Working for Families is a poverty trap

 

When Helen Clark introduced Working for Families in 2004 it was, ostensibly, for all the right reasons. Because minimum wage levels were much lower than today, there was often not a lot of difference in incomes between families on the dole and families on minimum wages. Working for Families was introduced, basically, to encourage low-income workers to keep working, essentially by giving them their taxes back. It was welfare for all the right reasons but, of course, it was still welfare.

And it is still welfare. And the hardest thing is getting off welfare. This, from Stuff: Quote:

When Sue* got a promotion and $16,000 pay-rise, she thought she would be able to start saving and eventually take her three children on holiday.

Instead, tax credits and subsidies decreased for the solo mother, leaving her only about $50 a week better off despite moving into full-time work.

In March, she was given the opportunity to take on a new role at her workplace, moving from a 30- to a 40-hour week and having her pay increased from $36,000 to $52,000.

Before tax, Sue’s new earnings were about $310 extra per week. Because she is the sole breadwinner for her family, she was previously entitled to an $81-per-week accommodation supplement through Work and Income – but a higher salary reduced that to $8.

A weekly $311 Working for Families tax credit was also reduced, to $239.

Before the pay increase, Sue would get about $911 a week in the hand, including the supplement and tax credits. In the new job, she was left with $962. Both figures include child support received. End quote.

As this lady has just found out, welfare is a poverty trap. Work part-time, or on low wages, and the government subsidises your lifestyle if you have children. As your wages increase, your welfare drops. Fair enough, but clearly she had not taken into account that, at some point, she was going to have to start paying tax on her income. Quote:

Sue got a reprieve when the Government rolled out the first part of its Families Package from April 1, where her accommodation supplement increased by $100, “but it would’ve gone up by $100 if I’d been on $36,000 as well”.

The new supplement also affected a child care subsidy, which she required to be able to go to work.

Work and Income provides the child care subsidy to anyone with a gross weekly income lower than $1400. Sue’s new job moved her into a new pay bracket, reducing her child care subsidy by $43 per week. End quote.

So, she is actually better off than she would have been if there had not been a change of government. Actually, that is not true because she would have got a tax cut. You know, one of those ‘tax cuts for the rich’? Quote:

According to an estimate on the Work and Income website, Sue’s tax credit entitlement will increase by nearly $80 a week. However, she will lose the $43 childcare subsidy and it is unclear whether her accommodation supplement will decrease.

“I don’t want people to think I’m ungrateful for all the help that I get from the Government, I am. (Please note the double negative, but I’m sure that is not what she meant.)

“I would rather they encourage people to work … with tax cuts. But welfare encourages people not to.” End quote.

My point exactly, although I cannot help but point out the hypocrisy. Now that she’s working, she wants tax cuts…  Quote:

“The point is that for any of these families [like mine] it’s just so hard to try and help yourself.”

Sue said the Working for Families scheme seemed to have “the unintended result of trapping people in poverty”, and her situation was not unique. End quote.

I’m not absolutely sure the result was unintended. Introduced by the last Labour government, John Key deliberately did not overturn it because he recognised that, even after four years, it would put too many people into severe hardship. Another ten years on and the poverty trap is firmly entrenched. Sue does not seem to have worked this out yet, but she will have to earn over $80,000 before she is actually better off, with no welfare. She has a little way to go for that. Quote:

Her concerns with the Working for Families set-up were echoed by David Marra, who manages the Christchurch Budget Service. The service has operated for 50 years and specialises in helping people permanently, casually or self-employed.

“[Situations like Sue’s] have been an ongoing problem for years,” Marra said.

“Whether it was intentional or whether it was an unintended consequence … Working for Families has worked as a mechanism to keep wages down because it removes motivation,” Marra said.

“It removes … the incentive, for workers [with families] to go for relatively small or moderate pay rises because it actually has no effect on the household income – because Working for Families tops up the income and then it abates [when pay increases].” End quote.

Yep. It keeps wages down because there is no point in going for a pay rise. You may think this has benefited employers, but it certainly hasn’t helped employees. And, there is another aspect to that. Quote:

But the policy also impacted wages for those who did not have families, Marra said. They had to compete with those receiving Working for Families, who would be happier to settle for a lower salary because the tax credits brought them up to the median income anyway.

“Why would I employ you if you have no children and I have to pay you more when I can employ Bill, who has children and because there is this subsidy I can get Bill for cheaper than you. So I’m going to employ Bill.”

Those factors had created “downward pressure” on all incomes “and that is part of what has created this low-wage economy that we have going on in New Zealand”. End quote.

When you are receiving welfare, it is important to remember that you are receiving welfare. It is also important to try very hard to get off it. Our welfare system is particularly generous so as to allow children to have a decent upbringing. Articles like this one, however, show how entrenched it is, and how much it is taken it for granted. I don’t begrudge Sue her family holiday at all, but she should have remembered that she is a welfare recipient. Instead of now demanding tax cuts that, ironically, were taken away from working people so that people like Sue could get a bigger handout, she needs to be grateful that she had so much help when she needed it. Welfare is a poverty trap but there is no need to feel sorry for people who are coming off welfare. Sue should be celebrating her success, not bemoaning it.

 


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Accountant. Boring. Loves tax. Needs to get out more. Loves the environment, but hates the Greens. Has been called a dinosaur. Wears it with pride.

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