Newstart and DSP Allowances: the brass tax

A guest post by Mick Peel

People reliant on pensions and benefits are recognised as being amongst the poorest in our community. Age and disability pensioners have always received higher payment rates than the unemployed. But since 1997, when the Howard government started to index pensions to average weekly earnings but continued to index unemployment payments to the consumer price index, the gap has widened significantly.

Pensions are indexed in a different manner to Newstart. Pensions are indexed to Male Total Average Weekly Earnings (MTAWE), the Consumer Price Index (CPI), or the Pensioner and Beneficiary Cost of Living Index – whichever is greater. Newstart is only indexed to the CPI. In September 2011, the MTAWE increase was 4% while the CPI increase was 2.5%, which resulted in an increase of $10 for pensions and $6 for Newstart.

Overview

Following the recommendations of the Harmer Review, in September 2009 the federal government increased the single rate of Age Pension by more than $35 per week – one of the largest pension increases in Australian history. This was a welcome change that significantly reduced income poverty among the aged. However, this further widened the gap between Newstart and pensions to the point where the shortfall is now nearly $266 per fortnight. In 1997, a single unemployed person received 92% of what was paid to a pensioner; that ratio is now 65%. There has not been a ‘real’ increase (apart from inflation) in Newstart Allowance since 1995.The Newstart Allowance is the lowest unemployment payment in the OECD for a single person on an average wage who has just become unemployed.[1]

Since 1996, payments for the single unemployed have fallen from 23.5% of the average wage for males to 19.5%. Furthermore, the level of Newstart for a single person has fallen from around 54% to 45% of the after-tax minimum wage. Newstart has fallen from 46% of median family income in 1996 to 36% in 2009-10.[2]

Currently, single unemployed adults receive $490 per fortnight in Newstart payments, or $35 per day. If they’re renting privately, they’re entitled to up to $120 per fortnight in rent assistance. But, to get that amount their rent has to be more than $267 per fortnight, leaving them with just $24.50 per day for all other costs.

Analysis

The real disposable incomes of Newstart recipients have been flat for the past couple of decades, while the real disposable incomes of minimum wage workers have increased modestly (compound annual growth rate = 0.7%). Full-time workers on average earnings have seen steady real income growth (compound annual growth rate = 1.7%), pulling away from minimum wage workers and from Newstart recipients.[3]

dollarcomparisons

[1] Australian Council of Social Services, 2011 http://acoss.org.au/images/uploads/ACOSS_Poverty_October_2011.pdf

[2] Prof Peter Whiteford, ‘Paltry Newstart Allowance is fast becoming a poverty trap’ 20 April 2012: http://theconversation.edu.au/paltry-newstart-allowance-is-fast-becoming-a-poverty-trap-6218

[3] “Newstart recipients” refers to adult recipients with no dependants and no income other than their Newstart payment. Similarly, “DSP recipients” are single, working-age adults who are wholly reliant on their pension. ‘Minimum wage worker’ refers to a full-time employee employed for 38 hours per week at the National Minimum Wage or its historical antecedent, which is taken to be the C14 rate in the Metals award; the worker has no other income and lives alone.

DSP recipients’ incomes started out at around the Henderson poverty line and ended up at the same point, but lagged behind the line for a decade and a half or so.[1] The gap between Newstart recipients’ income and both of the poverty lines has grown, while the gap between both lines and the income of a minimum wage worker has become smaller.[2]

incomecomparison

[1] Henderson poverty line from the Melbourne Institute. Relative poverty line based on ABS 6523 (median equivalised disposable household income).

[2] We don’t have an official poverty line in Australia, be it an absolute line as in the US or a relative line as in Europe.

In short, Newstart recipients’ real incomes have been flat, while those of full-time workers and DSP recipients have grown. The gap between the incomes of people on Newstart and minimum wage workers has grown; the gap between Newstart recipients and their counterparts on DSP has grown further.

The problems faced by the unemployed were recognised by the Henry Review of the tax system, which highlighted the need for a 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.

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.

Source note: Calculations via Matt Cowgill at the ACTU – real incomes take into account personal income tax liability, the Medicare Levy, the LITO, and the BTO. “1991″ refers to September 1991, with the tax parameters for the 1991-92 fiscal year; each subsequent year uses the same timing. Payment rates from FaHCSIA. Minimum wage rates from FWA/AIRC. Personal income tax rates and thresholds from the ATO. LITO amount and thresholds from the Income Tax Assessment Act 1936. AWOTE from ABS 6302. CPI from ABS 6401.

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