Nats’ work-first welfare all stick and no carrot

Last week I got quite a response to my post on crime and access to welfare, so I thought I would write a little more about why many beneficiaries can’t get ahead financially without breaking the law, however hard they may try.

I’ve had a look at what happens to a single sickness beneficiary aged over 25 when he or she engages in part time employment.  I’m using this example because it has the simplest benefit abatement regime, and because many sickness beneficiaries will never find themselves able to work full time and go off benefit completely.

So here is the graph of “in the hand” total income from both benefit and earnings sources against gross income earned on top of the benefit:

Up to $80 a week earnings on top of the benefit, the beneficiary sees a genuine improvement in the money he or she has in the hand each week.  But once he or she gets past $80 a week, he or she is left with less than 15 cents out of each additional dollar earned.  And this continues until the benefit is reduced to zero, which in this case happens at an income of $362 a week.  In many cases it is probably not enough to pay for the additional costs, such as transport and lunches, incurred by taking on more work.

It is a poverty trap (the flattish part of the graph I’ve put the big red ring around), and for a sickness beneficiary who cannot work full time there is no way out of it that is lawful.  The same applies to domestic purposes and invalid’s beneficiaries whose circumstances mean they cannot work full time, although the abatement rates and cut-in points are different.

So much for John Key’s and Paula Bennett’s “relentless focus on paid work” as being the route out of poverty for beneficiaries.

Unless the benefit abatement regime is reformed, it will result only in the harassment of many beneficiaries into trying to find jobs that are not there. It will not improve at all the lives of the few who can find a suitable job, and it will continue to act as an incentive for them to engage in illegal activities, such as dealing drugs or working but not declaring their income, in order to make ends meet.

27 Comments Posted

  1. I am an Invalids Beneficiary. The cruelest blow I have yet encountered is when either of the two main parties dish out tax cuts for the ” poor and vulnerable.” I was looking forward to one of said tax cuts but WINZ just altered my gross benefit so that, under the new tax rate, The nett benefit stayed the same. What ever happened to the law about not discriminating against the disabled??? I notice too that the amount we recieve to offset the new GST rate is a “temporary’ adjustment, whereas the GST rise is ongoing. At the end of this month will this amount become permanent and will I get the usual cost of living rise as well. Chances are this a National Party plot to further pauperise the disabled and those unable to work.For those people on $160 per week or so, there is no recognition from government that the going rate for board these days is $160 plus.

  2. Hi folks, the high abatement (effective marginal tax rate (EMTR)) problem has been one neither MSD nor Treasury have wanted to discuss, let alone work on internally (according to responses to my OIA requests) for decades. They say it is complex. I am unsure if rising the thresholds is the best approach as perhaps abating from the first dollar earned, but at a lower rate for those on UB and the SB is more sensible…. than the $80 threshols and 70 cents abatement rate.
    The policy analysis needs to be done, and done rigourously, and in consultation with those who know something about the disincentives the current regime have. After all if high EMTR supposedly impacts on the highly paid, surely the incentives impacts on the low income as well. The analysis needs to look at improved tax income of the state through more GST raised because the beneficiary in part-time works a few more hours and spends their increased income… or the benefits to the nation of low income people reducing their personal debt. The policy analysis is complex, but as yet NOT done for well over 15 years. The last reference was a report by a two guys (Brett Prebble was one) using a Tax-model the Reserve Bank had in the mid-1990s …. and the model was outdated then…
    And we can learn from our neighbours too. For example…. Australia from talking to those who have been on benefits in both countries suggests they have a better model in terms of incentives to part-time work

  3. I find it interesting that 7500+ people are being brought into the country to work in NZ’s horticultural industry …. who supports this?

  4. “that money would have to be found year after year”

    Bit like the borrowing for tax cuts to the most privileged people in NZ eh!.

    Except extra payments to beneficiaries go straight back into the local economy to local tax paying businesses. Not to propping up the US derivatives con game.

  5. Kerry says “So just one bailout and a bit to SCF?”

    No – not really. Fees for the desposit guarantee scheme are about 3/4 of a billion dollars so far, so depending on what happens in the next couple of years, and how much the govt gets for SCF assets, there is a very good chance the govt will make a profit on the scheme.

    Also rather than a one off costs (if there ends up being a cost at all) the $2 billion would be ongoing, and that money would have to be found year after year.

  6. Kerry asks “Can someone please explain to me why someone on an invalids benefit or even on a sickness benefit, who cannot work, should be punished by less than minimum wage. It is not their fault they are ill or incapacitated.”

    Yes – I can explain. You’re right – it does seem unfair, however the same arguement could apply to people on the UB and DPB.

    Here’s the reason. It would cost at least $250/week to lift an invalids benefit to reach 40hrs at the minimum wage, and there are 145000 on the invalids and sickness benefits.

