Improve employment opportunities and incomes for people at risk of poverty
Facts:
• At 6.2% in November 2014, unemployment is at a 13 year high
• Youth unemployment over 20%
• Weak labour market
• Majority receiving Newstart are unemployed long term – 60% (over 12 months)
• 10% are Aboriginal or Torres Strait Islander
• 45% lack Year 12 qualifications
• 15% have a disability
• 15% are over 50 years old
• 15% were from Culturally and Linguistically Diverse (CALD) backgrounds
Employment services
At 6.2% in November 2014, unemployment is at a 13 year high. While Australia’s unemployment rate is still low by OECD standards, the majority of those receiving the unemployment payment are unemployed long term (over 12 months), and the weak labour market will compound the difficulties faced by this group. In 2011, 10% of JSA clients were Aboriginal or Torres Strait Islander, 45% lacked Year 12 qualifications, 15% had an assessed disability, 15% were over 50 years old, and over 15% were from Culturally and Linguistically Diverse (CALD) backgrounds – all groups with below average employment prospects. Young people have been particularly severely affected by the decline in employment opportunities since 2008.
Once people are unemployed long-term, their future job prospects progressively diminish. As a result, even a temporary weakness in the labour market can have long lasting and harsh economic and social impacts. Reducing prolonged unemployment is the most important task of our employment services system. While the impacts of employment assistance on an individual’s job prospects are typically modest, even a 10 percentage point improvement over the short to medium term can, if sustained, substantially reduce long term unemployment. This leads to savings in income support, higher tax revenues, and reduced needs for services such as health care as people who would otherwise be excluded from the labour market find employment.
The Government is reforming the main employment services system, Job Services Australia. Many of the changes being introduced are welcome including a greater emphasis on payment for employment outcomes and less administrative burden for providers. The key weakness of the new system is the same as that of the present one: a lack of flexible investment in assistance to help people experiencing or at risk of long-term unemployment overcome their hurdles to employment. Under the proposed system, providers will receive annual ‘service fees’ of $510 per annum (or $638 per annum for with regional loading) to assist the most disadvantaged jobseekers (those in Stream C) and an up-front ‘Employment Fund’ credit of $1200 to invest in work experience and training. Unlike the present system, this fund is not replenished once an individual becomes unemployed long-term, except to fund very specific investments such as Work for the Dole and wage subsidies.
In this sense, the greater flexibility of the new system is illusory because flexibility and innovation require investment – and not only in forms of assistance determined in advance by Government. While higher outcome payments give providers more scope (and incentive) to invest in people unemployed long-term, a typical outcome payment for an individual unemployed for 12 months in Stream ‘C’ who remains in employment for 6 months is just $5500. If an effective work experience, training or other program improves such an individual’s job prospects by 10%, then a provider who invests more an average of $550 in a long-term unemployed person would not benefit financially from their investment.
The likely outcome of the new model is that people unemployed long-term, and those at risk of it, continue to receive employment assistance that is standardised and low-cost. This is exacerbated by the requirement that most unemployed people participate in a single program, Work for the Dole, for six months of every year. Participation in work for benefits schemes has little or no impact on people’s employment prospects. Data released in June 2014 shows that only 19% of participants in Work for the Dole were employed three months later. A recent evaluation of the United Kingdom’s equivalent of Work for the Dole, Mandatory Work Activity, found that participation in that program had no statistically significant effect on employment. The main drawback of work for benefits schemes is that the work experience participants receive is usually well removed from paid employment opportunities. If it is regular productive employment, then the participants should be paid the legal wage. To invest in this program on a large scale is therefore an inefficient use of public resources. Further, it is not reasonable to require people to undertake a program that will not improve their job prospects, especially where it involves working for less than the minimum wage – as will be the case with the ‘fulltime’ variant.
If the resources devoted to Work for the Dole – including establishment fees ($64,000 one-off payment), service fees ($380,000 per annum) and placement fees ($220 per placement) paid to Work for the Dole Coordinators and $1000 to $3500 placement fees paid to Job Services Australia providers, were instead made available to providers to invest in the assistance which they consider best meets the needs of each individual, employment assistance would be more cost effective.On the other hand, programs which connect unemployed people with regular jobs are relatively effective. The Wage Connect wage subsidy scheme has achieved promising results, with 47% of the 8084 participants who completed the program’s 26 week job placement by May 2013 retaining their positions after the subsidy ended. The scheme, which provides a subsidy roughly equal to Newstart Allowance to employers to offer paid work experience to very long-term unemployed people, gives people valuable experience in a ‘real job’ and the employer an opportunity to test their ability on the job. We therefore welcome the Government’s commitment to expand wage subsidies, and propose some adjustments to these schemes to make them more cost effective. Rather than operate three separate schemes for different age groups, we suggest that a single wage subsidy scheme be introduced and targeted to people unemployed long-term. Rather than defer payments to employers until the participant has remained in employment for a prolonged period, part of the subsidy should be available within the first three months to assist employers with induction and training expenses.
