Welfare to work and sole parents

In the future many sole parents on income support will receive a very unpleasant surprise when their youngest child finally reaches the age of six. Depending upon the level of any earned or other private income, their incomes will fall by up to about $100 a week immediately after that 6th birthday party.

Such sole parents will also find it relatively hard to improve their lot through paid work. The combined impact of the social security and income tax system will result in most keeping only 25 to 35 cents from every extra dollar of earnings. For those in public housing and with costs of work of around $30 a week the picture will be even bleaker, with effective hourly pay rates possibly falling as low as $2 an hour.

These changes will result from the Federal Government’s proposed welfare to work measures, which take effect from 1 July 2006. Currently, sole parents with a qualifying child aged less than 16 years who meet various income and asset tests can receive Parenting Payment Single (PPS), which is subject to the pension income test and payment rate rules.

Sole parents in receipt of PPS prior to 1 July 2006 will continue to remain on that payment and be subject to the ‘pension’ income test (which is more generous than the ‘allowance’ income test), until their youngest child turns 16. However, new compulsory work obligations will be imposed on this group from the later of 1 July 2007 or when their youngest child turns six. These new obligations will be satisfied by working part time for a minimum of 15 hours a week or by searching for part-time work and participating in Job Network or other services.

There are more significant changes for sole parents applying for PPS after 1 July 2006. Sole parents with a child aged less than six years will still be eligible to receive PPS. However, as soon as their youngest child turns six, they will be transferred to Newstart Allowance (NSA) and be subject to an obligation to seek part-time work of at least 15 hours per week.

NATSEM has recently modelled the likely impact of the welfare to work reforms, based on projections of price and earnings changes between now and 2006-07 and the description of the policy outlined by the Government.
PPS for sole parents with one child and no private income is expected to be about $257 a week on average in 2006-07 (Table 1). A crucial factor is the amount of private income that can be earned before the income support payment is reduced. In 2006-07, a sole parent with one child on PPS will be able to earn $76 a week without incurring a reduction in income support. For every dollar of income earned above this threshold, the support payment is reduced by 40 cents. Sole parents with a youngest child aged less than six years, applying for PPS after 1 July 2006, will be subject to this payment rate and income test.

Sole parents with a youngest child aged six years and over will be placed on NSA, which is expected to average $228 a week in 2006-07. This is $29 a week less than the PPS payment rate. In addition, they will be able to earn only $31 a week before their income support payment begins to be reduced. That is, their ‘free area’ will decline sharply relative to the current rules, by about $45 a week. The first $94 of private income above $31 a week will reduce their NSA by 50 cents for every dollar earned. Once they reach the second income test threshold of $125 a week, the reduction in their allowance increases to 60 cents for each additional dollar earned.

Table 1: Summary of the Newstart Allowance and Parenting Payment Single Payments for Sole Parents with One Child, 2006-07a

Source: Harding et al, 2005, ‘The Distributional Impact of the Proposed Welfare-to-Work Reforms Upon Sole Parents’, available from www.natsem.canberra.edu.au

Table 2 traces the impact upon the disposable incomes and effective tax rates of sole parents whose youngest child is aged six to 15 years and who would qualify for PPS under the current rules but will qualify for NSA under the proposed rules. That is, it shows the impact upon those sole parents who commence receipt of income support after 1 July 2006. ‘Disposable income’ means the income that sole parents have left in their pockets to spend each week, after the receipt of any income support or private income, the payment of income tax and Medicare levy (net of the various tax allowances such as the pensioner tax offset and the low income tax rebate).

As Table 2 shows, the disposable incomes of sole parents with one child aged six years and over are much lower under the proposed system than under the current system over a very broad range of private income. (‘Private income’ means income other than government cash transfers.) For example, the proposed reforms reduce the ‘take-home’ incomes of sole parents with one child and earnings of $200 a week from $531 under the current system to $439 under the proposed system – a cut of $92 a week or17 per cent.

The maximum loss increases with the number of children, because the free area allowed under the allowance income test does not vary with the number of children. As a result, a sole parent with three children and $200 a week of earnings will be $99 a week worse off under the proposed system compared with the current system.

Table 2: Impact of Proposed System on Disposable Incomes and EMTRs of Sole Parents: Various Levels of Earnings, 2006-07

Note: Averaged 2006-07 payment levels used. All dollar figures rounded to nearest dollar. All EMTRs rounded to nearest one per cent. Pharmaceutical Allowance excluded from all calculations. Figures may not subtract exactly due to rounding.

Source: Harding et al, 2005, ‘The Distributional Impact of the Proposed Welfare-to-Work Reforms Upon Sole Parents’, available from www.natsem.canberra.edu.au

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