    So the cost to lift the IB and SB to the same rate is around $2 billion per year ($250/wk x 145,000 x 52 weeks) – that’s a similar amount as the total income tax paid by half the population (47% pay $1.9 billion) see

    So to do this one small thing would take all the tax from the lowest paid half of the population.

  7. Monday August 11, 2008:

    National leader John Key said a government formed by him would have “an unrelenting focus” on getting beneficiaries into work.

    Meanwhile beneficiary numbers are growing. Let’s sack more of the public sector huh! Is that campaign promise fail #5?

    Announcing core elements of National’s welfare policy, he pledged there would be no cuts to benefits and National would not introduce a work-for-the-dole or a community wage scheme.

    Not increasing benefits to compensate for increases in the cost of living looks like a cut to me.

  8. Kerry, Super is also below the minimum wage, though workers have work related work costs and need to pay for housing (whereas many on Super own their homes). I suppose there is the likelihood that those on IB, SB and DPB without their own homes qualify for state houses (as would some of those on Super without their own homes). But the different support levels just shows the vagaries of ACC cover as compared to other ill health work incapacity.

    It’s interesting that IB is a permanent/long-term incapacity benefit yet the income is well below Super for an individual – this being because Super is linked to the net average wage, whereas the IB is only increased by the CPI. Formerly the two were more closely aligned. I suspect they think those with permanent incapacity would be supported by family/relatives and assistance from social support (to those with the incapacity) groups.

  9. Can someone please explain to me why someone on an invalids benefit or even on a sickness benefit, who cannot work, should be punished by less than minimum wage. It is not their fault they are ill or incapacitated.
    In many cases it was their work that made them ill.
    An ill persons expenses are often much greater than an able bodied person.

    Is it considered compulsory that someone who is ill must live in poverty.

    From some peoples ideas around here they would expect paraplegics to lick stamps for a living.

  10. frog and SPC – my appologies. The news story I read said the new abatements were on benefits – it didn’t specifiy they were on DPB, widows, invalids, and a few others but not all.

    Other changes brought in at the same time was putting inflation adjustments for benefits into legilslation, which is also good.

    If the Greens get their wish of a new abatement regime, how will you stop the situation where someone on a benefit working two days per week gets paid more than someone on no benefit working four days a week?

  11. I think there is an issue with the government applying rules for those fit to work (UB) to those on the SB, who may be only able to work part-time.

  12. If we had a higher minimum wage there could be a move to a lower abatement (50 rather than 70 cents) which would reduce the poverty trap without reducing the incentive to work full-time, where this was possible.

  13. photonz1 9:17 PM

    I didn’t want to do too much bold type edit on your comment, but your second assertion is wrong too. Having checked the PAYE tax tables, Catherine is right.

    Sure, a beneficiary can claim back some money after the end of the tax year if they are working part time for the entirety of the year, but for someone struggling with cashflow week by week, it is the week by week that counts.

    And on the “SB” (secondary bottom) or “S” (secondary) tax codes that apply in Catherine’s graph, she has got it right on a week by week basis. It is no help getting something back after the end of the tax year if the family car has already been repossessed because you haven’t been able to keep up with the payments.

  14. People’s benefits are reduced as they start to earn income from work. There are two types of abatement:

    Full-time abatement applies to people on Unemployment Benefit, Sickness Benefit, Independent Youth Benefit, New Zealand Superannuitants and Veteran’s Pensioners with non-qualifying spouses who claim the married couple rate. Every dollar earned over $80 a week reduces the benefit by 70 cents.

    People on UB, SB and IYB will not have abatement thresholds increased. The aim for people on these benefits is a return to full-time work as soon as possible, rather than remain on benefit while working part-time.

    Part-time abatement applies to people on all Domestic Purposes Benefits, Invalid’s Benefit, Widow’s Benefit and Veteran’s Pensioners aged under 65. Currently, every dollar earned over $80 a week reduces the benefit by 30 cents, and every dollar earned over $180 a week reduces the benefit by 70 cents.

    From 27 September 2010, people on Domestic Purposes Benefit, Invalid’s Benefit, Veteran’s Pension while aged under 65, and Widow’s Benefit can earn:

    up to $100 a week before their benefit is reduced by 30 cents – an increase from the current $80 threshold.
    up to $200 a week before their benefit is reduced by 70 cents – an increase from the current $180 threshold.

    New Zealand Superannuitants and Veteran’s Pensioner’s with non-qualifying spouses who claim the married couple rate will be able to earn up to $100 before their benefit is abated.

    As is noted, this excludes those on the SB and UB – though the government did not mention any intention to do this when they said they would increase them.

  15. What will it take to change this depressing situation?

    Maybe the French, Greeks, Tunisians and Egyptians have the solution!!!!!

  16. Catherine – how about if the abatement thresholds for beneficiaries were increased so they could earn $100 and $200 per week (instead of $80 and $180), and still keep their benefits?

