Why unemployment benefits need to be increased

One of the more surprising newspaper stories of recent times was Peter Martin’s article of November 15 on OECD takes aim at Labor policies which quoted the OECD Economic Survey of Australia as saying that Australia’s unemployment benefits are too low. Along with a number of other people I couldn’t recall the OECD ever previously saying that any country’s unemployment benefits were too low – and I worked there for eight years.
The OECD stated: “The low level of …Newstart Allowance has raised concerns about its adequacy. Unlike most OECD countries, Australia provides a flat (non-earnings related) means-tested allowance to meet social risks such as unemployment, which may be paid for an unlimited period. … The resulting net replacement rate is below the OECD average for the initial stage of unemployment.” In fact, for a single person at the average wage losing their job, Australian benefits are about the lowest in the OECD.

Currently, a single unemployed adult receives about $470 per fortnight or $33.55 per day. If renting privately, they can get Rent Assistance of up to $115 per fortnight, but to get that amount their rent has to be more than $256 per fortnight, leaving them with just $23.50 per day for everything else; and that assumes you can find somewhere to rent for $256 a fortnight. Earlier this year the NSW Government’s Rent and Sales report found that in early 2010 the cheapest one-bedroom homes in Sydney’s outer ring were in Wyong and Gosford, costing “just” $170 a week. If you were on Newstart and paying that rent you would have just $17.50 a day left over for your food, clothing, transport and other bills.

In September 2009, the Government increased the single rate of age pension by more than $30 per week – one of the largest pension increases in Australian history. This was based on the recommendations of The Harmer Review, which had argued that “the relativity of the rate of pension for single people living by themselves to that of couples is too low … there is strong evidence that many pensioners in private rental housing face particularly high costs and have poor outcomes”.

In making its recommendations the Harmer Review cited research by Peter Saunders and Melissa Wong of the Social Policy Research Centre, who looked at the relative wellbeing of pensioners using measures of deprivation and social exclusion to complement measures of cash incomes. The Harmer Review, however, was not given the task of looking at the adequacy of benefits for the unemployed. Earlier research at the SPRC on deprivation and social exclusion in Australia found that the unemployed were even more likely than age pensioners to face deprivation and exclusion and have difficulties managing on their incomes.

In fact, The Henry Review on Australia’s Future Tax System also pointed out that Australia could benefit from a more principles-based approach to setting payment levels. “Establishing adequacy benchmarks for transfer payments not considered in the Pension Review would make the system more robust, particularly if the benchmarks were preserved through a common but sustainable indexation arrangement”. This “would mean an increase to base rates for single income support recipients” on Newstart. Moreover, the Henry Review also recommended that the maximum rate of Rent Assistance should be increased and the rent maximum should be indexed by movements in national rents.

So, both the OECD and the official inquiry into Australia’s tax and benefit system think that unemployment benefits are too low.

Part of this concern is actually about incentives, particularly due to the gap between Newstart and Disability Support Pension. The OECD argue: “The large gap between the benefits in the current system can reduce incentives to work. The unemployed may have an incentive to apply for the Disability Support Pension (DSP), which has a higher risk of long-term welfare dependency … the majority of those leaving DSP does so either because they took up Age Pension or died. At the same time, more than a third of those entering DSP in 2008 had previously had Newstart Allowances.”

The 2009 improvements in pensions widened the gap between payments for the unemployed and lone parents with children eight years and over and payments for people with disabilities and for carers, so that currently it is nearly $250 per fortnight. A lone parent who moves from Parenting Payment to Newstart when their youngest child turns eight can lose up to $100 per fortnight. As the system is currently configured these gaps will grow over time.

The 2010 Intergenerational Report (IGR) helps us gauge the scale of this future problem. Under current indexation policies, age, carers and disability pensions are indexed to wages, while most other payments for people of working age and families are indexed to prices. If continued, these provisions will produce a remarkable change in levels of support—pensions are projected to rise by 4 per cent a year on average, while benefits and allowances would rise by 2.6 per cent a year. The result—if the indexation provisions actually continued for 40 years—would be that in 2050 a single unemployed person would be receiving a payment little more than 11 per cent of the average male wage, compared to about 20 per cent now.