To increase the flexibility of employment assistance for people who are disadvantaged in the labour market, proposed restrictions on access to vocational and other training should be removed. If training is restricted to preparation for a specific job, then opportunities for many people whose skills are narrow or out of date to improve their employability would be arbitrarily restricted. Governments have invested for many years in vocational education and training and basic education because these qualifications and skills improve people’s career prospects and life chances. People who are unemployed and low skilled should not be denied these opportunities. These are better ways to connect training to job opportunities.
A close working relationship between employment services providers, training organisations and employers is essential to improve the employment prospects of people disadvantaged in the labour market. The present employment services system throws up a number of hurdles to such cooperation. These include competition among individual providers (which means that employers are often approached by many different providers when they would prefer to establish a lasting relationship with one), the limited resources available to providers to invest in the work required to establish these relationships in the first place (for which they cannot use Employment Pathway Fund credits), and a reward structure that emphasises quick outcomes. In collaboration with the Business Council of Australia and the Australian Council of Trade Unions, ACOSS has identified these barriers to a partnership approach to employment services, and we have made a number of recommendations to adjust the employment services system to remove them. The recommendations include national and regional employment brokers, the establishment of local networks or boards of employers, training and employment service providers, rewards for employment outcomes lasting one year, and allowing providers to use Employment pathway Fund resources to finance the preparatory work required to establish formal partnerships with employers.
Recommendation: Strengthen flexible investment for people unemployed long term within the employment services system by redirecting resources to the Employment Fund and easing restrictions on the purposes for which they can be used.
1) Funds earmarked for Work for the Dole (including for Work for the Dole Coordinators) should be reallocated into the Employment Fund to assist individuals who are unemployed long-term with work experience, training and other assistance that improves their job prospects. (Saving =$150 million in 2015-16, $200 million in 2016-17)
2) The Job Commitment bonus program should be abolished and the savings diverted to the Employment Fund. (Saving = $70 million in 2015-16, $70 million in 2016-17)
3) Credits should be made to the Employment Fund in respect of each jobseeker at the commencement of 12 months of long-term unemployment, equivalent to those made at the commencement of the unemployment spell. (Cost: $300 million in 2015-16, $350 million in 2016-17)
4) Employment Fund credits should be available for training whether or not this is linked to a specific job, and for the purpose of establishing ‘demand-led’ schemes, that is, a formal agreement with an employer to supply them with workers drawn from people who are either unemployed long term or classified within Streams B or C, and to mentor and train those workers for positions with the employer.
5) The Work for the Dole Supplement ($10.40 per week) should be indexed annually to movements in the Consumer Price Index. Work for the Dole participants should not be required to work for less than an appropriate legal wage beyond the 4 week limit that currently applies to unpaid work experience placements. (Cost $20 million in 2015-16, $20 million in 2016-17)
Cost: $100 million ($100 million in 2016-17)
Recommendation: Simplify and improve the effectiveness of wage subsidy schemes
1) The proposed wage subsidy schemes for different age groups should be replaced by a single program targeting people of all ages who are unemployed long-term, and the number of places expanded.
2) Half the subsidies paid to employers should be paid within the first three months of the placement.
Cost: neutral
Recommendation: Invest in an effective youth employment transition program to support at risk young people in their transition from school to work
The Government should ensure that the gap left by the cessation of the Youth Connections program is filled by funding a youth transitions employment program that:
1) provides effective career counselling for early school leavers and those at risk of leaving school without achieving Year 12 or equivalent qualifications;
2) assists early school leavers on income support to re-engage with education and training that improves their employment prospects; and
3) supports those at risk of leaving school early to achieve Year 12 or equivalent qualifications.
Cost: $65 million ($70 million in 2016-17)
Working-age payments
The social security system provides an essential safety net for people who are unable to earn sufficient income to meet their basic living costs. Australia’s social security system is more cost effective in reducing poverty than those in almost every other OECD country. Expenditures on social security payments in 2013 were 9% of GDP compared with an OECD average of 13%.
