issues are more urgent and should be acted on as a matter of priority.

The system needs to minimise adverse incentives to work and save. It should treat different types of households equitably, and be politically and economically sustainable. But, if payments are not adequate, the system is not meeting its primary objective.

The unemployed

Currently, for a single person on the average wage losing their job, Australian benefits are the lowest in the OECD.

A single unemployed adult receives about $475 per fortnight, or $33.90 per day. If they’re renting privately, they’re entitled to up to $116 per fortnight in rent assistance, but to get that amount their rent has to be more than $258 per fortnight, leaving them with just $23.75 per day for everything else.

And that assumes you can find somewhere to rent for that amount. The NSW government’s Rent and Sales Report found that in June 2011 the cheapest one-bedroom homes in Sydney’s outer ring were in Wyong and Gosford and cost “just” $180 a week.

If you were on Newstart and paying that rent would have just $16.50 a day left over for your food, clothing, transport and other bills.

Adequate payments are important for incentives. If the gap between pensions and allowances widen further then incentives to claim disability payments will increase.

High housing costs can also price the unemployed out of areas where job opportunities are greater.

If welfare recipients don’t have enough money to live on, they may not be able to undertake sufficient or effective job search; a student may compromise their study efforts.

The carers' case

The difference between payment rates can also create major equity problems.

The Australian community provides support to people caring for those who have a disability. But if the person being cared for dies then their carer, who has been encouraged to commit many years to providing support – and whose labour market skills and experience have therefore been adversely affected – can experience a massive drop in income after the bereavement period of 14 weeks is over.

If they are under 60 when their partner dies they will see a reduction in income of more than $200 per fortnight.

The gap between pensions and allowances has existed for a long time, but has become much worse since 1997.

Pension payments

Since 1997 Age, Disability and Carers Pensions have been indexed to average earnings while payments for the unemployed remained indexed to the CPI.

Before then single rate of Newstart was around 91% of the single pension rate. The gap between pensions and allowances has widened over time.

Changes in payments for pensioners implemented after the Harmer Review have meant that the gap between in benefits for the unemployed and for people with disabilities has widened. It’s now more than $230 per fortnight, and a single unemployed person receives a payment that is only 65% of the payments for a disability pensioner.

As the system is currently configured this gap cannot narrow over time, it can only grow.

Last year’s Intergenerational Report assumes that current indexation policies apply into the future so that age and disability pensions will be linked to wages, while most other payments for people of working age and families will be indexed to prices.

Over a 40 year period this will produce an even more remarkable change in the relative levels of support for pensioners and beneficiaries. Pensions are projected to rise by 4% a year on average, while benefits and allowances would rise by 2.6% a year.

The result – if actually continued for 40 years – would be that in 2050 a single unemployed person would be receiving a payment of about 11% of the average male wage, compared to 20% now.

The gap between pensions and allowances would widen enormously, and an unemployed person would be receiving a payment that was little more than one-third that of an age or disability pensioner.

So relative poverty among working age allowance recipients including families with children would increase significantly. But also incentives for the unemployed to qualify as eligible for disability payments would be strengthened enormously.

Encouraging employment

Would raising benefits to a more adequate level keep the unemployed out of jobs or even cause low paid workers to give up jobs?

Australia has been very fortunate in having one of the lowest increases in unemployment of any OECD country since 2008. But we shouldn’t overlook the fact that it has still risen significantly, and there are many people relying on an increasingly inadequate payment.

Over the last fifteen years the level of Newstart for a single person has fallen from around 54 per cent to 45 per cent of the after-tax minimum wage. If it hadn’t changed from the 1996 level then benefits would be around 19 per cent higher. It is difficult to see that going back to to that would pose serious disincentives to work.

Urgent reforms

These problems are not going to go away. Current policies are simply going to make the problems more difficult to deal with the longer decisions are postponed.

The single rate of Newstart should be increased by around 20%, and rent assistance should be increased substantially (with a rent threshold of around 20% of income before support is payable).

In the longer run, Rent Assistance should be indexed to rental costs. The indexation of unemployment payments needs to be regularly reviewed and adjusted to ensure payments are adequate.

The Tax Forum needs to make changes now, before inequalities in the system are too great to handle.