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Chapter 6: improving incentives to work.

Raising labour force participation is of major importance for sustaining vigorous growth, especially in the face of population ageing. The major challenge is to increase participation among women with families and lone parents, disability benefit recipients and older workers over 55. While participation decisions reflect personal choices, these are influenced by policy settings. Despite improvements in "inactivity traps", Australia ranks high internationally in terms of "low wage traps" for lone parents and one earner households. Tackling such "low wage traps" either by addressing allowance and parenting payment income tests or by reducing the lowest income tax rate or raising the threshold at which income tax is first paid, should be a priority. Access to affordable child care also plays an important role in facilitating female participation, and efforts towards this end need to continue. Encouraging older people to stay in work longer requires removing incentives for early retirement. Imposing the recently announced tighter eligibility and participation requirements for disability pensioners uniformly across all recipients would also be beneficial.

Australia's overall labour force participation rate is above the OECD average. However, it lags behind the leading countries, indicating scope for doing even better. The remainder of this chapter focuses on those groups where there is greatest scope to raise participation, namely: women with families and lone parents; disability benefit recipients; and older workers over 5B. In each case recent reforms are examined and the case for further policy change considered.

Raising labour supply of women with families and lone parents

The female participation rate has risen by 14 percentage points between 198B and 2005, but international benchmarking suggests that there is scope for further improvement. Even though above the OECD average, the employment rate of women lags behind the leading countries, particularly for women with children aged under 6 (Figure 6.1, upper panel). Effective labour supply is even lower than these figures suggest since part-time work accounts for over 40% of total female employment, which is one of the highest in the OECD (Figure 6.1, lower panel). There is nothing wrong with this situation if it reflects flee choices made by individual families. However, according to Russo and Hedley (2004), part-time work may be seen as a potential source of additional labour supply with around a quarter of part-timers wanting to work extra hours.

[FIGURE 6.1 OMITTED]

Of particular concern is the high proportion of people living in jobless families, which is well above the OECD average (Figure 6.2). Around 70% of jobless families with children aged under 15 are headed by lone parents, raising concerns about the welfare of such children. Joblessness is a major contributor to financial hardship in Australia--more than 60% of poor children in Australia live in households where no adults are in paid employment, a share nearly twice the OECD average (Whiteford and Adema, 2006). "Activating" lone parents and other parents in families with children receiving income support is therefore of major importance, as recognised in the government's welfare reform agenda.

[FIGURE 6.2 OMITTED]

Current welfare support for families

The flat rate and highly means-tested nature of benefits in Australia have resulted in a social security system that costs less and is more re-distributive than in most other OECD countries. Even though gross spending on social welfare lies below the OECD average, the spending on family benefits is more than 1 1/2 times the OECD average, partly because assistance that used to be provided through the tax system before 1975, is now provided mainly through cash benefits (Whiteford, 2006). Lone parents and unemployed parents receive the seventh highest benefits in the OECD (adjusted by purchasing power parities). Family benefits appear generous compared to other OECD countries in relation to the maximum level of benefits available (OECD, 2004), although these are withdrawn as income rises (Table 6.1). On the other hand, benefit withdrawal rates are well below the 100% rate that is typical in social assistance schemes operating in many OECD countries. The "generosity" of the system for low income families is enhanced by the relative ease of access to benefits, with the result that rates of receipt of income support benefits by lone parents are amongst the highest in the OECD and employment rates amongst the lowest.

Effective marginal tax rates (EMTRs) provide a way of assessing the balance between the comprehensive targeting of the income support system and work incentives. High EMTRs can occur, particularly, in cases of income tests with high withdrawal (taper) rates (even if there is no interaction with the income tax system), when different social security payments overlap, implying that individuals or families may face two or more tapers on different income support payments at any one time (Table 6.1) (Dawkins, 2001 and Beer, 2003). The EMTR profiles for secondary earners are higher than for single individuals (Figure 6.3). The heavier tax burden, despite a system of separate personal taxation, is mainly due to the withdrawal of benefits based on family and second-earner income. This is particularly the case for second earners in low wage families, as these families are still eligible for various benefits even if the head has a full-time job. About one-fifth and one-quarter of households in the lowest and second lowest income deciles, respectively, are estimated to face EMTRs of over 70% which is a much higher proportion that in any other income decile (Buddelmeyer et al., 2004; CEDA, 2006). This is consistent with the findings by Beer (2003), who suggests that high EMTRs mainly hit families with children--with a quarter of sole parents and 15% of individuals in couples with children facing EMTRs in excess of 60%, largely due to the impact of the withdrawal of family assistance.

