Time to reform Australia’s unfair family support system

Tuesday, Mar 16, 2021, 10:31 AM | Source: Pursuit

Barbara Broadway

Raising children isn’t easy, especially when times are tough and the family income might be hit, or you are a single parent, or both parents are working. So, Australia’s welfare safety net has a range of payments to help people out.

There’s the child care subsidy, family tax benefit (two types named “A” and “B”), the parenting payment, and youth allowance for your kids while they study, as well as other additional payments and bonuses based on specific family circumstances. All these have their own sets of rules and income tests to determine which benefit, and how much, families can receive.

Dr Barbara Broadway explains why the family support system is unfair and what can be done to make it better. Video: University of Melbourne

This complex system is understandably challenging to navigate, but it is also unfair, especially to women.

When mothers return to work – and overwhelmingly it is mothers who give up work to look after the family’s children –benefits start to drop off as they earn income. In many instances we end up with a situation where two families on the same total income receive different benefit amounts – a family with both parents working will be receiving significantly less support than another family where there is just one income earner, usually the man.

So, when a mother returns to work and earns an income, she pays tax on that income. This is normal for everyone. But, the family now also has to cover child care costs and they lose some of their Family Tax Benefit Part A, and maybe all of their Family Tax Benefit Part B, and their Parenting Payment, and their Youth Allowance.

For example, assume two families both have an income of $A77,040 a year. If in the first family the income is earned all by the one parent they will qualify for an annual Family Benefit Part B payment of $A4,571. However, if in the second family both parents are each earning $A38,520 a year (amounting to $A77,040 combined), they won’t qualify for any Family Benefit Part B payment.

This is because Family Tax Benefit Part B is determined by the secondary (or lower) earner’s income, not by the overall family income. So, when the second parent enters the workforce, they lose some or all of their Part B payment.

All else being equal, more Family Tax Benefit is paid when a family’s income is earned by one person, rather than by two.

Once a mother begins earning an income, the family faces losing support while having to pay for childcare. Picture: Getty Images

For low and medium-income families, the burden of losing multiple payments can make it very hard for women to earn their own income.

There, are of course many benefits for individuals engaging in paid work, but if we look at the financial position of the family alone, the loss of benefits may far outweigh possible gains of the mother earning an income.

To reduce a benefit payment not because the family earns too much money, but because the lower earning partner earns too much is irrational and poses a significant obstacle for women joining the workforce.

Part of the problem is that benefits are determined based on the individual rather than the family. Australia is the only OECD Country to do this.

There is always a tension between supplementing low earnings and making sure families are not penalised as they (often slowly) increase their earnings.

The fundamental challenge of any system of family payments is targeting payments to those who are truly in need without punishing people when they climb out of poverty.

The burden of losing benefit payments by working makes it difficult for mothers to earn their own income. picture: iStock

All countries grapple with this. Australia is no exception. But, some systems do provide lessons from which we can learn.

The Nordic countries and France, for example, have adopted universal payments to all parents regardless of their income. This means that a family’s increased earnings aren’t cancelled out by the loss of government support. The drawback of this approach is that families receive assistance when they don’t actually need it – often called middle-class welfare.

To avoid this, other countries, such as the UK and Canada, use payment models based on total family income, or have a base payment for everyone, with top-ups for families who need it most.

So, what can we do better?

The first thing we can do is simplify the system. The more parameters there are determining the level of a benefit payment, the more difficult it becomes to even see who loses what payment and at what income thresholds.

Combining several payments into one single payment would solve this issue. Income tests should be based on the family income, or the primary earner’s income, to provide an incentive for the lower earning partner to work.

Family support needs to be made simpler and fairer. Picture: Getty Images

Having just one payment based on the minimum cost of raising a child in a low-income family and which increases with the age of the child, would be simpler and fairer. It should also be set at a higher rate than current payments, given these are too low to combat childhood poverty.

It is also objectively more expensive to raise children as a single parent – a single parent will have less time to earn income and if they do work full time they will face higher childcare costs. So, there should be a supplement to the simplified payment for single parents, and the payment should taper off for higher income families.

These measures would help families to make informed decisions about work and family life and would be more efficient in supporting recipients to be self-sufficient in the long term.

In last year’s “COVID-19 Budget” the Government largely ignored the need for additional childcare funding aimed at low-income families and single parents. The budget also skipped the opportunity to target additional support generally to low-income families who were among the hardest hit by the pandemic’s economic slowdown.

Now, with the nation’s economy improving there should be no excuse for not reforming our out-of-date family support system to finally make it simpler, fairer, and more generous to those who need it.

Banner: Getty Images