European Anti Poverty Network Ireland

OUT OF THE TRAPS

Ending poverty traps and making work pay for people in poverty

Foreword Ireland fails the meanness test Ireland has had the fastest growing economy in the European Union (EU) for nearly 15 years, and this has led to a dramatic drop in unemployment and to labour shortages in some sectors. Nevertheless, we also have the highest rate of poverty in the EU and unemployment remains high among some disadvantaged groups, including lone parents.

This report looks at one set of reasons for this – the very high costs of moving from welfare to work which are built into our tax and welfare systems. It contradicts the increasingly popular notion, in some sections of the media, that there are many people who are able to work but are not willing to. It documents in detail the enormous financial barriers for people moving from welfare to work. Indeed, it shows that our social welfare provision is designed to provide a welfare system ‘on-the-cheap’, but it is self-defeating as it keeps people out of work and below the poverty line. For example, it finds that: o

A lone parent with one child can drop 42% of her/his net income by moving to a 40 hour minimum wage job (from !197 to !115)

o

A couple with two children going from Unemployment Benefit to a 35-hour minimum wage job would experience a 25% drop in net income (from !292 to !219)

o

A couple with three children would lose a third of their income taking up a 40-hour week on the minimum wage (from !404 to !270)

The report also shows how the system keeps many people at work below the poverty line, and the complexity of the system and the different cut-off levels make it difficult for individuals to make well-informed choices about work or to know their rights. It explains the main reasons for these and other poverty traps as the use of stringent means tests with low cut-off points for many essential supports. We recognise that there are other barriers to taking up work, such as lack of childcare and other care services, poor public transport, unavailable training, but the poverty traps outlined in this report must be addressed if we are to make work pay for people in poverty. The Government is committed, along with our EU partners, to ‘make a decisive impact on the eradication of poverty’ by 2010. It argues that a job is the best way out of poverty and talks, in the latest EU jargon, about ‘making work pay’. In Ireland, this must include a step-by-step plan to integrate the social welfare and tax system to ensure that work always provides an effective route

out of poverty and to simplify the system of benefit ‘cut-offs’ so that people are clear about their entitlements." Ireland can afford to change to a system with realistic cut-off points - in fact we cannot afford not to.

Joan Courtney

Joe Gallagher

Chairperson

Chairperson

OPEN

EAPN Ireland

Acknowledgements EAPN and OPEN would like to thank Camille Loftus for her commitment to this project, above and beyond her contract. Without her enthusiasm, expertise and knowledge, this publication would have been impossible. We would also like to thank Robin Hanan, from EAPN, Frances Byrne of OPEN and Mary Keogh, former Director of the Forum of People with Disabilities, for formulating and guiding the project. We are grateful to Niamh O’Carroll for very effectively managing the publicity and press work and to Paul Ginnell & Alex McMahon (EAPN Ireland) and Naomi Feely & Adele McKenna (OPEN) for their contribution to finalising and producing the report. .

EAPN Ireland

OPEN

is a made up of organisations and individuals in

is the national network of lone parent self-help

Ireland fighting against poverty and social

groups, numbering 80 in all. OPEN aims to assist

exclusion." It is the Irish national network of the

the capacity of our member groups and to

European Anti Poverty Network (EAPN).

campaign for positive policy change for one-

EAPN aims to put the fight against poverty and social exclusion at the top of the EU agenda. See www.eapn.ie

parent families, especially those living in poverty or at risk of living in poverty. See www.oneparent.ie

EAPN and OPEN are both core-funded by the National Lottery, through the Department of Community, Rural & Gaeltacht Affairs, under the National Anti-poverty Networks Support Programme.

Table of contents

1:

Executive summary ......................................................................... 1

2:

Welfare to work 2005 .....................................................................12 2.1 Introduction .............................................................................12 2.2 People of working age .................................................................13

3:

Welfare to work transitions ..............................................................16 3.1 The elements of welfare to work policy............................................16 3.2 Deductions from earnings.............................................................25 3.3 Basic weekly social welfare payments: earned income means tests ..........26 3.4 Secondary Benefits.....................................................................28 3.5 Welfare to Work Supports ............................................................31

4:

Welfare to Work outcomes for different household types ..........................33 4.1 Introduction .............................................................................33 4.2 Assumptions underpinning calculations.............................................34 4.3 Reading the tables and graphs .......................................................34 4.4 Index of examples illustrated ........................................................35 4.5 Unemployment Payments .............................................................36 4.6 Lone Parents ............................................................................53

5:

Towards an effective welfare to work system ........................................67 5.1 Introduction .............................................................................67 5.2 Are social welfare payments are too high?.........................................67 5.3 Towards more effective welfare to work transitions.............................68 5.4 Means tests ..............................................................................68 5.5 Definitions of unemployment ........................................................72 5.6 Welfare to work programmes ........................................................73 5.7 Information provision ..................................................................74 5.8 Administration ..........................................................................75 5.9 Reforming the welfare to work system .............................................75

6:

Glossary

..............................................................................78

1:

