Systemic issues with Centrelink and the welfare system

I want to firstly point out I have never personally received significant money from Centrelink, however I know many people who have, including one current Launtel employee. Secondly this is not going to be some right wing rant about how people need to get off welfare. I want to look at the deeper issues about why the Centrelink system makes it so hard for people to stop using them. I believe Centrelink unwittingly behave like drug pushers keeping their users addicted.

The welfare system has long been described as a “safety net”, a way for the government to ensure that everyone at least has food on the table and a roof over their heads regardless of what happens to them in life.

When it was first created generally people either had a job or they didn’t. Only if you didn’t have a job did you get welfare. However this either-or situation has substantially broken down with the dramatic rise in part-time work. People now have half a job or a quarter of a job – or more likely an irregular number of hours according to when your employer needs you. The welfare system needed to adjust to this, however certainly here in Australia, they have done this in such a way to create a massive disincentive for people to look for and get work.

The first problem is a purely economic one. Given the rise in part time work, for many unemployed people, they can’t just “get a job”, the most they can expect is casual work and hopefully slowly increase their hours. Even employers see this as a logical move – they can “try people out” before committing to giving them full time work.

However as someone’s paid hours slowly increase, Centrelink starts to withdraw some of their Newstart payments. What is important to calculate is the “marginal tax rate”, or to put it another way how many cents of each dollar earned has to be surrendered to the govt either in tax or in reduced Newstart (or both). This is important because it guides how people react if they are offered extra work. The figures are quite interesting:-

From To “Tax Rate” Notes
$0 $2704 0% Centrelink allow earning up to $2,704 without penalty
$2704 $6604 50% For every dollar earned over $2,704, Centrelink take 50c away
$6604 $18200 60% For every dollar earned over $6,604, Centrelink take 60c away
$18200 $26264 79% Over $18,200 pay 19% tax and Centrelink is still being withdrawn at 60c in the dollar
$26264 $37000 19% After $26,264 only the 19% regular tax rate remains
$37000 $87000 32.5% Regular tax rate up to $87,000

 

What is very concerning is that if you are earning between $18,200 and $26,264 (highlighted), this is the period that 60c of each dollar earned is taken from Newstart in reduced payments AND you are being taxed at 19c in the dollar – an effective “tax” rate of 79%!

To put that into actual dollar terms: at $18,200 income you receive $23,000/yr in your pocket (still getting some Newstart), at $26,264 income you receive just $24,700 in take home (all Newstart has gone). So you have to earn an extra $8,000 in income to get an extra $1,700 in take home. If it takes 400 hours to earn that extra $8,000 – $20/hour – that’s just $4.25/hour in take home pay.

You can also see even after you earn $2,704/yr you are being effectively taxed at 50% and you know it is only going to get worse until you get to $26264. That is a “tax” rate that is higher than even people earning over $180,000/yr are taxed at (45%). This must be a substantial disincentive to earn more money.

All the above assumes that the people involved are what economists call “rational actors” – i.e. they think carefully about exactly what they do and the choices they make. In practice the people on Newstart are rarely like this. The conversations I have had with people who deal with Centrelink find the process confusing and difficult to predict. However what they can predict is that if they take on any work and earn money then Centrelink will require confusing paperwork, probably demand a repayment of money or a cut in future benefits. This can easily feel like a punishment. It is then very rational for people to turn down this paid work rather than deal with Centrelink.

I believe we have to look at the system that has been created by Centrelink as the problem and not the people who are stuck in it.

The second problem is the mental health effects of receiving Centrelink payments. I will cover this in my next blog article…

Damian Ivereigh

MD Launtel

6th October 2018