A Wel-fairer system

The recent McClure report has highlighted the plight of our welfare system.

Our welfare budget is currently $150 B / yr.

This is spent in a rather complex array of payments to qualifying individuals, be they unemployed, sick, disabled, children, so on. The system is complex, expensive to operate and arguably mis-directed, creating disincentives to recipients to seek work and allocating payments to those not 'in need'.

$150 B is a lot of money! Could it be allocated in a more efficient and more effective way? McClure has suggested a much simplified system that is currently being scrutinized by the government and will no doubt lead to a response over the next few months.

I have only had a brief introduction to the McClure report so cannot comment on it, other than note that it still seems complex. 

It starts by classifying welfare recipients according to various criteria and then establishes how each is to be treated by the system. Although much simpler than the current bureaucratic nightmare, I wonder if this is the right approach?

Welfare, at its core, is intended for those who, for whatever reason, are 'in need'. Simply stated, they cannot afford to pay for their day to day living and medical expenses themselves. It can be due to unemployment, hopefully temporary, illness, disability, etc. No matter the cause, the problem is they have insufficient earnings for their needs.

So why not use earnings as the sole criterion for determining who receives welfare?

Under this alternative approach welfare recipients would all have to pass an earnings test. The test itself would take into account only a few factors, such as number and age of dependents, special needs for the physically disabled, and the value of assets for high nett worth individuals.

Welfare payments would go to those whose earnings were below the benchmark minimum earnings (BME) for their group. The size of the payment would be equal to the difference between their current earning and the BME for their group, but would be subject to an adjustment to ensure there was always an incentive to work. The details for this adjustment have to be thought through and I accept there is some 'devil in this detail'. For the current overview suffice it to note that the adjustment would be sufficient to ensure there is a financial benefit for a welfare recipient to secure employment if there is any opportunity to do so.

I can see two key advantages of this approach. Firstly, it would be simple to administer and easy to understand These criteria are too often ignored when framing government policies. And Secondly it would bring a visible 'fairness' into the system by ensuring that only those in need received welfare payments and that the value they received was related directly to the extent of their need.

I have not done the sums on this (yet), but feel that by eliminating mis-directed expenditure, this alternative approach would deliver a higher welfare benefit to those in genuine need without increasing the overall welfare budget .


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Is our poverty line straight?

I was surprised to learn that according to the recently published report by Australian Council of Social Service (ACOSS) some 14 percent of Australians are below the 'internationally accepted poverty line"( http://www.acoss.org.au/policy/poverty/).

One in 7 Australians living in poverty is a terrible indictment for a rich country like Australia.

However, in view of Australia's increasing standard of living over the past 15 years (see http://www.natsem.canberra.edu.au/storage/Cost-of-Living-September-2013.pdf ) and Australia's ranking as number 2, behind only Norway, in the Human Development Index (see http://hdr.undp.org/en/content/table-1-human-development-index-and-its-components), it made me curious. What are these figures? Where do they originate? What is this poverty line?

So I did a little research. I downloaded the rather lengthy report from ACOSS. You can download it here.

I also followed up on Wikipedia to see what other countries were doing and how Australia compared with other countries.

As you delve, there is a lot to learn, and I confess I have more questions than answers. Nevertheless I have gleaned a few snippets.

What does ACOSS mean by 'poverty line'? 

The report defines the 'internationally accepted' poverty line for a single adult as 50% (or 60%) of the 'middle income' (median) single income household. There are different 'poverty lines' for different types of household. ACOSS however uses an adjusted figure by excluding housing costs, arguing that 'in this way , it compares different households' ability to meet their basic living costs apart from housing." Let's take that at face value , for now.

Wikipedia provides a less dogmatic definition noting that while many developed countries use the above definition, others also use the average rather than the median, and more importantly poorer countries tend to use an absolute definition of poverty based on daily earnings of but a few dollars per day. 

More questions than answers

The method used by ACOSS to calculate their published figures from the definition is still a bit of a mystery to me and has left me with a number of questions (see below). However there is an overriding problem with the definition. 

Simply, the 'poverty line' as defined, does not measure poverty in the normal sense of the word, ie a level of deprivation. It provides a sort of measure of distribution of income across a society, but not what we commonly mean by poverty.

Ok, I need to illustrate. 

Recall that ACOSS defines the poverty line as an income level  of 50%(or 60%) of the median household income for any family group. 

So imagine, one day miraculously, every employer decides to double everyone's income but without a commensurate change in the cost of goods. Yes I know this is unlikely, but hear me out it is only to illustrate this point. 

If everyone is earning double what they used to earn, with costs not having changed, you would expect that there should be less people living under the poverty line. But according to the ACOSS definition, not one person who was below the poverty line before this sudden increase in wealth is raised above the poverty line.  This is because the poverty line definition is based only on income distribution, totally ignoring the cost of living. Whereas we know poverty is not based on just income but what that income will purchase.

So clearly the definition is flawed, and really badly flawed. 

Now I am not saying that people living below the ACOSS poverty line are not deprived. I fully accept that there are significant numbers of fellow Australians who live in poverty. My point is that the ACOSS poverty line is NOT an appropriate measure for who is and is not in poverty, and therefore it should be replaced by a measure that takes into account both income and living costs for each family group.

Further questions

Even if we did accept the ACOSS definition, other problems arise. ACOSS does not break down the income distributions by geographic region. This is despite large variations in both the income and the cost of living across states, cities and rural regions. 

For example in 2011, 13.7% of households in Regional Tasmania earned between $400-$599 per week compared to 9.3% aggregate for Australia as a whole and 4.7% of households in the ACT. (see  http://profile.id.com.au/australia/household-income?WebID=170 )

This shows very wide variation in incomes by geographic region.  The same is also true for the cost of living. For example You would need around $5,500 in Hobart to maintain the same standard of life that you can have with $7,100.00 in Sydney, assuming you rent in both cities (see http://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Sydney&city2=Hobart). 

Once again the ACOSS poverty line can grossly mis-assign poverty. A person in Hobart with an above poverty income may find it a real struggle to live in Sydney. 

Clearly any measure of real deprivation should take into consideration the cost of living and the income in the geographic region in which the household is located.  Without this all that can be concluded is that the ACOSS poverty line gives some , rather ill-defined, measure of income distribution.

Why does this matter?

We are a rich country and want to be generous to our citizens, so this poverty line is a measure of our success as a society , at least in some senses.

Whilever there is competition for our tax dollars poverty rates will be amplified as a weapon against tight fisted governments in order to increase welfare spending.

ACOSS serves its purpose well in publishing headline poverty rates that are perceived as high, and increasing year on year. 

I share the common ethos of most Australians to provide generously for the disadvantaged. Therefore I take no issue with ACOSS' role seeking to limit poverty. However using false and misleading measures will tend to be discounted and can turn counter-productive. I believe the method of measuring poverty should be revised. ACOSS' poverty line, based only on income, should be replaced by a measure which really reflects both income and cost structures across geographic zones.

In the end, the best remedy for poverty may not be though increasing welfare payments, but through the availability of jobs and training.  More spending on welfare can be counter productive, as it removes responsibility from the individual and also the satisfaction that comes from doing an honest days work, but that is a discussion for another day