[FIGURE 6.3 OMITTED]

EMTRs have declined in recent years largely as a result of reduced income tax and family assistance withdrawal rates. However, while measures introduced, at least until the beginning of the decade, have reduced the "inactivity trap", they appear to have increased the marginal effective tax rates from moving up the wage distribution exacerbating a "low wage trap" (Figure 6.4). The OECD tax-benefit models suggest that Australia has among the highest EMTRs in the OECD for single parents and one-earner couples with children for the transition from part to full-time work. On the other hand, Australia is significantly below the OECD average in international comparisons with regards to the EMTRs faced by these groups when they move from inactivity to part-time work.

[FIGURE 6.4 OMITTED]

Recent reforms to tighten eligibility and participation requirements

The 2005/06 Budget increases work obligations for principal carer parent recipients with school age children who will now be obliged to seek part-time work. (1) Eligibility criteria have also been tightened for new Parenting Payment claimants; new applicants will move to the unemployment benefit when the last child turns 8 in the case of lone parents or 6 in the case of partnered parents. New parenting payment claimants will be subject to participation requirements when their youngest child turns 6. Existing recipients whose youngest child is under 16 years old will continue to receive the Parenting Payment, but will be subject to participation requirements from 1 July 2007 or when their youngest child turns 7 (whichever is the later). At the same time, the income test for the Newstart and Youth Allowance and for Parenting Payment (Partnered) has been changed to encourage a return to part-time work, by allowing people to keep more welfare payments as their income from work increases. (2) Compliance with the conditions attached to welfare benefits is expected to be encouraged by the move towards a suspension-based approach for most people who fail to comply with participation requirements. The new arrangements include the retention of a non-payment period of 8 weeks for serious or repeated participation failures, although financial case management will seek to avoid unreasonable hardship on eligible recipients (Australian Government, 2005a).

Recent reforms to facilitate access to affordable child care facilities

Alongside financial incentives to work and tighter criteria for the entitlement of welfare benefits, access to affordable quality child care is an important determinant of the participation decision of second earners (OECD, 2005a; Jaumotte, 2003). Recent empirical findings for Australia suggest that a 10% rise in the price of child care results in a decline in the participation rate of lone parents and married women by 0.5% and 0.2%, respectively (Doiron and Kalb, 2005). Up until the beginning of the decade, public spending on child care was low in international comparison (Figure 6.5), although recent reforms have led to significant increases in the subsidisation of child care services (Box 6.1).

[FIGURE 6.5 OMITTED]
Box 6.1. Measures to improve access to child care

Important steps towards helping parents meeting the cost of formal
child care include: i) the expansion of assistance through the
introduction, in July 2000, of Child Care Benefit (CCB) providing
fee relief to parents (both working and non working) who have their
children in approved or registered child care; and ii) a 30% Child
Care Tax Rebate (CCTR), in effect since July 2004, on out-of-pocket
child care expenses for approved care, complementing CCB.

CCB is an income-means tested benefit whereby eligible families can
claim up to 50 hours of CCB per week, per child. Families where both
parents (or a single parent) are not working, studying, training or
looking for work are eligible for up to 20 hours of CCB for approved
care. Through the CCTR scheme eligible families are able to claim 30%
of the costs in excess of CCB payments received (out-of-pocket costs)
for approved child care up to a maximum of AUD 4 000 per child per
year. The CCTR is a non-refundable, transferable (so that any excess
may be transferred to the taxpayer's spouse) tax offset that can only
reduce a person's tax liability to zero. Additional funding was
introduced in the May 2005 Budget through the "jobs, education and
child-care" programme, which pays gap fees for care to low-income
families while the parent is undertaking training or searching for
work, topped up by extra funding (AUD 877 million over the period
2005/06 to 2009/10) in the latest budget earmarked for a programme to
assist parents with child care fees.