Executive summary

1.1

Introduction

Maximising participation in employment is a key goal of both economic and social policy. Achieving a high rate of labour market participation is seen as critical to maintaining Ireland’s economic success. Employment is also identified as the primary route out of poverty. These are of course not new goals – with a relatively recent history of up to 20% unemployment, these goals have been high on the Irish agenda for some time. However, the context in which pro-employment policies are designed and implemented is very different now: both our economy and our labour force are radically different to the situation prevailing twenty years ago. Labour shortages have replaced job shortages, which in turn have fuelled the growth in labour market focussed immigration. Economic growth, in the context of social partnership, has seen reductions in personal taxation and the introduction of the National Minimum Wage. Recent years have seen budget surpluses replacing the crippling burden of debt. In the current context, continued job growth, the NMW and low personal taxation are increasingly seen as the most appropriate response to unemployment. Another area in which there has been significant and rapid change is in the diversity of the labour force in Ireland. As well as inward migration, policy makers have looked to expand the labour force by drawing on heretofore excluded groups in the indigenous population. As employment grew, so called ‘women returners’ sought to rejoin the labour market in significant numbers. The growth in families headed by a person parenting alone, and the high rates of poverty experienced by such families, means that employment must become a viable option for people parenting alone. The growing articulation of a rights-based agenda among the diverse community of people with disabilities also encompasses the field of employment. These changing contexts have implications for our employment policies. Policymakers increasingly seek to focus on the broader group of ‘people of working age’, who have more diverse needs to their more homogenous predecessors. Economic growth creates not only the jobs and the resources to design and implement policies to address these more diverse needs, but also creates an imperative that these policies are efficient and effective. In this context it is important to note that work does not always prove to be a route out of poverty: in 2003, the EU Survey on Income and Living Conditions showed that 9.2% of people at work were at risk of poverty because their income remained below the poverty line, even after social transfers. The survey also showed that the comparable rate for ill or disabled people was 54%, for households containing one adult with children the rate was 42.3%, and for unemployed

1

people the rate was 42.1%1. The at risk of poverty rate for people living in the private rented sector was 26%. In a full employment economy, the reasons why a person remains unemployed are many and varied. Sectoral shifts in local labour markets can result in redundancies and skills deficits; lack of, or the cost of access to public services can create barriers to the take up of employment e.g. childcare; educational disadvantage is strongly related to labour market exclusion, as is the experience of discrimination; issues at the level of the individual such as addiction are also implicated. A further consideration is the financial return from employment. While the financial benefit of a move from welfare to work may not in and of itself to overcome these barriers, poverty and unemployment traps can make the move unsustainable. If work doesn’t pay, and employment proves not to be a route out of poverty, people who successfully negotiate one or more of these barriers can find they are unable to afford a job. This paper focuses on the financial aspect of moving from welfare to work, in particular for unemployed people and their partners and for people parenting alone.

1.2

Moving from welfare to work

The rules and provisions governing the move from welfare to work are multi-layered, administered by a range of different government departments and agencies, and very complex. They include deductions through the income tax system, assessment of earned income for basic social welfare payments, as well as ‘secondary benefits’ – supplements to the basic payment – which are often not administered directly by the Department of Social and Family Affairs; there are also particular packages designed to support people who have been unemployed for an extended period. The system uses a very high number of means tests, differing for each payment or benefit. The complexity of the system governing welfare to work transitions makes it administratively inefficient, as well as making it challenging to ensure poverty and unemployment traps are eliminated – there are so many different assessments and thresholds that a change in one area can easily have an unanticipated outcome in another From the perspective of the target group, it is not easy to work out the financial implications of taking up employment. Neither is it easy to find a source of comprehensive information to support informed decision making. Therefore it is reasonable to assume that many people make decisions about returning to work without knowing all the benefits they are entitled to.

1

Data on consistent poverty – where low income results in deprivation of basic necessities – shows that

the rate for workers was 3.5%, for lone parent households it was 32.6%, and unemployed people had a consistent poverty rate of 26.4%.

2

This highlights the importance of: • Simplicity in the design of a welfare to work system • Ensuring the ready accessibility of clear and comprehensive information • Proactive delivery of benefits to ensure better take-up, and therefore more sustainable welfare to work transitions. A range of sample outcomes are summarised below for different household types: • Single adults without dependents • Families, both two parent and lone parent, with one child • A two parent family with three children And for different payments: • Unemployment Assistance and Benefit • One parent Family Payment • Back to Work Allowance It should be noted that in all examples it is assumed that claimants have maximised their income by claiming all supports to which they are entitled. However, in practice, this is not always the case e.g. Family Income Supplement has a very low rate of take-up. Other assumptions underpinning these examples are outlined in more detail in the paper. In the tables below, outcomes below the poverty line are shaded, and poverty traps are highlighted with bold text.

3

1.2.1

Summary outcomes for single adults without dependents SW only

24hrs NMW

40hrs NMW

24hrs AIE

40hrs AIE

n/a

!184

!306

!347

!578

60% poverty line

!193

!193

!193

!193

!193

Net income before housing

!156

!222

!292

!323

!485

Net income after housing

!143

!196

!200

!231

!393

! !

! !

! !

" !

" "

Net income before housing

!149

!245

!292

!373

!485

Net income after housing

!136

!183

!200

!280

!393

! !

! !

! !

" "

" "

Net income before housing yr 1

!302

!411

!435

!596

Net income after housing yr 1

!279

!388

!343

!504

! !

! !

! !

! !