It is inaccurate to suggest that expenditures on working-age payments are a growing pressure on the Federal Budget. There has been a long term decline in reliance on working-age payments. Over the 20 years to 2012, the proportion of the working-age population receiving income support fell from 19% to 17%. In 2013-14 just 30% of social security expenses comprised working-age payments such as Newstart Allowance, Disability Pensions and Parenting Payment. Of the $28 billion of growth in social security costs between 2002 and 2012 after inflation, only $6 billion comprised increases in working-age payment expenses. Expenditure on Newstart Allowance and Parenting Payment declined by $4 billion over that period, despite a rise (with higher unemployment) during the Global Financial Crisis. A sharp increase in the number of people receiving the Newstart Allowance in 2013 was mainly due to the transfer of approximately 80,000 sole parents in that year from the higher Parenting Payment to the lower Newstart Allowance, a decision that reduced payments for the poorest single parent families by over $60 per week.
It is disturbing that some of the harshest social security measures in last year’s Budget targeted working-age payments, especially the proposed six month wait for unemployment payments for many people up to 29 years of age, when the major drivers of growth in Budget expenditures lie elsewhere. The main purpose of income support for unemployed people is to share the risk of unemployment between each individual and Government. The removal of income support for up to six months each year from unemployed young people would undermine that purpose. We are not aware of any other wealthy country that has responded to rising youth unemployment in this way. A fairer and more productive approach is to keep young people engaged with education, training and the labour market and support them in their transition to paid employment through income support and effective employment and training programs (as proposed elsewhere in this Chapter).
Unemployment payments (Newstart and Youth Allowances) were originally designed to tide people over a short period of unemployment. However, as unemployment fell over the last two decades, the profile of those remaining on benefits has become more disadvantaged. Among Jobs Services Australia (JSA) clients in 2014, over 60% were unemployed long term (over one year), and most of this group were unemployed for over two years.
The maximum single rate of Newstart Allowance in December 2014 was just $258 per week, or $36 a day. The payment for unemployed young people living independently of their parents was $207 per week. Our ‘Poverty in Australia’ report estimated that the risk of poverty among people in households where the main earner receives Newstart Allowance was 55% in 2012 and the equivalent statistic for people receiving Youth Allowance was 51%. Together with people receiving Parenting Payment and Disability Support Pension, those receiving the Newstart and Youth Allowance consistently rank highly among people experiencing financial hardship and deprivation.
The real value of Allowance payments has not increased since the early 1990s, and these payments were excluded from the $32 per week in pensions announced in 2009. Further, Allowance payments are only indexed to the Consumer Price Index whereas pensions are currently indexed to both consumer price movements and Male Total Average Weekly Earnings, which are likely to rise by almost 1% per year above inflation in each of the next few years. Indexation to both consumer prices and wages is essential to ensure that people who rely on income support do not fall behind the living standards of the rest of the community, as is the experience of people on Newstart and other Allowances. For this reason, ACOSS opposed the proposal in last year’s Budget to restrict pension indexation to consumer prices only.
As a result of these payment anomalies, the single rate of Newstart Allowance (and related supplements) is $166 per week less than the pension and Youth Allowance is $217 less. Aside from the inequity of different levels of payment for people with similar living costs, this gap between pension and Allowance payments discourages many people on pensions such as the Disability Support Pension from seeking employment, in case they lose the pension and wind up on the lower payments. The per week gap between pension and Allowance payments for single parents means that many of our poorest families experience a sharp decline in their income once their youngest child turns 8 years and the parent is transferred to Newstart Allowance, despite the fact that the costs of raising a child increase with age. The gap between pensions and Allowance also flows through to supplementary payments, which are lower for those on Allowances. For example, the Clean Energy Supplement for a single person without children receiving an Allowance is $9 per week while a single pensioner without children receives $14 per week.
The previous Government legislated a small increase in Allowance payments in the form of an Allowance Bonus, worth the equivalent of $4 a week. This would be the first real increase in these payments for 20 years. Regrettably, it is now to be phased out after 2016, a decision we call on the Government to reverse. Alternately, these expenditure savings should be reinvested in lasting improvements in income support for people receiving Allowance payments. One option is to index those payments to movements in wages as well as the CPI.
The Henry Report on the tax-transfer system recommended that the single rate of Allowance payments be benchmarked to two-thirds of the partnered rate, as was implemented for single pensioners in 2009. This would currently require a $51 per week rise in the single rate of Newstart Allowance, which should also extend to other Allowances such as Austudy and Abstudy payments and the Youth Allowance for those aged over 17 years living away from their parents. Payments for sole parents on Newstart Allowance should also increase accordingly. As the Henry Report noted, there is room to increase these payments without significantly weakening work incentives. A single adult on Newstart Allowance who obtains a fulltime job at the minimum wage would more than double their disposable income. This payment increase would have a substantial and immediate effect on reducing poverty, including among sole parent families affected by last year’s payment cuts (which would be fully restored for the poorest of those families by a combination of the Newstart Allowance and Family Tax Benefit increases proposed here).