Recent policy reforms increased significantly the number of funded
child care places. They are expected to reach more than 700 000 by 2009
compared with only 307 000 in 1996. The 2006/07 Budget abolished the
cap on the number of funded places in outside school hours care and
family day care places, thus removing one of the complexities in the
child care industry. This initiative is expected to result in an
additional 25 000 child care places (at a cost of AUD 60 million over
4 years) (Australian Government, 2006).


Though on an upward trend since the mid-1980s, the use of formal child care is still limited: about 75% of children do not attend CCB-approved care, with their child care needs being met through informal care arrangements (in which the Australian government is not involved) (OECD, 2004). Analysis based on the HILDA (Household Income and Labour Dynamics in Australia) Survey also highlights ongoing concerns about the cost of child care as a barrier for some families to access such facilities, especially in the case of households with under-school age children (NATSEM, 2005). Affordability of child care--proxied by child care costs (fees charged less government assistance) as a percentage of net family income--improved for many family types with the introduction of the Child Care Benefit in 2000, with the groups least affected being those on higher income (Fibre 6.5). However, the effect was short lived, with some of the gains being eroded by 2004, as a result of increases in child care fees that outpaced increases in average weekly earnings and government assistance to families (AIHW, 2006).

The cost of child care is an important determinant of the quality of the chosen services, and more importantly, the decision between using formal child care arrangements or looking after a child at home by withdrawing from the labour market (OECD, 2002). The introduction of the 30% Child Care Tax Rebate will further reduce child care costs paid by parents. Nevertheless, the affordability of child care services is not influenced solely by changes in government funding and family assistance. Supply constraints may also play a role. Though "unmet demand" for formal child care has declined significantly over the 1990s, the 2002 ABS Child Care Survey data indicate that there is additional demand for formal child care (around 6%), mainly in the areas of before and after school care (27% of demand), long day care (27%) and occasional care (22%) (ABS, 2003). Under-supply is a particular concern in rural and remote areas. The fees for facilities in these areas are higher, reflecting the additional financial incentives needed to attract and retain staff and/or a lack of competition (AIHW, 2006). Planning controls applying to family day care and outside school-hours care could influence supply decisions as well as the structure of the Child Care Benefit. In particular funding does not take into account the fact that child care services are more expensive for younger children.

Recommendations for further action

Dealing with the problem of high EMTRs is tricky, because there are difficult trade-offs which have to be faced (OECD, 2005b). For example, financial incentives to work could be improved by lowering welfare benefits, but doing so raises equity concerns. Alternatively, lowering benefit withdrawal rates at the low end, but extending the income range over which they apply exposes more people to high EMTRs higher up in the income range, which poses the risk of undermining work incentives there (Warren, 2004). Given these trade-offs it is important to be clear exactly which disincentive problems are the priority to tackle. While "inactivity traps" remain a concern, especially in the light of the high prevalence of jobless households with children, it appears that in international comparisons this is not necessarily a consequence of high EMTRs, as previously discussed. Recent measures toward tightening the eligibility criteria for Parenting Payments should raise the activity rates of lone parents and low-income partnered mothers. Moreover, the extension of work obligations for benefit receipt to sole parents is in line with reforms in many other OECD countries, a number of which apply even stricter requirements. (3) On the other hand, where Australia stands outs with regard to EMTRs is in the transition from part-time to full-time work, suggesting that the future policy priority could be to reduce "low wage traps". That said, there are economic and social benefits from moving from joblessness to part-time work; and the Australian evidence indicates that part-time work is a stepping stone to full-time work. Furthermore, three quarters of Australians in part-time work are satisfied with their number of hours worked, although this may be influenced by current policy settings. This highlights that there are a number of competing considerations which the government's policy changes to the tax, family benefit and income support systems attempt to address.