UA

Gross earnings

Full Medical Card

UB

GP only Medical Card

Full Medical Card

BTWA

GP only Medical Card

Full Medical Card GP only Medical Card

• The situation for single adult households is relatively straightforward, as there are less payments and supplements involved. The earnings assessment for claimants of unemployment payments are comparatively uncomplicated: • UA recipients have a daily disregard of !12.70, and 60% of remaining net earnings are assessed against the payment; UB recipients lose a day’s payment for each day they work; part of the UB payment is also taxable • Recent changes to the Medical Card assessment have improved the situation for unemployed people; the Card is retained when working full-time at the NMW, although eligibility is lost with earnings in excess of this. • For Rent Supplement claimants the withdrawal of this payment creates a severe poverty and unemployment trap; this is still the case under the BTWA as the retention threshold of !317 is crossed.

1.2.2

Summary outcomes for families with one child

Gross earnings 60% poverty line

4

SW only

24hrs NMW

40hrs NMW

24hrs AIE

40hrs AIE

n/a

!184

!306

!347

!578

!385

!385

!385

!385

!385

UA

Net income before housing

!305

!417

!441

!443

!565

Net income after housing

!293

!369

!226

!367

!350

! !

! !

! !

! !

! !

Net income before housing yr1

!462

!538

!569

!764

Net income after housing yr1

!444

!475

!354

!545

! !

! !

! !

! !

Full Medical Card

BTWA

GP only Medical Card

! !

Full Medical Card GP only Medical Card

• The situation for families is more complicated – there is a wider range of payments and supports available, and consequently more calculations to determine post employment outcome • The difference in earned income assessments for claimants and qualified adults on unemployment payments complicates things further – the paper provides a detailed worked example illustrating the complexity of choices required to maximise income for this type of household. • Net income almost levels off between !184 and !347 – there is only !30 difference in net income at these earnings levels. Increasing the level of the FIS income threshold (currently !446pw for this family size) would generate a better return from increasing earnings. • Recent changes to the Medical Card system have been beneficial to this household type – both types of cards are retained at all income levels illustrated. • Families in the private rented sector would suffer severe poverty traps from the withdrawal of Rent Supplement; this is also the case on the BTWA when the threshold for retention of secondary benefits is exceeded at !317pw – just over the NMW level.

1.2.3

Summary outcomes for a lone parent household with one child SW only

25hrs NMW

40hrs NMW

25hrs AIE

40hrs AIE

n/a

!191

!306

!361

!578

60% poverty line

!257

!257

!257

!257

!257

Net income before housing & childcare

!210

!438

!420

!441

!551

Net income after housing & childcare

!197

!248

!115

!248

!246

! !

! !

! !

! !

! !

OFP2

Gross earnings

Full Medical Card GP only Medical Card

2

For the OFP examples, part-time work is 25 hrs a week

5

BTWA

Net before housing & childcare yr 1

!462

!539

!569

!764

Net after housing & childcare yr 1

!398

!444

!354

!549

! !

! !

! !

! !

Full Medical Card GP only Medical Card

• Determining a reduced level of One parent Family Payment requires the use of the Department’s rates book, which makes it more difficult for lone parents to assess postemployment incomes; the payment is also taxable which further increases the complexity of welfare to work calculations. • Childcare is a necessity for employed lone parents which substantially reduces net income – only a nominal cost of !90 is included in the examples illustrated, many lone parents will have to pay more than this making it very difficult to get a return from employment. The threshold for the withdrawal of the OFP was originally set at a level to take account of childcare costs, but as it has not been increased, it is now below the level of the NMW. • Recent changes to the Medical Card system have been beneficial to this household type – both types of cards are retained at all income levels illustrated. • As for other household types, the withdrawal of Rent Supplement creates a severe poverty trap for families living in the private rented sector, which also occurs when the !317 threshold for retention of secondary benefits under the BTWA is exceeded

6

1.2.4

Summary outcomes for a family with three children SW only

24hrs NMW

40hrs NMW

24hrs AIE

40hrs AIE

n/a

!184

!306

!347

!578

60% poverty line

!513

!513

!513

!513

!513

Net income before housing

!417

!539

!552

!554

!639

Net income after housing

!404

!457

!277

!451

!364

! !

! !

! !

! !

" !

Net income before housing yr1

!580

!642

!668

!862

Net income after housing yr1

!502

!563

!393

!588

! !

! !

! !

! !

UA

Gross earnings

Full Medical Card

BTWA

GP only Medical Card

Full Medical Card GP only Medical Card

• This larger family experiences the same difficulties as for the family with one child – post employment income remains just over the poverty line until the highest earnings level illustrated. The poor return from employment is largely attributable to the fact that the FIS income threshold for this family size is below the poverty line. • Recent changes to the Medical Card system have not improved entitlement for this household type – the full Medical Card is still lost at the highest level of earnings illustrated. • As for other household types, the withdrawal of Rent Supplement creates a severe poverty trap for families living in the private rented sector – rent costs would be higher for a family of this size. Even when in receipt of BTWA, this family would be below the poverty line at the lowest earning level, and experience the severe poverty trap that arises when the !317 threshold for retention of secondary benefits is exceeded