    Because the abatement thresholds went up to these levels a few months ago which makes your figures out of date.

    Your graph also seems old as someone on $350 gross per week would now be taxed $43 per week – much less than your figure of $60.

    [frog: You are completely wrong, photonz1. Catherine’s example is about sickness benefit. The abatement thresholds were not changed for that benefit (or for unemployment benefit) despite National’s pre-election promise to do that. Methinks you have been sucked in by a Nat pre-election promise which, unfortunately for both your and their credibility, they didn’t deliver on.]

  17. “Any system where you get paid MORE for working LESS is doomed to failure”.

    How do you explain the many people who work part time for Mcd’s, as they do not want to be on a benefit, when after their travel and other expenses are deducted they would be much better off on the dole.

  18. What does this mean?

    Finance Minister Bill English has decided to exclude last year’s GST from the Consumer Price Index figures which were released today.

    Are we not being informed of the actual impact of GST increases perhaps?

  19. Photonz

    The clear problem is that the phase out of the benefit as people earn more, amounts to an effective rate of taxation. This has been a problem in other places in this country, leading to WFF and other odd solutions.

    Part of the problem is that when the taxes on the wealthier among us got collapsed down to a low rate there was less scope for making these sorts of changes more gradual. The wealthy rate cuts in quite low on the income ladder, and remains static no matter how much more you make.

    The 90% EFFECTIVE tax rate which used to hit people trying to get through the 60K-95K range of incomes is a lot of the reason people in the technical professions (who tend to earn in that range), left. It is a lot of the reason they looked to invest in housing and work through tax losses, to try to reduce the bite.

    Having paid that rate, and been similarly gouged on other taxes in other places, always ALWAYS seeing the effective tax rates of the wealthy being fractions of my own… I have no small awareness of the problem.

    In this case the rate at which the benefit is reduced has to be low enough that the lines converge somewhere a bit higher on the income ladder. A less aggressive slope to the clawback.

    When it is about taxation the basic rule I expect is that tax & benefit reduction rates should result in a monotonic increase in the EFFECTIVE tax rate for most common situations. Make more, pay more, but for that to happen, the top rate has to be higher. No room for it otherwise.

    I have heard that Sweden has implemented something like that rule. It is a difficult one to be sure, but it leaves some incentives for people to earn more if they can. Always. Not like what we have now.


  20. The higher rate of abatement (and current exemption level) for those on the dole exists because part-time work is part of the path to full time employment – beyond the exemption threshold (so they can afford travel and other work related costs) the incentive is work experience as a path to a full-time job.

    However this does not apply when part-time work testing those on SB or IB, so this is a valid issue for review. Why not

    1. An adjustment to the exemption level applying to those on the SB – this with the move to (part-time) work test them. An exemption till the benefit level of the IB + exemption is reached, then a 50% abatement.

    2. With the IB (long term inability to work full-time and thus a higher benefit level) the $80 exemption and then a 50% abatement.

    This prevents any poverty trap with work.

  21. A beneficiary loses their accommodation supplement straight away.

    So let’s say a single male 18 years old living away from home and receiving $161.76 unemployment benefit also receives $22 Accommodation Supplement because his rent is high. He has around $50 a week left to cover expenses including food.

    He decides to get a part time job earning minimum wage for 9 hours a week. Total wages before tax = $91 – $22 Accommodation supplement = $69 cash in hand. He’s effectively getting paid $7.70 per hour with the tax component still to be deducted.

    Any system that treats people as slaves is doomed to fail.

  22. So what to propose to do Catherine?

    If you have a system where a beneficiary can earn say an extra $200 (rather than the current $80) without losing any of their benefit, then they can work two days a week, and claim a benefit, and earn MORE money than if they worked four days a week.

    Any system where you get paid MORE for working LESS is doomed to failure.

  23. Yeah, high unemployment and low wages means improved productivity doesn’t it? Or have I been reading too much into National’s economic growth strategies?

  24. Indeed, Kerry. It is the old “reserve army of labour” approach that capitalists and their client Governments have traditionally used to keep down wage costs.

    In 1991 we saw Ruth Richardson and Jenny Shipley slash benefits by as much as 24% (depending on the benefit concerned). The excuse was that they needed the money to bail out the BNZ bank.

    That cut to benefits has never been restored (despite 9 years of Labour-led administrations until 2008).

    I think it is clear who has the interests of those most marginalised by capitalism at heart – it is the Greens.

    Neither National or Labour give a stuff about people who have lost their jobs, or have never been given the chance to find one).

    A plague on both their houses!

  25. We know for sure that NACT wants a big pool of unemployed to keep the economy “efficient”.
    A big pool of underpaid labour to keep their multi-national paymasters happy.

  26. I doubt that the Nats are really interested in getting beneficiaries into employment at all.

    I think they just want to use them as a scapegoat to wind up the redneck vote and and a distraction from the failure of National’s policies to actually create any jobs.

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