In this context, recent simulations using the Melbourne Institute Tax and Transfer Simulator (MITTS)--a micro-simulation model with detailed information about the tax and transfer system and on household characteristics--are illuminating in highlighting the various trade-offs from tax and benefit reforms designed to reduce EMTRs (Buddelmeyer et al., 2004; CEDA, 2006). A range of policy options, each involving a similar cost in revenue foregone, were considered and their main effects can be summarised as follows:

* Reducing the lowest tax rate or lifting the tax free threshold provides the largest aggregate labour supply response in terms of additional hours worked. While such policies induce less new participation than some other policy options, particularly Earned Income Tax Credits, they do not increase anybody's EMTR (as many of the other policy options considered do) and the additional work effort they induce from those already in work more than compensates to produce the highest aggregate labour supply response.

* Employment Income Tax Credits are more effective at inducing labour supply from currently jobless households, but reduce labour supply where they increase EMTRs for middle and higher income families.

* Reducing the taper rate at which benefits are withdrawn would reduce the number of jobless households. However, the net effects of higher labour supply in lower income households and lower labour supply in high income households reduces both total participation and total hours worked.

Overall, if the future policy priority is to reduce low wage traps, which are high in international comparison, reducing the lower rates of income tax and raising the tax free threshold is likely to have the largest effect on aggregate labour supply. On the other hand, reforms involving a reduction in taper rates at which benefits are withdrawn are likely to be more successful in reducing the number of jobless households. The relative attractiveness of such policies will also depend on the success of recent reforms designed to increase the participation requirements of those receiving parenting payments (as well as increases in child care provision).

Further efforts should also be made towards reducing the cost and increasing the availability of child care places. Recent OECD cross-country empirical work suggests that the scope for raising female participation from increased child care support is greater than in most other OECD countries; full-time participation for women aged 25-54 years is predicted to rise by 3 percentage points if public child care spending were raised to the average OEGD level (Burniaux et al., 2003). However, the design of subsidies is crucial in achieving such outcomes. Making CCB more conditional on employment--in contrast to the present situation where it is still available for up to 20 hours to families where no family member works--would provide incentives for mothers to participate in the labour market, while reducing fiscal costs (OECD, 2006). Moreover, further bringing the structure of CCB in line with the age-related cost profile of child care provision would help to boost the use of formal care facilities, with beneficial effects on female participation, given the close correlation between labour market activity and the presence of dependent children (OECD, 2002). The introduction of tighter eligibility criteria for the existing recipients of parenting payments, in line with those applicable to new claimants, is also advisable.

Raising the labour force attachment of older workers

Recent developments in the participation rate of older workers are encouraging, with the rise in the participation rate among the 55-64 age group from 2000 to 2005 of over 7 percentage points, substantially exceeding the rise in the OECD average. In addition to sustained strong economic growth and a tight labour market, changing employer attitudes towards older workers and policy measures to improve the participation of older workers have contributed to the change. Nevertheless, there is still a marked decline in participation from age 55, well before the age pension eligibility of 65 years (for men) and 63 for women (Figure 6.6). Australia therefore remains below the OECD's leading countries in terms of participation for those aged over 55. Early retirement decisions are also affected by a range of welfare benefits, especially the Disability Support Pension, as well as the eligibility requirements for old-age pensions and superannuation benefits.

[FIGURE 6.6 OMITTED]

Helping the disabled to find work

Eligibility for a Disability Support Pension (DSP) is based on age, residency, assessed medical impairment and work capacity. Applicants must be aged between 16 and Age-Pension age, have a medical impairment that attracts at least 20 points under the Welfare to Work reform DSP impairment tables and a continuing inability to work (30 hours or more per week in the case of existing recipients or 15 hours for new claimants). DSP recipients are not subject to any job search, rehabilitation, re-training or other participation requirements, although employment assistance is available. The benefit is generally not subject to income tax and replacement rates are similar to those for an Age Pension, but significantly higher than for unemployment benefit. (4) In addition, the income and asset tests for disability benefit recipients are less strict than for the unemployed.