7

1.3

Towards more effective welfare to work transitions

The complex interaction of a number of different means assessments and payment levels can make it difficult to identify the problematic areas in welfare to work transitions. Costs faced by different individuals can also make a substantial difference to the return from employment – and many of these, such as housing, childcare and health costs have increased substantially in recent years. The issues presenting cut across the various contingencies and payments, and are outlined below before addressing recommendations for reform. • Over reliance on means testing: A recent NESC report notes that Ireland is “exceptional” for its high degree of reliance on means tests: Ireland is 8% more reliant on means testing than the UK, the country which comes second to Ireland in this regard. The argument in favour of means testing is that it targets supports on those most in need of them, thereby ensuring more effective anti-poverty expenditures. However, the experience of other countries, for example Denmark, which is also a small, open, high-performing European economy, challenge this view. Ireland is nine times more reliant on means testing than Denmark, but its social transfers reduce the poverty rate by 70%, compared to 40% in Ireland. • Means testing reduces the transparency of the social welfare system, which contributes to the ‘myths’ that often exist among social welfare recipients about welfare to work transitions; they are also administratively expensive and burdensome. • Multiplicity of means tests: Related to the issue of over-reliance on means testing is the multiplicity of different means tests in the system – an issue for reform identified almost 20 years ago, in 1986, by the Commission on Social Welfare. Each payment has its own means test (and some have more than one), but they are all broadly intended to do the same thing i.e. identify people on low income in need of support. • Means tests use different assessments of income: Some means tests are based on gross income, others on gross less PRSI, some are based on net income, and a number of means tests disregard specific income e.g. Family Income Supplement or Child Benefit. • Failure to index link: Most means tests include income disregards and/or thresholds or ceilings of some sort. While some are ‘moving targets’ (e.g. income in excess of the SWA rate automatically changes when the SWA rate is changed) others are fixed amounts which must be uprated to ensure that they continue to serve the purpose for which they were intended. For example, the upper earnings threshold for receipt of the One Parent Family payment - !293 – was originally set to take account of childcare costs, but failure to index link means that this level is now less than earned by a full-time worker on the NMW.

8

• 100% withdrawal rate: Some means tests are based on a fixed threshold after which the entire payment is withdrawn. This effectively eliminates the incentive to earn in excess of the threshold, creating a poverty trap. For example, all earnings over !60pw are deducted from any Rent Supplement payable, so that unless earnings are greater than the total amount of supplement, there is no incentive to increase earnings over !60. Similarly, under the BTWA entitlement to all secondary benefits is lost once income exceeds a threshold of !317.43pw. • Benefits linked to unemployment status: Some of the assumptions that underpin definitions and eligibility in the social welfare system are out of step with current practice. For example, unemployment is defined as being out of work for 3 days out of 6, and an hour’s work is considered a day’s employment. This doesn’t reflect changing employment patterns, which increasingly involve atypical patterns, shift work etc. • Welfare to work programmes: These programmes are intended to deliver additional financial support to low income households returning to work after a period of unemployment. However, they have lost effectiveness in recent years. People returning to employment often don’t earn enough to benefit from the additional tax credits provided under the Revenue Job Assist scheme. The threshold for retention of secondary benefits under the BTWA has not been adjusted in a number of years, and is now just over the level of the NMW, which for many is not sufficient to cover the loss of these benefits. In addition, unemployed people are not eligible for the scheme until 5 years unemployed, by which time their chances of finding work are substantially reduced. • Information provision: Working out the financial implications of moving from welfare to work requires considerable knowledge of the intricacies of the social welfare system, and a lot of calculations. The target population for welfare to work information is more likely to experience literacy and numeracy difficulties, making the challenge even greater. The experience of coping with poverty can make people risk averse (is this language okay??), and a job isn’t a route out of poverty in every instance. To make the decision to take up employment requires clear, comprehensive and reliable information on all aspects. Resourcing information providers and simplifying the system to make it more user-friendly would facilitate better information provision for both providers and target groups. • Administration: Welfare to work transitions could also be better supported through improved administration of the system. For example, approval to participate in rehabilitative employment for disabled people can take 5-6 weeks, by which time the job may be gone. Speedier decision making could support more transitions to employment. More proactive administration could improve take-up rates of some supports, particularly where the information required to assess eligibility is already in the system e.g. Family Income Supplement or Back to School Clothing and Footwear Allowance

9

1.3.1

Reforming the welfare to work system

Most of our current framework of welfare to work supports was designed for a very different labour market to that of today. Incremental adjustments to different elements of the framework have complicated an already complex system. In some instances the failure to adjust has rendered supports ineffective. A systematic and integrated review of all elements of welfare to work support could generate an integrated package of recommendations to ensure that policy is both efficient and effective in addressing poverty by maximising participation in employment and making work pay. To support these goals, the following objectives are put forward: • Work must be a route out of poverty. Unemployment and poverty traps should be eliminated so that progression into and in employment always yields a financial reward, regardless of the duration of unemployment or social welfare contingency, for all potential workers in the household • The system should be as simple as possible, clear and easy to understand, to support well informed decision making and efficient administration • Welfare recipients should have ease of access to reliable, clear and comprehensive information • Administration should be proactive to ensure full take-up of benefits and prioritise decision making to facilitate participation in employment The table below summarises how these objectives might be realised for the areas identified: Too many means

Use the same means test to access a range of related schemes i.e. use

tests

one means-test as a ‘passport’ to a range of benefits.

Different

Adopt a uniform basis of assessment e.g. net earned income, certain

assessments of

social welfare payments consistently disregarded. This will probably

income

require the raising of income thresholds to ensure no-one loses out.

Failure to update

Re-base disregards, income thresholds, ceilings etc. to ensure that they

disregards

are at an appropriate level to achieve their objectives. Update on an ongoing basis in line with relevant developments e.g. increases in social welfare and/or net incomes

100% withdrawal

Withdraw benefits on a tapered basis e.g. as for FIS, UA

Definitions of unemployment

Assess entitlement on basis of needs and means only, rather than social welfare contingency.

