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Paid Parental Leave: Robin Hood or piggy bank?


While there are numerous differences between the Labor and Coalition policies on parental leave pay, the most controversial is the rate of payment. While the current Government scheme is paid at the National Minimum Wage ($606.50 per week), the Coalition proposal is for parents to be paid at their full salary capped at an income level of $150,000.

The difference between the two approaches highlights the complicated relationship present in both schemes between the idea of Parental Leave Pay as a workplace entitlement and a payment made through the social security system.

Australia's current Paid Parental Leave scheme operates within the framework of social security benefits paid through the Department of Human Services (DHS). Those wishing to claim parental leave pay must apply through DHS and meet eligibility criteria, including work and means tests. Payments are made through the eligible person's employer. The Coalition plans to further entrench the link to the social security system by paying parental leave pay through DHS.

One aspect of the controversy over the Coalition's proposal is that payments made through the social security system are not and have never been intended to replace a person's entire previous income. The principle of income replacement is more associated with the contributory social insurance schemes (for unemployment, sickness, parental leave and so forth) operating in other OECD countries. The key principle here is that an individual is able to maintain their level of income across their life-cycle. This is sometimes known as the 'piggy bank' approach to welfare—mandatory savings to ensure that individuals are protected against the various risks to their incomes that occur throughout the life course.

The Australian system, on the other hand, is based around targeting flat rates of payment at those most in need. As the Henry Tax Review noted, 'the primary purpose of government assistance payments to individuals is to provide them with a minimum adequate standard of living'. A further value underlying the Australian system is that there should be incentives for private provision, with the benefit system seen more as a safety net. The Australian system is strongly focused on what is known as the 'Robin Hood' function of welfare.

So, in this respect, the Coalition's proposed scheme seems quite at odds with Australia's longstanding approach to government income support. However, as has been pointed out elsewhere, one way of justifying this is to think of parental leave pay not as welfare but as a workplace entitlement. Further, government involvement in providing this entitlement can be seen as necessary for achieving objectives such as improving gender equality (properly compensating women for time spent out of the workforce whilst caring for children) and workforce participation.

Indeed, most OECD countries treat parental leave pay in this way, providing benefits through mandatory social insurance or similar schemes at rates which either fully or substantially replace the mother's previous wage.

Liberal Party Leader, Tony Abbott's, recent explanation of his proposed scheme in terms of wanting to give women on higher incomes the opportunity to have children whilst maintaining their income was therefore consistent with the piggy bank approach to parental leave pay taken by most OECD countries.

Where the scheme differs most from those overseas is in the fact that direct beneficiaries are not required to contribute premiums towards the piggy bank. While the Coalition's scheme is to be paid for via a levy on Australia's richest companies, their 2010 policy document stated that they would prefer to pay for it from a 'Budget surplus'—that is, from general revenue—and would ultimately seek to reduce the burden on business through tax cuts. Again, this suggests a scheme that is something of a hybrid: an income maintenance scheme paid for through taxation revenue.

The current Government's scheme is much more in line with Australia's traditional Robin Hood approach in that it targets support at those most in need of support and seeks to retain space for private provision. The Productivity Commission report, on which the Labor scheme is based, expressed this as follows:
Payment at a flat rate would mean that the labour supply effects would be greatest for lower income, less skilled women — precisely those who are most responsive to wage subsidies and who are least likely to have privately negotiated paid parental leave. Full replacement wages for highly educated, well paid women would be very costly for taxpayers and, given their high level of attachment to the labour force and a high level of private provision of paid parental leave, would have few incremental labour supply benefits.
In this sense, the current scheme is an attempt to use the existing principles of the income support system to promote parental leave pay as a workplace entitlement but by building on the existing framework of private provision. Supporters of the Coalition approach see this as insufficient and are proposing a piggy bank/income maintenance model to more decisively address gender equity and workforce participation goals.

Image source: fahcsia.gov.au