A relatively high share of men in the older age groups is inactive because of illness or disability compared with many OECD countries (Figure 6.7). In contrast, the share of older women is below the OECD average. Although the number of Disability Support Pension beneficiaries has begun to level out, (5) its steep increase in recent years is of particular concern; in the mid-1990s the number of DSP beneficiaries was 60% of those receiving unemployment benefit, but this ratio has risen to 130% in 2005, with DSP beneficiaries currently accounting for around 6 3/4 per cent of the workforce. The adverse effect on labour supply is aggravated because participation rates for persons with disabilities are the lowest in OECD, a situation partly explained by the minimal obligations placed on beneficiaries (Figure 6.8). Outflows from the disability scheme are approximately 85% the rate of the inflow, but close to three quarters of those leaving DSP either because they died or took up the Age Pension.

[FIGURES 6.7-6.8 OMITTED]

Past reforms, (6) demographic changes (including population ageing) and structural adjustment, which resulted in the displacement of workers, especially of older males, have all influenced developments in the number of DSP beneficiaries. There is evidence to suggest that the DSP programme may be increasingly used in preference to unemployment, given the greater generosity of the benefit and the absence of requirements for job search or participation in rehabilitation or re-training programmes, and also as a pathway to early retirement:

* Around 35% of new disability pension beneficiaries in 2003 were previously on unemployment benefit and deteriorating labour market conditions tend to increase disability pension take-up rates. Argyrous and Neale (2003) found a positive relationship between the availability of work and the DSP rates of various age groups. Cai and Gregory (2003) also conclude that the deterioration of labour market conditions has been the most important factor for DSP changes over the period 1971-99, while the impact of population ageing was negligible. Furthermore, the probability of moving from unemployment to DSP increases with the duration of unemployment benefit receipt (Cai and Gregory, 2005).

* While as might be expected the incidence of sickness and disability increases with age the increase is particularly pronounced above the age of 55, at which point the medical assessment for DSP has in the past been less stringent with greater weight put on the potential employability. Thus, while inactivity for males in the age group 50-54 is close to the OECD average for older age groups it is well above it (Figure 6.7).

Recent reforms to the disability support pension

The Welfare to Work reform announced in the 2005/06 Budget included a tightening of eligibility criteria for new applicants for DSP, which will result in more income support recipients with disability facing work requirements. In particular, new applicants for DSP who are assessed as being capable of working 15 hours or more per week at, or above, the relevant minimum award wage are no longer eligible for the DSP after 1 July 2006, but will receive the Newstart Allowance instead, and have job search requirements which match their assessed work capacity. This represents a reduction by one-half in the capacity to work requirement of 30 hours per week, which will continue to apply to existing DSP recipients.

The reform package also provided for additional 20 900 places in the disability employment network and 36 600 places in vocational rehabilitation services for job seekers with a disability who have partial capacity to work and participation requirements. It also entailed funding for 12 300 extra vocational and training places.

Recommendations for further action: disability

Recent initiatives go in the right direction. However, further gains could be achieved if the stricter eligibility and participation requirements entailed in the Welfare-to-Work package did not focus solely on new entrants (which annually are typically around 10% of the existing stock), but also applied to the stock of the 700 000 existing disability pensioners who have no part-time work requirements. In particular further progress could be made by extending the new eligibility and obligation conditions to those existing beneficiaries who have the least severe medical conditions.

The provision of more vocational rehabilitation places, which are essentially demand-driven, is also encouraging, although the number of places remains small in relation to the overall stock of disability beneficiaries. As demonstrated by the success of the Pathways to Work scheme in the United Kingdom (OECD, 2005c), where claimants are required to attend work focused interviews with ready access to specialist employment advice, timely rehabilitation can help beneficiaries return to work.