10

Specific welfare

Ensure that work always pays; eliminate poverty and unemployment

to work schemes

traps, for all adults of working age low income households, regardless of social welfare contingency. Specific welfare to work programmes should address particular difficulties faced by people who are long-term unemployed, and must be appropriate to the needs of the target group.

Information

Simplify the welfare to work system, to make it more transparent, easier to understand and administer Resource information providers who can address welfare to work transitions comprehensively – the community and voluntary sector has established expertise in this area, and is often considered more approachable by the target group.

Administration

Reduce the application of discretion Prioritise time-critical administration e.g. approval of rehabilitative employment Be proactive in ensuring take-up of benefits and supports Examine the potential of refundable tax credits as a more effective way of administering in work benefits

11

2: 2.1

Welfare to work 2005 Introduction

This report was commissioned by the European Anti-Poverty Network (EAPN), Ireland and OPEN, the national network of lone parent groups. Maximising participation in employment is seen as crucial to maintaining Ireland’s economic success. Government policy also identifies employment as the primary route out of poverty. Accordingly, these organisations wished to investigate the financial barriers currently faced by social welfare recipients trying to benefit from current economic success through participation in employment. In a labour market deemed to be at ‘full employment’ the reasons why people remain unemployed – defined in the broadest sense, as people who want jobs but can’t get them – are many and varied. They can include sectoral shifts in local labour markets resulting in redundancy and skills deficits; lack of access to public services such as transport, health, housing or childcare; discrimination; educational disadvantage as well as issues at the level of the individual, such as addiction. People experiencing these problems, particularly people who have experienced severe disadvantage, will require a range of different supports and services working together to make a successful welfare to work transition. The decision to move from welfare to work involves a range of factors, for example job satisfaction and opportunities for promotion, travel to work, the cost and availability of childcare, to name a few – but an important consideration is the financial outcome. This is the primary focus of this paper - the financial aspects of welfare to work transitions. While financial incentives alone may be insufficient to secure successful outcomes, poverty and unemployment traps can stop successful transitions for people who are ‘employment ready’. Failure to ‘make work pay’ can leave people unable to afford a job. As a country with a recent history of 20% unemployment, concern with transitions from welfare to work is not new. During Ireland’s period of high unemployment all kinds of policy initiatives, including those in the social policy realm, were, as far as possible, oriented towards the goal of increasing employment. However, poor economic performance meant that the scope and potential effectiveness of these initiatives was hampered both by lack of resources and a lack of jobs. As the economy improved and job growth became established, the numbers on the Live Register plummeted – even among those who had been long-term unemployed. Labour shortages replaced job shortages. The new (for Ireland) phenomenon of labour market focused immigration grew. Economic growth facilitated significant cuts in personal taxation, and social partnership supported the introduction of a National Minimum Wage. Increasingly, these developments were seen as the key to successful welfare to work transitions.

12

During the years of high unemployment, welfare to work reforms evolved incrementally, identifying critical barriers and adjusting schemes accordingly, or developing new schemes to address a number of barriers simultaneously. However, during the ‘Celtic Tiger’ years many of these provisions have become less effective. The current economic context facilitates more ambitious goals in relation to the target populations, and new opportunities, in terms of labour market demand and the resources available to implement reform. The current context is therefore highly conducive to a review and reform of welfare to work provisions.

2.2

People of working age

The primary focus of welfare to work policies in Ireland has traditionally been on the contingency of unemployment, with other contingencies included on an ad hoc basis. However, this focus is gradually changing, and increasingly, policy makers wish to ensure that the path from welfare to work is facilitated for as broad a population as possible. Welfare to work polices are now increasingly focused on ‘people of working age’. The table below illustrates the numbers receiving the main social welfare payments for people of working age3. Claimants

Qualified adults

Unemployment Assistance

73,840

14,692

Unemployment Benefit

57,699

6,356

One parent Family Payment

80,103

n/a

Disability Allowance

72,976

6,142

Disability Benefit

58,726

8,200

343,344

35,390

Main payments for people of working age 58,726

73,840 Unemployment Assistance Unemployment Benefit One parent Family Payment Disability Allowance