The current Welfare Review is examining the structure of working-age payments and both the Review Panel and the Government have identified the removal of payment anomalies between pensions and Allowances as a key goal. The Panel’s Interim Report provides substantial evidence to demonstrate the inadequacy of Allowance payments, especially for single people and sole parents, and suggests that a new intermediate ‘tier’ of payments be introduced between Allowance and pension levels for groups who are not expected to participate fulltime in the paid workforce such as many people with disabilities. This proposal cuts both ways. It is likely that if it were implemented many people who will receive social security in the future would receive increased payments while many others would receive reduced income support – an unacceptable outcome.
In our submission to the Review, we argued that a more fundamental reform of working-age payments is needed. Instead of setting levels of payment on the basis of an individual’s ‘distance from employment’ (and by implication whether they are more or less ‘deserving’ of income support) they should be set on the basis of financial needs and living costs. The present division between working-age pensions and Allowances should be replaced by a base rate payment that is adequate to meet basic minimum living expenses and supplements to meet additional costs faced by substantial minorities of people on income support, including rent payments, the extra costs faced by people with disability and their carers, the extra costs of raising a child alone, and the costs of any job search and training requirements. The base rate payment would be substantially higher than Newstart Allowance. Activity requirements (where appropriate) would continue to be based on each individual’s employment capacity, but maximum payment levels would not.
This reform would reduce the most severe poverty. If carefully crafted it could remove inequities in payment levels without leaving any group worse off financially. Importantly, it would smooth transitions from income support to employment and greatly simplify the system because people would no longer have to move from higher to lower payments as they move closer to paid employment.
Equitable and cost effective payment reform is difficult to achieve through the vagaries of the political process and the annual Budget cycle. Governments also lack a rigorous, regularly updated evidence base to determine the adequacy or otherwise of payments for different groups and different needs. The system is built on the assumption that regular indexation will ensure that adequacy is maintained, in the absence of a proper assessment of the adequacy of different payments, and the appropriateness of relativities between them, in the first place. In reality, indexation of a poorly designed payment base exacerbates inequities in the system over time.
A number of reviews of social security payments have been undertaken in recent years, including the Harmer Review of pension payments, a Senate inquiry into the adequacy of Allowance payments, the Henry Review of the Tax Transfer system and now the Welfare Review Panel. Each of these reviews has contributed to our stock of knowledge of the circumstances of people who rely on income support, the options for payment reform and the trade-offs involved. Their limitations are that they are all one-off reviews, and repeated recommendations to improve the adequacy of Allowance payments have been ignored by governments.
One way to introduce more rigour into the setting of payment levels is for Government to establish an independent commission that reports regularly to the Government and Parliament on the adequacy of all social security payments, appropriate relativities between them, and indexation arrangements. The commission would also consider the impact of its recommendation on employment incentives and budgetary costs. It would not set payment levels since these are rightly decisions for Government.
Recommendation: Increase Allowance payments for single people by $51 per week
(1) Allowance payments for single people (other than those on youth and student payments) should be increased by $51 per week from March 2016, and benchmarked to 66.3% of the combined married couple rate of Allowances (a higher rate in the case of sole parents) as is the case for pension payments. This applies to people on Newstart Allowance, Widow Allowance, Sickness Allowance, Special Benefit and Crisis Payment.
(2) Allowance payments for single people on youth and student payments (Austudy Payment, Abstudy Payment and Youth Allowance) who are either over 24 years of age or 18-24 years and living away from the parental home should also be increased by $51 per week from March 2015 and benchmarking of those payments to 66.3% of the married rate should be phased in.
Cost: $400 million ($1,300 million in 2016-2017)
Recommendation: Index Allowance payments annually to movements in earnings
From July 2015, Allowance payments for people aged 17 to Age Pension age, and those over pension age not eligible for an Age or Veteran’s Pension, should be indexed annually to movements in wages as well as to movements in prices.
Cost: $90 million ($100 million in 2016-17)
Recommendation: Establish a social security commission to advise the Government and Parliament on a regular basis on the adequacy of social security payments
A social security commission should be established as a statutory authority to advise the Government and Parliament on a regular basis on the financial needs of people relying on social security payments, appropriate relativities between them, and the budgetary costs and implications for employment incentives of policy options to improve payment adequacy.
Cost: $5 million ($7 million in 2016-17)
Recommendation: Phase out compulsory income management schemes
Compulsory income management schemes around the country (including New Income Management in the Northern Territory and the Place Based Trails) should be phased out over a 12 month period. Where the individuals and communities affected seek to continue some form of income management, they should be replaced by opt-in schemes designed in consultation with the communities. Cost: 0 (not in forward estimates)