Current retirement income arrangements

Australia has a three-pillar pension system. The tax-funded public pension (Age Pension) is the first pillar and is means tested. The pension is payable at age 65 for men and 63 for women, gradually increasing to 65 by 2014. The Age Pension is flat rate, means-tested, with a comparatively low replacement rate, aiming essentially to prevent poverty. The second pillar involves the Superannuation Guarantee, introduced in 1992, which, with few exceptions requires employers to provide a minimum level of pension contributions, currently set at 9%, for all employees earning above a (low) threshold level of wages. The earliest age for access to superannuation benefits is 55 years. A phased increase in the preservation age (i.e. the age until which the benefits must be preserved in a superannuation fund) to 60 will be implemented between 2015 and 2025. The third pillar mainly comprises private savings, mainly voluntary superannuation contributions, encouraged by tax concessions including incentives such as the ability of the self employed to claim a tax deduction and government co-contributions for low to middle income earners (OECD, 2005d and the previous Survey).

Recent reforms

There have been numerous reforms to pension arrangements aimed at extending the retirement age, including a combination of: more flexible superannuation access arrangements and measures to improve financial incentives to continue working; increases in eligibility ages for access to some components of retirement income; increased job search obligations for the older unemployed; and enhanced services to assist them to find a job.

Recent measures to improve financial incentives to retire later are commendable (Box 6.2). In particular, the removal, from 1 July 2005, of the restriction to receive superannuation by those still in employment, enables older workers--in case they choose to work on a part-time basis--to move gradually into retirement, by supplementing their lower income from employment with superannuation payments. The latest 2006/07 Budget proposes simplifying and streamlining superannuation, including a reduction in the pension asset test withdrawal rate (Chapter 2) and the abolition of the taxation of superannuation benefit for those over 60 who have already paid tax on their superannuation contributions and earnings. These proposals would boost incentives to work and save in a number of ways. In particular, they would encourage individuals to work till 60 when superannuation will become tax free for most people, and as superannuation from age 60 would not be included in a person's assessable income this may also reduce the tax payable on other work income providing further incentives to work.
Box 6.2. Initiatives to improve financial incentives to retire later

The main measures to encourage older workers to retire later are as
follows:

* The Mature Age Worker Tax Offset: It is available to those aged 55
and above who earn income from working. From 2005/06 it provides a
maximum annual tax rebate of AUD 500, and phases out once net income
from working reaches AUD 53 000, with no offset available when net
income from working exceeds AUD 63 000.

* The Pension Bonus Scheme and other changes to the Age Pension: The
Pension Bonus Scheme, introduced in 1998, provides a tax-free lump sum
to people who defer claiming the Age Pension and instead continue to
work longer. The maximum period over which a bonus can be received
is five years. Moreover, the Age-Pension income-test withdrawal rate
was eased from 50 to 40%, increasing the amount of pension benefit that
can be received while working.

* Changes to the superannuation scheme: In recent years, the
government has introduced a number of changes to superannuation
arrangements. These include:

* The age of accessing superannuation--currently at 55--will gradually
increase to 60 between 2015 and 2025.

* Removal of the restrictive rule, from July 2005, requiring a person
under age 65 who has reached their preservation age of 55 to retire or
leave employment before they can access their superannuation benefits
(as a lump sum or an income stream).

* As from 1 July 2004 the work-test for superannuation contributions
has been removed for anyone under age 65, implying that non-working
people can make additional contributions to their superannuation and
claim a tax deduction.

* In the May 2004 Budget, the government increased significantly the
co-contribution matching rate (first introduced in 2003) and raised
the qualifying income threshold, to increase eligibility and encourage
additional voluntary superannuation contributions. Moreover, as part
of the budget the superannuation surcharge was abolished for
contributions made from 1 July 2005.

* The 2006/07 Budget proposed measures to simplify and streamline
superannuation which will boost incentives for those over 55
(see Chapter 2).

Source: OECD (2005d); Australian Government (2005a; 2005b).