72,976 57,699

80,103

3

Statistical Information on Social Welfare Service 2004

13

Disability Benefit

However, adopting a wider focus also illustrates the differences between the treatment of different contingencies, including the manner in which welfare to work transitions are supported. This wider focus presents a challenge to many of the assumptions underpinning the different contingencies in the social welfare system. Women’s participation in the labour market has increased substantially over recent years, particularly among younger age groups. However our social welfare system is still predicated on the ‘male breadwinner model’, which treats women’s desire to engage in paid employment differently to men’s. The male breadwinner model also causes difficulties for another growing group, that of people parenting alone. The incidence of poverty is particularly high among lone parents and their children. If employment is to be the best route out of poverty for this group, the barriers currently impeding lone parents from taking up paid work need to be removed. While it may not be appropriate to oblige or compel these populations to participate in the labour force, due to for example, the need to care for children, or because of the nature of a disability, it is counter-productive to place barriers in the way of those who are capable of working and wish to do so. This report looks at welfare to work transitions for people in receipt of unemployment and lone parent payments. The main elements involved in the financial outcomes of welfare to work policies include assessments of earned income for primary social welfare payments; arrangements for retention of secondary benefits, and specific supplements designed to top-up earned income. These components have also been combined into special ‘packages’ for particular populations. The income tax system also plays a role in welfare to work transitions. This paper focuses on the financial outcomes of moving from reliance on social welfare to open market employment. Accordingly, the financial aspects of participating in training, education or employment programmes are not addressed in this paper. In considering outcomes, the full range of social and income supports must be included - including the social security and tax systems, as well as social policy instruments such as housing, health, childcare and transport policies. All of these elements must be able to work together to ensure that getting a job does mean getting out of poverty. During the years of high unemployment, when jobs were scarce and public finances tight, the potential contribution of welfare to work policies was limited – the ‘work’ component was missing, and the resources to effect significant changes in the tax and benefit systems simply weren’t available. Now Ireland is a wealthy country facing labour market shortages. Ireland now has both the jobs and the resources to implement an efficient and effective welfare to work strategy, which ‘makes work pay’ by guaranteeing that employment is a route out of poverty.

14

2.3

Structure of this paper

This paper sets out the provisions in the tax and social welfare systems governing transitions from welfare to work, provides worked examples of outcomes for people in receipt of unemployment or lone parent payments, and concludes by analysing where the problems with the current system arise, and outlining approaches to addressing these. Section 3 sets out the elements contributing to the financial outcomes of moving from social welfare to employment. Sections 4 provides worked examples of these provisions for the three categories of payment, and highlights some of the key difficulties. Section 5 analyses the difficulties in current welfare to work provisions, and suggests and approach to resolving these problems.

15

3:

Welfare to work transitions

3.1

The elements of welfare to work policy

The transition from welfare to work involves the interaction of a number of different systems and administrative structures. Incomes at the lower end of the scale are determined by the combination of basic social welfare payments, secondary benefits – both cash and in-kind – and the income tax system: • Basic weekly payments and supplements paid by the Department of Social and Family Affairs. Ireland’s social security system is contingency based i.e. to claim a payment you must prove that you meet a particular contingency e.g. that you are unemployed or, parenting alone, etc. Income support is provided via two different systems - one social insurance based, where entitlement to a payment is determined on the basis of an individual’s record of social insurance contributions, and the other means-tested, where entitlement is based on having insufficient means, determined by using a means-test. Most contingencies are catered for in both the social insurance and means tested systems however, some contingencies are not covered by social insurance e.g. parenting alone. • As well as basic weekly payments, there are also additional supplements to cater for particular expenses – often known as ‘secondary benefits’. The Supplementary Welfare Allowance scheme incorporates a number of supplements e.g. towards private rent and back to school costs. The SWA scheme is funded from the D/SFA budget, but administered via Community Welfare Officers in local Health Centres. The Medical Card, while not a cash payment, is a further important component of the income package of people on low incomes. The Department of Health and Children has responsibility for the Medical Card scheme, which is administered by the Health Service Executive via local Health Centres. • Both earned income and certain social welfare payments are assessable for income tax. The Revenue Commissioners administer the income tax system. • Finally, there are particular ‘welfare-to-work’ supports such as the Back to Work Allowance, and in-work benefits such as Family Income Supplement, which are administered by the D/SFA, as well as Revenue Job Assist, which is administered by the Revenue Commissioners. Unemployment and poverty traps arise when either a benefit is withdrawn, or a liability imposed (in the case of the tax system) with the effect that participation in employment, or an increase in earnings, results in only a nominal increase, or even a decrease, in income.

16

In the Irish context, one of the key challenges of an effective welfare to work policy is to ensure that all of the elements of the systems work well with each other, ensuring a smooth transition from total reliance on the social security system to employment and escape from poverty. Our system’s dependence on a myriad of different means tests adds significantly to this challenge. This section illustrates the nature of this challenge. Tables 1 and 2 below summarise the main components of each element of the transition from welfare to work. Table 1 overviews the situation in relation to the tax and PRSI systems, basic weekly social welfare payments for people of working age, and key secondary benefits; Table 2 focuses on specific welfare to work programmes, including general supports for low waged workers. The tables are followed by text explaining in greater detail the operation of each of these areas. It is important to preface this section by stressing that this is the complex landscape that must be negotiated by current welfare recipients seeking to take up employment. It is critical that such decisions are well-resourced by accurate and comprehensive information communicated in a manner that is easy to understand. Thus while not included in the welfare to work system as detailed below, easily accessible and reliable information must be recognised as a critical element in an effective welfare to work system.

17

Table 1 Earned income assessments

Basic weekly social welfare payments

Deductions from earnings

Income assessed

Earned income thresholds

Assessment

Other

PRSI & Health Levy

Gross earnings

PRSI not charged on income under !287 pw; Health Levy charged only where earnings exceed !400 pw

PRSI: 4%; first !127 PRSI free, ceiling !850. Health Levy: 2% on all earnings

Income tax

Gross income, including certain social welfare payments

Main personal tax credits for different household types: Single person: !1,580; Married couple: !3,160; Lone parent: !1,580; PAYE credit: !1,270; Home carer: !770; Blind person: !1,000 Standard rate tax bands: Single: !29,400; Lone parent: !33,400; Married couple, one earner: !38,400; Married couple, two earners: !58,800

