Children shouldn’t pay for our broken system

Opinion: 'Children’s needs don’t suddenly reduce because their parents become so poor that they qualify for an adult benefit,” writes Susan St John.

Children can become the ‘undeserving poor’ under Working for Families policies. Photo: iStock

Most low-income families battling to survive will get a long overdue boost to weekly payments for their children on April 1. But other, slightly better-off families will get not so much, and some families will actually see a reduction.

In the case of NZ Super, all recipients will get a worthwhile increase.

The basic principle of how we protect the old and the young in New Zealand is the same. We make sure there is a basic floor of income for both. Basic incomes work by providing a flat rate of benefit to all, while recouping some of the cost from high-income recipients through higher taxes.

NZ Super (NZS) has more visibility and understanding as an effective basic income for every older person. It has been very successful in providing unconditional support and preventing poverty. No previous contributions are required and there are no rules around how it must be spent. Higher-income recipients pay a higher tax rate on their super under our very modestly progressive tax scheme, (they could and should pay more).

Working for Families (WFF), the comparable programme for the young deserves the same understanding and support. Currently all families who are in some paid work, earning under $42,700 a year and not accessing any benefit receive the full WFF weekly payment. This payment is an unconditional income cushion for their children. Like NZS, nobody says how it should be spent and no contributory records are needed. Many have found it a boon as other income has dried up in the pandemic.

But in contrast to NZS, WFF is not fully unconditional for all low-income children. For example, a sole parent who is so poor that she must access a benefit, even if in part-time paid employment, is deliberately cut out of at least $72.50 per week for her children. Her children are the ‘undeserving poor’.

WFF payments are also reduced much more severely as incomes rise than is NZS. A way to make this clearer would be to give all New Zealand families the full WFF with a corresponding increase in the up-front tax rate on families’ incomes. From April 1, a primary earner for example on income between $42,700-$48,000 would pay a tax rate of 44.5 percent, between $48,000-$70,000, a tax rate of 57 percent and above $70,000, a tax rate of 60 percent until all the WFF is recouped. In contrast superannuitants on incomes as high as $180,000 pay only 39 percent.

And there are other differences between what we do for children and what we do for older citizens. NZS is annually adjusted for wage growth as well as prices to keep NZS no lower than 66 percent of the average net wage for a couple with adjustments for single and living alone. NZS is automatically adjusted each April and usually attracts no special government fanfare.

In contrast, WFF is adjusted only once cumulative inflation exceeds 5 percent. The last time WFF was reset after a gap of six years was July 1, 2018 when the first child Family Tax Credit became $113 per week and the second and subsequent children $91.25 per week. The law requires that in April of this year the family tax credit is adjusted for total inflation from July 1 to September quarter 2021, a change to $123 for the first child and $99 for subsequent children. Over and above this there will be an extra $5 per child, but it is scarcely a lot of new money that will ‘lift more children out of poverty’.

Moreover, only part of WFF is inflation-adjusted. For those ‘deserving’ families not on benefits, the In Work Tax Credit has been fixed at $72.50 since April 1, 2016. The full inflation-adjusted WFF, including the IWTC for a one-child family should be $210 by April 1, 2022.

So, the changes coming in on April 1 are just an overdue inflation catch-up; the total WFF payment when there is one child will be $200.23 per week and subsequent children, $104. In the meantime, the first quarter of 2022 has seen a spike in price rises that will further undermine WFF payments.

And there is another fish hook. For families in low-paid work, the $42,700 threshold of income has not been changed while the rate of abatement (clawback) from this low total household income has jumped to 27 percent. An inflation adjustment would have raised the threshold to $46,500, saving cash-strapped low-income families up to $1000 annually.

Working for Families was never designed for extraordinary lockdowns or recessions. It works very badly for the worst-off children because it is based on the mantra that paid work is the only way out of poverty. A payment meant for support of children (the In Work Tax Credit) is dangled like a carrot to reward parents for not being on a benefit even in a pandemic. This is cruel when full-time paid work is inappropriate or impossible for many families. Sole parents, disabled and sick parents are particularly affected.

What children need is both for their parents to have an adequate income for themselves and for children to be acknowledged as also having separate income needs. The children’s needs don’t suddenly reduce because their parents become so poor that they qualify for an adult benefit. Under current policy when parents need a welfare benefit, the worst-off children are pushed into deeper poverty. It is literally stunting these young lives in ways evident in far less developed countries.

What can be done immediately? First the IRD could flip the switch overnight and pay the full WFF to all low-income families. It won’t cure child poverty on its own, but it is an obvious start, targeted at only those with greatest need. It would commit the government to spending around an extra $650 million per annum and be an excellent stimulus as it would be spent immediately, saving parents precious time and anguish in queuing for food parcels and hardship relief. It requires letting go of a failed neoliberal ideology that withholds a poverty-reducing payment for the poorest children in the name of a work incentive.

All aspects of WFF should also be annually indexed like NZ Super and the tough tax rates on low-income families in low-paid work must be reduced. The clawback should be reduced from its April 1 new rate of 27 percent to its former rate of 20 percent. Other bold steps such as for housing are of course also urgently needed to avert social crisis of hunger and despair brewing in Aotearoa and provide the promised transformation.

Susan St John is Associate Professor of Economics in the Business School and Director of the Retirement Policy and Research Centre.

This article reflects the opinion of the author and not necessarily the views of the University of Auckland.

Used with permission from Newsroom Children shouldn’t pay for our broken system 23 March 2022

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