The phased increase in the superannuation preservation age, from 55 in 2015 to 60 by 2025, should also reduce incentives to retire early. In addition, it reduces the scope for "double dipping", a practice whereby individuals may spend their superannuation benefits paid out as a lump sum before they are 65, relying later on the Age Pension, without being penalised for the superannuation benefits through the asset or income test, although there is little evidence that double dipping is a practical problem. In addition, earlier access to the Age Pension for females is being gradually removed; women's eligibility age has started to rise progressively since July 1995 and will reach 65 in 2014. This measure should boost participation of older women, although its impact will be partly offset by an increasing use of the DSP programme. This view is supported by the fact that the DSP rate for women in the 60-64 age group has increased markedly since 1996 in a "two-yearly step pattern"--corresponding to the years that the changes to the eligibility age of the Age Pension were implemented (Parliament of Australia, 2005) (Figure 6.9).

[FIGURE 6.9 OMITTED]

The Welfare to Work reform announced in the 2005/06 Budget included an increase in the obligations for the older unemployed through a closer alignment of participation requirements for older people on unemployment benefit to those for younger recipients. In particular, it abolished reduced job search requirements for Newstart Allowance recipients aged 50 to 64, obliging them to look for the same number of jobs per fortnight as other jobseekers.

Recommendations for further action: Retirement incomes Efforts towards encouraging people still in the labour force to delay retirement should continue. Potential reform initiatives include:

* Changes to the Age Pension to improve the incentives to remain in work after Age Pension age, through a reduction in penalties for combining a pension with income. In particular, removing earned income from the Age Pension income test (or further reducing the income-test taper) would be an important step to increase incentives to work at older age, with higher participation rates offsetting, at least partly, the fiscal cost (OECD, 2005d).

* Reducing incentives to retire early under the Superannuation Guarantee scheme by aligning the eligibility age of superannuation (currently 55, but to be increased to 60 by 2025) with that of the Age Pension (age 65) over time. If evidence of significant "double dipping" emerges, the generous tax-treatment of superannuation if drawn as a lump-sum after the age of 60 should be withdrawn and limits placed on the exemption of owner-occupied housing in the means test for the Age Pension. Implementation of the proposals to simplify superannuation announced in the 2006/07 Budget would further encourage workforce participation by older workers.
Box 6.3. Recommendations to raise labour force participation
Raising female participation

* Introduce tighter eligibility criteria for existing recipients of
parenting pensions, in line with those applicable to new claimants.
Although existing recipients will have the same job-search obligations
as new claimants from 1 July 2007 or when their youngest child
turns 7 (whichever is the later), new claimants could be on a different
benefit (Newstart Allowance), with different levels of generosity and
income tests, compared to existing claimants with the same
circumstances. The enforcement of the eligibility and
participation requirements should be closely monitored.

* Maintain efforts towards providing employment services to people on
welfare benefits with participation requirements to help them find a
job.

* Reduce low wage traps, which are high in international comparison,
either by addressing allowance and parenting payment income tests or
by reducing the lowest income tax rate or raising the threshold at
which income tax is first paid. Relevant considerations for
evaluating these options are the fiscal cost and the labour supply
response.

* Efforts to facilitate access to affordable child care should
continue. The structure of the CCB could be changed to reflect the
age-related cost profile of child care provision. Consider
making CCB more conditional on employment, in contrast to the
present situation where it is still available for up to 20 hours to
families where no family member works.

Reducing reliance on disability pension

* Extend the tighter eligibility requirements applicable to new
entrants of the DSP programme to all recipients, monitoring closely
the enforcement of eligibility and participation.

* Steps towards expanding employment, rehabilitation and education and
training services to help people with disabilities find a job, and
retain it, should be continued.

Improving the labour force attachment of older workers

* Encourage older workers to continue working after they become
eligible for an Age Pension by excluding earned income from the
Age-Pension income test or, alternatively, by continuing to ease
further the income-test taper (but with adjustments to reduce the
favourable income-tax treatment of pensioners).

* Reduce incentives to retire early under the Superannuation Guarantee
scheme by aligning the eligibility age of superannuation with that of
the Age Pension over time. If evidence of significant "double dipping"
emerges, the generous tax treatment of superannuation if drawn as a
lump-sum after the age of 60 should be withdrawn and limits placed on
the exemption of owner-occupied housing in the means test for the Age
Pension. Implementation of the proposals to simplify superannuation
announced in the 2006/07 Budget would further encourage workforce
participation by older workers.