Standard rate: 20% Higher rate: 42%

Many social welfare payments are taxable, including: Unemployment Benefit (except increases for dependent children, and the first !13 pw); Disability Benefit (except increases for dependent children, and first 6 weeks of payment); Invalidity Pension (except increases for dependent children); One parent Family Payment

Unemployment Benefit: claimant

n/a

n/a

No UB payment for each day worked

If working more than 3 days out of 6, weekly payment lost

Unemployment Assistance: claimant

Net income

!12.70 daily disregard for those with child dependents

60% earnings (after disregard as appropriate) assessed as means and deducted from payment

If working more than 3 days out of 6, weekly payment lost

Unemployment Benefit: qualified adult

Gross income

Assessment is based on four different income bands: 1. Up to !88.88 pw 2. Between !88.89 and !220 pw 3. Over !220 pw 4. Over !350 pw

1. IQA rate not affected 2. Reduced IQA, rates set out in the D/SFA rates book. 3. No IQA payable, CDA’s reduced to half rate 4. No CDAs are payable

Although not a means tested payment, spouse/partners income is assessed to determine if they constitute a ‘qualified adult’.

18

Secondary Benefits

Basic weekly social welfare payments

Income assessed

Earned income thresholds

Assessment

Other

Unemployment Assistance: qualified adult

Both gross & net earnings in two stage assessment

First stage of assessment, as for UB, based on four gross income bands: 1. Up to !88.88 pw 2. !88.89 to !220 pw 3. Over !220 pw 4. Over !350pw For second stage of assessment earned income disregards: • !38.09 pw, plus travel, for 1-3 days work • !88.88, (including travel) for 4 days work or more

1. IQA rate not affected 2. Reduced IQA, rates set out in the D/SFA rates book. 3. No IQA payable, CDA’s are reduced to half rate 4. No CDAs are payable In the second stage of the assessment, half of net earnings over the relevant threshold are assessed as means and deducted from the household payment

One Parent Family Payment

Gross earnings

Assessment is based on three different income bands: 1. Up to !146.50 pw 2. Between !146.51 and !293 pw 3. Over !293 pw

1. OFP rate not affected 2. Half of earnings over !146.50 assessed, reduced personal rate, as per rates book 3. No OFP

Where a person has been in receipt for at least a year, and their earnings subsequently exceed !293, they may retain a half rate OFP for a lifetime maximum of 6 months. Both OFP and earnings are liable for tax.

Medical Card

Recently moved to a net basis

See table below – limits differ depending on household size and composition, as well as expenses in relation to housing, travel and childcare. Second set of income limits recently introduced for GP only card.

Comparison of household income with relevant income limit for that household. Reasonable expenditure on housing travel and childcare can be included as part of the income limit, but unclear how ‘reasonable’ will be determined.

Income from Child Benefit and Family Income Supplement is excluded from the means test

Fuel Allowance

Net income

Combined income limit of !50.79 (in excess of maximum contributory rate) for all member of household

All income in excess of maximum contributory rate assessed as means

Only one allowance paid per household

19

Income assessed

Earned income thresholds

Assessment

Other Part-time work defined as less than 30 hrs pw. Where one adult in the house is working more than 30hrs, no Supplement is payable.

SWA Rent Supplement

Gross income less PRSI and reasonable travel expenses

!60 disregard for part-time employment

All income, after disregard, over basic SWA rate assessed as means, and Supplement reduced accordingly

SWA Back to School Clothing & Footwear Allowance

Gross income less PRSI and reasonable travel expenses

n/a

All income, after disregard, over basis SWA rate assessed as means. Where means exceed limit, no Allowance paid.

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Table 2 Welfare to Work supports Eligibility

Primary payment

Secondary Benefits

Other

Family Income Supplement

Employed for at least 38 hours over a 2 week period. Have a least one qualified child under 18, or under 21 if in full time educations The working hours of married/cohabiting people can be combined to make up hours. Self-employment does not qualify

Where net income is below the income level, the FIS payment is 60% of the difference between the two. Income limits: • 1 child !446 • 2 children !472 • 3 children !497 • 4 children !522 • 5 children !554 • 6 children !580 • 7 children !601 • 8 children !623

n/a

If there is an unemployment payment into the household, including an IQA, there is not eligibility for FIS There is a minimum FIS payment of !20 pw CB, Carer’s Allowance, any payments under the SWA scheme are not included in income assessed.

Revenue Job Assist

Employed for at least 30 hrs pw & have been unemployed & claiming one of the following payments for at least a year: • Unemployment Assistance or Benefit • One parent Family Payment • Disability Allowance • Blind Person’s Pension

Benefit is in the form of additional tax credits: • First year, extra personal credit of !762, plus !254 per child • Second year, extra personal credit of !508, plus !170 per child • Third year, extra personal credit of !254, plus !85 per child

Medical Card is retained for 3 years regardless of income. Other secondary benefits can be retained where gross household income (excluding PRSI, reasonable travel expenses, and FIS) is less than !317.43 pw. Rent Supplement payments are also tapered: • 75% in first year • 50% in second year • 25% in third year • 25% in fourth year

A key weakness of the Job Assist programme is that many of the target group do not earn sufficient income to be able to benefit from the additional allowances

