Adequacy of income support payments

Michael Klapdor, Social Policy

Key issue
Debate over welfare policy in the 43rd Parliament was dominated by concern as to whether allowance payments were adequate to support recipients with basic living expenses and with their search for paid work. Little has been done to address this concern and the issue will remain contentious.

There is now widespread agreement that allowance payments are too low. Allowance payments are the main form of income support for the unemployed, students and those with temporary illnesses or disability that prevent them from working. A 2012 Senate committee inquiry into the adequacy of allowances heard from a broad range of interest groups, the overwhelming majority of which expressed the view that the current rate of payment was inadequate and impeded income support recipients’ ability to meet their basic costs of living. While the committee examined all allowances, its main focus was on Newstart Allowance (NSA), which has the most recipients.

A matter that was of particular concern to the committee is the large number of long-term NSA recipients and the possibility that the low payment is actually hindering their efforts to find paid work.

Australia’s income support system

Providing for a minimum acceptable standard of living is the main purpose of Australia’s income support system. The system is made up of two main payment types: allowances and pensions. These are paid at different rates: a higher rate for pensions and a lower rate for allowances. Pensions are primarily paid to the aged, people with disability and carers. Pensions for single parents with young children are paid at a lower rate than other pensions. Allowances are primarily paid to those of working age who are expected to be looking for paid work or undertaking training and education to improve their employment prospects.

All payments are targeted at those who do not have the means to support themselves, and are subject to income and assets tests. Additional assistance is available to families (through family assistance and child care payments) and to those renting privately (through rent assistance). Various supplements, lump-sum payments and concessions are also available.

What is the problem with current rates?

The current basic rate of NSA (the main unemployment payment) for a single person with no children is $501 per fortnight; around $36 per day. This amount has been criticised on the basis that, as it does not allow recipients to meet their basic needs, it undermines the main purpose of the income support system.

The Henry Review of Australia’s Future Tax System examined levels of assistance offered by the income support system and found that a number of factors need to be considered in setting payment rates. These include: community standards, expected duration of payment, incentives to work and the overall coherence of the system. When the current allowance rates are assessed on the basis of these factors, they are found wanting:

  • The Senate committee’s findings, a range of poverty and deprivation studies, and concerns expressed by charities, welfare organisations and business groups indicate that it no longer meets community standards.
  • Allowances are intended to be short-term assistance while a recipient finds work, but most recipients are long-term: of the 704,005 people receiving NSA in July 2013, 65% (454,506) had been on the payment for 12 months or more.
  • The rate is low enough to offer an incentive to find paid work but, as the Business Council of Australia has stated, it is so low that it is likely to prove a barrier to gaining employment. Too little assistance can make it difficult for job-seekers to maintain their readiness to work, to present themselves well, to be able to access transport and to afford to live in areas where there are employment opportunities.
  • The low rate creates a perverse incentive for those who are out of work to try to access higher rate pension payments. This reduces work incentives and the overall coherence of the income support system as well as driving up expenditure.

Why are pensions higher than allowances?

The maximum basic rate for a single person receiving the Disability Support Pension is currently $751.70 per fortnight; $250 more than the single NSA rate. The main rationale for this difference is the work incentive factor: allowance recipients are expected to look for and take up any available job so payments should be low enough to ensure taking up paid work will leave them better off. As pensioners are not expected to work for a significant amount of time, if at all, this type of incentive is irrelevant. While this rationale justifies a difference in payment rates, it does not necessarily justify the extent of the difference or the growing gap between the payments.

Changes to indexation arrangements introduced in 1997 have resulted in pensions increasing in line with movements in either prices or wages while allowances have increased in line with prices (as measured by the Consumer Price Index—the CPI). Since these changes, growth in wages has significantly outstripped price increases leading to the large and growing gap between the rates of pensions and allowances. In 1997, NSA recipients received 92% of what was paid to pensioners. Now they receive 67%. If this trend continues, by 2040, allowance recipients will be receiving around 40% of a pension payment.

Options for reform

The obvious solution would be to increase allowance rates. The Henry Review recommended increasing the single allowance rate by around $50 a week. This recommendation was primarily intended to improve the relativity between the single and couple rate. The single allowance rate is worth around 55% of the combined couple rate, while for pensions this ratio is closer to 66%. The Senate committee heard evidence that increasing the single allowance rate by $50 per week and changing the indexation method so that it is the same as pensions, would cost $2 billion a year.

Measures introduced in 2013 included a lump sum ‘income support bonus’ payment for allowance and Parenting Payment recipients (equivalent to around $4 a week for singles) and making the income test for NSA more generous. The measures are improvements but they do little to address the underlying issue of adequacy.

Measures to improve employment outcomes and to assist long-term and disadvantaged allowance recipients to move into the workforce could reduce the overall numbers receiving these payments. However, such measures could take time to produce results and effective policies would require significant investment.

A ripe area for reform is Rent Assistance (RA). Housing costs dominate the budgets of those reliant on welfare, but current rates of RA are not matched to these costs and are poorly targeted. Proposals for reform include the Henry Review recommendations to increase RA and index it to rents, rather than to the CPI. Improving the effectiveness of RA would be a significant step towards improving the adequacy of the income support system as a whole.

There are grounds for more widespread reform of the welfare system, in terms of reducing payment complexity, ensuring settings such as means tests and indexation are consistently applied, and addressing the way income support and other payments interact. A system-wide approach to reform may better allow issues such as the adequacy of payments to be addressed while maintaining work incentives and the system’s responsiveness to the diverse needs of those reliant on income support.

Further reading

M Klapdor, Social Security and Other Legislation Amendment (Income Support Bonus) Bill 2012, Bills digest, 58, 2012–13, Parliamentary Library, Canberra, 2013.

For copyright reasons some linked items are only available to members of Parliament.

© Commonwealth of Australia