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Notes

(1.) Under the previous arrangements, Parenting Payment recipients with a youngest child between 6 and 12 years were only required to attend an annual interview with a personal advisor. Recipients with a youngest child aged between 13 and 15, were obliged to undertake 150 hours of approved activities in each 26-week period.

(2.) The maximum withdrawal rate for the Newstart Allowance was reduced from 70 to 60 cents in the dollar and the income at which this rate commences increased to AUD 250 per fortnight, from AUD 142.

(3.) In the United States the age of a child at which lone parents are excluded from work requirements was reduced in 1988 from 6 to 3 years, and since 1996 this has been left to individual states to determine. In Nordic countries, sole parents are expected to actively search for a job once a child reaches three years of age, while in Germany and the Netherlands labour force participation requirements for lone parents have been extended to those with primary school age children. In France, participation is required when the youngest child reaches three years of age (Saunders, 2003).

(4.) For example, from March 2006, the maximum single rate of DSP is AUD 499.70 per fortnight (plus a pension supplement of AUD 17.80 per fortnight), compared with AUD 410.60 in the case of the Newstart Allowance (Cai and Gregory, 2005).

(5.) The growth of DSP recipients stood at 0.9% between March 2005 and March 2006, the lowest in 20 years.

(6.) The 1991 Disability Reform Package replaced the invalid pension and the sheltered employment allowance by the DSP, with the corresponding restructuring adding 10 100 new claimants. The new scheme also broadened the eligibility criteria, permitting part-time workers to claim the pension while working up to 30 hours per week, as well enabling greater access to the DSP for people with psychiatric and drug and alcohol conditions. The increase in the late 1990s in the female retirement age from 60 to 62 also influenced the number of DSP recipients (Saunders, 2004).
Table 6.1. The structure of main income support
benefits received by families June 2006

Type of benefit   Eligibility conditions

Family Tax        Dependent child under 21
Benefit Part A    or qualifying dependent full-time
                  student aged 21-24.

Family Tax        Extra assistance to families with
Benefit Part B    one main income, including
                  sole parents.
                  Dependent child under 21 or
                  qualifying dependent full time
                  student up to 18.

Parenting         Support for principal carer of child
Payment           under 16 for those on low income.
                  Subject to participation
                  requirements. (2)

Type of benefit   Maximum benefit rate (1)

Family Tax        Varies with the age of the children.
Benefit Part A    For a child aged under 13
                  is 8.2% of AW.

Family Tax        If youngest child is under 5 is 6.6%
Benefit Part B    of AW. If youngest child is 5-15
                  (or 16-18, if a full-time student)
                  is 4.8% of AW.

Parenting         Sole parents up to 25.4% of AW.
Payment           For a parent who is part of a couple
                  up to 18.8% of AW.

Type of benefit   Income tests

Family Tax        Subject to a family income test
Benefit Part A    (save few exceptions).
                  Withdrawal rate 20-30%.

Family Tax        No income test for sole parents.
Benefit Part B    For two parent families, only
                  income of the lower earner is not
                  taken into account. Withdrawal
                  rate 20%.

Parenting         Subject to income and asset tests.
Payment           Withdrawal rate 50-70% for
                  partnered parents and 40%
                  for lone parents. (3)

(1.) Rates applicable between 20 March and 30 June 2006, expressed
as a percentage of the average wage (AW) equal to
AUD 51 169 in 2005/06.

(2.) From 1 July 2006, support for principal carer of a child
under 6 (partnered parents) and 8 (sole parents) for those
on low income. Participation requirements apply when the
youngest child turns 6.

(3.) From 1 July 2006, withdrawal rates for partnered
parents were reduced to 50-60%.

Source: Australian Government (2006), "A Guide to Australian
Government Payments", Family Assistance Office;
OECD (2004), Benefits and Wages.
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Publication:OECD Economic Surveys - Australia
Article Type:Country overview
Geographic Code:8AUST
Date:Jul 1, 2006
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