The gap between pensions and allowances would widen enormously, and an unemployed person would be receiving a payment that was less than 40% of that of a disability pensioner (not including the extra concessions and bonuses received by pensioners). Relative poverty among working age allowance recipients would be bound to increase significantly.

It is certainly true that the best way to help the unemployed is to get them into jobs. But people who become unemployed still need adequate incomes while they look for work. Australia has been very fortunate in having one of the lowest increases in unemployment of any OECD country since 2008, but it should not be overlooked that unemployment has still risen significantly. In June 2008 the number of people receiving Newstart Allowance was just under 430,000 – its lowest level since the 1980s; this rose to 602 thousand in February 2010 and has come down to 557,000 in October this year (the most recent available figures). The number of people on Newstart for 12 months or more rose from 250 thousand in late 2008 to around 340 thousand in recent months, although this also appears to be now coming down.

But would raising benefits to a more adequate level keep the unemployed out of jobs or even cause low paid workers to give up jobs? Since 1996 the level of Newstart for a single person has fallen from around 54% to 45% of the after-tax minimum wage. If it was still 54% of the net minimum wage, then benefits would be around 19% higher – about $45 per week. It is difficult to see that going back to the 1996 relativities between Newstart and the minimum wage would pose serious disincentives to work.

This problem is not going to go away, and it is not going to resolve itself on its own. Current policies are simply going to make the problem more difficult to deal with, if decisions are postponed. It is worthwhile remembering that following its election in March 1983, one of the first initiatives of the Hawke Government was to increase the rate of unemployment benefits (in April 1983), recognising that lack of consistent indexation had made these payments inadequate. It’s time the current government recognised that unemployment payments need to be increased.

Cross posted from Inside Story: http://inside.org.au/why-unemployment-benefits-need-to-be-increased/

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Andrew Norton
Andrew Norton
11 years ago

Peter – Is there any research on the broader implications of the fact that Australia effectively lacks an unemployment insurance system?

Personally I have always taken the view that given the conditions attached to and amount of the unemployment benefit it is unlikely I could ever rely on it, and therefore I have to self-insure against unemployment by having enough savings. But the apparently spendthrift behaviour of middle class Australia suggests that perhaps this approach is not widespread.

On the other hand, when people are sacked in Australia there are often quite substantial payouts which can operate as de facto unemployment insurance. I have heard of people ‘saving’ their holiday entitlements for this purpose. Are retrenchment payouts as high in Europe? If they exist is unemployment insurance adjusted in light of them? Are their differences in holidays taken that might be partly explained by storing holiday benefits for a rainy day?

Anthony
Anthony
11 years ago

Andrew, retrenchment payouts – along with accumulated leave entitlements – do function as a de facto unemployment insurance, in that they increase according to greater continuity of service, and so the retrenched long-term worker gets a certain ‘breathing space’, and free of activity tests. But they don’t quite do the job that proper unemployment insurance does in certain European countries, which is to perhaps maintain you on something like 80 per cent of salary for 12 or 24 months. The ACTU has explored the option that rather than just increase super contributions, which is on the agenda, some of the increased contribution could go to an insurance fund.

BTW, we’ve only had retrenchment payouts since the mid-1980s

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Don Arthur
Don Arthur(@don-arthur)
11 years ago

The Henry Review’s approach to adequacy benchmarks is peculiar.

After noting that “The Pension Review developed adequacy benchmarks for age, disability and carer pensions paid to those where there is limited or no expectation of work” it goes on to say “Adequacy benchmarks are also required for other government payments, but these must also address incentives to work.”

But why must adequacy benchmarks address incentives to work? Adequacy and work incentives are two separate issues. What the review ought to say is that ministers may want to keep payments at inadequate levels in order to strengthen work incentives. Blurring the distinction between the two issues conceals the tradeoff and undermines accountability.

And as Peter argues, it’s hard to see how modest increases in benefit levels are likely to undermine work incentives.