4 days ago
The young need state support just as much as the old
In a recent column in the NZ Herald, Mathew Hooton said that if superannuation can't be cut, then wage subsidies should be. As 'welfare costs are exploding' and there is no political will to carve 20 percent off the universal pension, he continued, we must stop providing families with child-related tax credits and accommodation assistance, which he describes as 'wage subsidies'.
While this view may resonate with some, all developed countries have variants on state policies like Working for Families to support children, and a version of New Zealand Superannuation to support the old.
Typically and confusingly it is often argued that Working for Families is either 'corporate welfare' (letting businesses get away with not paying workers enough for their families to live on), or 'communism by stealth' that puts 'the whole population on welfare'. By similar logic it could be argued that NZ Super puts everyone on welfare at 65 or is a form of corporate welfare because wages should be high enough so people can save for a pension for themselves.
Mid-last century, in a world long gone, wages were set by arbitration to ensure that one full-time male breadwinner earned enough to support a 'typical' family with a wife at home, and several children. Even so, tax breaks and a family benefit for children were also necessary. In the 21st century we have very different family structures including two-earner families. It is ludicrous to expect employers to meet the needs of both low-income adults and their children.
For example, a very low-wage worker with four children currently receives an extra $610 per week from Working for Families. If cut completely, the net wage would have to rise by around $32,000 a year to make up for it, by Hooton's logic. The increase in the gross wage rate would cripple employers, be too much for workers without children, and not enough for larger families.
There is the argument that by wiping Working for Families, the money saved be given back in tax relief to workers. That's pie-in-the-sky thinking. If families were to be compensated, it would require a complex package of abating tax credits. Oh, but isn't that that what Working for Families currently is? It all becomes so circular.
One million superannuitants are collectively paid $20b after tax each year. Around one million children are given just $3.3b in Working for Families each year. You read that right. Each year around one million superannuitants are paid around six times more than one million children through Working for Families.
But it is true that Working for Families is badly designed and does not meet the main goal of child poverty prevention. It doesn't reward paid work, as it is intended to. It is in desperate need of reform.
It's often said that Working for Families is all Labour's fault, but it did not magically come into being fully formed under the Helen Clark Government in 2004. The universal weekly family benefit and tax breaks for families in the 1950s evolved by the 70s and 80s to become a complex mix of family benefit and different family tax credits. In 1991 the National Party folded the universal family benefit into the targeted tax credits to become one weekly targeted payment per child called Family Support.
There were further changes under National in the mid-1990s, and rewarding paid work became elevated as a fundamental principle. All that the Clark government did in 2004 was to change the name to Working for Families, then build on and expand the existing complex structure, with even more emphasis on paid work as a criterion. Then, the Ardern government introduced an additional significant payment, called Best Start, for children under three years old, universal for the first year.
As a policy, Working for Families is a mess. In contrast NZ Super is a simple, unconditional universal payment indexed to wages. It is easy to access and, until the housing crisis, has been enough to prevent poverty in old age. It is a basic income floor that does not disincentivise paid work. It has a very gentle income test though the tax system, so that the very highest income earners still get around three quarters of a pension paid when there is no additional income.
The extra assistance for families to meet the basic income needs of their children is a very different story. Working for Families is tightly targeted and assists only children of low- and middle-income parents. Moreover, the full payment is conditional on parents having paid work and receiving no core benefit or part benefit. These conditions result in 200,000 children in the worst-off families being excluded from around $5000 per year, or more for larger families. With this division between deserving and undeserving children it's no wonder child poverty is so intractable.
Working for Families payments are not annually indexed and are increased only when cumulative inflation exceeds 5 percent. There is no wage link as for NZ Super. Furthermore, payments are subject to a draconian clawback equivalent to an extra tax of 27 percent from a very low base of joint parental income. That threshold will be lifted marginally next year to $44,900, but to pay for it, the rate of abatement rises from 27 percent to 27.5 percent and Best Start becomes income-tested.
This very 'tight targeting' ensures child poverty persists for many families in paid work. The overlap of tax, Working for Families clawbacks, student loan repayments and loss of accommodation assistance, and now Best Start clawbacks, confirms for too many, that extra work effort does not lift them out of poverty.
Children are invisible: that is the problem. Fundamentally we need to understand that low-income wages, benefits, and paid parental leave are for the income needs of adults, but children also have income needs.
I would argue that rather than take more from children we take more from the top end of NZ Super through the tax system and direct the revenue for fixing not just Working for Families but also the other failing welfare measures such as the accommodation supplement, benefits and disability support. We do want to grow the economy but should not be done at the expense of the wellbeing of both our current and future workforce.