21

Back to Work Allowance

Eligibility

Primary payment

Secondary Benefits

Other

Employed for minimum 20hrs pw and: • Aged over 23 & claiming an unemployment payment for at least 5 years. If an ex-prisoner, qualifying period is 15 months. If claiming UB, must qualify for a minimum UA payment of !50.79 if single, or !78.72 if married/cohabiting. Any age & claiming any of the following for 15 months: • One parent Family Payment • Disability Allowance • Blind Person’s Pension • Invalidity Pension • Carers Allowance (former recipients) • Unemployability Supplement • Pre-retirement Allowance • Widow/ers (non-contributory) Pension • Deserted Wife’s Benefit & Allowance • Claiming Disability Benefit for at least 3 years (any age) • Qualified adults on any of the above claims can ‘swap’ eligibility • Farm Assist

Value of weekly social welfare payment retained on a tapered basis: 75% in first year 50% in second year 25% in third year

Medical Card is retained for 3 years regardless of income Other secondary benefits can be retained where gross household income (excluding PRSI, reasonable travel expenses, FIS and BTWA) is less than !317.43 pw. Rent Supplement payments are also tapered: 75% in first year 50% in second year 25% in third year 25% in fourth year

A person in receipt of a qualifying payment for at least 5 years can also avail of: A six week period of employer provided training, a !44.50 pw Meal & Travel Allowance in addition to social welfare payment !254 cash bonus on starting work and after 6 months in employment People on BTWA are also eligible to apply for FIS.

22

Eligibility

Primary payment

Secondary Benefits

Other

Back to Work Enterprise Allowance

Self-employed and: • Claiming an unemployment payment, or Disability Benefit, for at least 3 years. Claiming any of the following payments for 15 months: • One parent Family Payment • Disability Allowance • Blind Person’s Pension • Former recipients of Carers Allowance • Invalidity Pension • Unemployability Supplement • Farm Assist • Pre-retirement Allowance • Widow/ers (non-contributory) Pension • Deserted Wife’s Benefit & Allowance • Qualified adults on any of the above claims can ‘swap’ entitlement to participate in the scheme • Claiming Farm Assist where the employment is new

Value of weekly social welfare payment retained on a tapered basis: • 100% in first year • 75% in second year • 50% in third year • 25% in fourth year

Medical Card is retained for 3 years regardless of income Other secondary benefits can be retained where gross household income (excluding PRSI, reasonable travel expenses, FIS and BTWA) is less than !317.43 pw. Rent Supplement payments are also tapered: • 75% in first year • 50% in second year • 25% in third year • 25% in fourth year

A person in receipt of a qualifying payment for at least 5 years can also avail of: A six week period of employer provided training, a !44.50 pw Meal & Travel Allowance in addition to social welfare payment !254 cash bonus on starting work and after 6 months in employment People on BTWA are also eligible to apply for FIS.

Secondary Benefit Retention: Medical Card

• Taking up full-time work having been unemployed for at least 12 months & claiming an unemployment payment or One-parent Family Payment

Medical Card is retained for 3 years regardless of income

This facility is not available to people on disability payments

23

Eligibility Secondary Benefit Retention: Rent Supplement

Primary payment

• Signing off a social welfare payment, having been in receipt of payment for at least a year, to take-up full-time employment

24

Secondary Benefits

Other

Rent Supplement can be retained on a tapered basis, subject to the household income limit of !317.43 per week: • 75% in first year • 50% in second year • 25% in third year • 25% in fourth year

Income assessed gross; FIS, PRSI and travel expenses are disregarded

3.2

Deductions from earnings

Many, although not all, social welfare assessments are now based on net rather than gross income, for example the means assessment for the Medical Card has very recently moved to a net basis. So in the case of most social welfare payments, the first element of welfare to work calculations is to determine is net earned income. A further consideration is that some social welfare payments are taxable. These are primarily social insurance based payments, and in most cases some portion of the payment is not taxable. The exception to this rule is the One-parent Family Payment, which is a means tested payment that is fully taxable. Where a person moving from welfare to work has been in receipt of a taxable social welfare payment prior to taking up a job, or retains part of that payment while working part-time, the tax deducted from their earnings will be proportionately larger, as it is the combined earned and social welfare income that is assessed for tax. 3.2.1

PRSI and the Health Levy

Employees are liable for Pay Related Social Insurance only when their earnings are greater than !287 per week. No PRSI is charged on the first !127 per week, and PRSI is not charged on income over the ceiling of !850 per week. PRSI is charged at 4%. Employees are only liable for the Health Levy where earnings exceed !400 per week. The Health Levy is charged at 2%, on all earned income 3.2.2

Income tax

Income tax is charged at the standard rate of 20% on all income up to the level of the standard rate band, and at 42% on income above this. This amount is then reduced by the total value of tax credits. Main personal tax credits Single person

!1,580

Married couple

!3,160

Lone parent

!1,580

PAYE credit

!1,270

Home carer

!770

Blind person

!1,000

25

Standard rate tax bands

3.2.3

Single

!29,400

Lone parent

!33,400

Married couple, one earner

!38,400

Married couple, two earners

!58,800

Taxable social welfare payments

Many social welfare payments are taxable, in these instances it is the combination of social welfare income and earned income that tax will be charged on. In the context of this paper, these include the following: Taxable social welfare payments

Payments which are not taxable • Unemployment Assistance

• Unemployment Benefit – increases for children, as well as the first !13 per week are not liable for tax

• Back to Work Allowance

• One parent Family Payment

• Child Benefit

• Family Income Supplement • SWA payments (from the Health Board)

3.3

Basic weekly social welfare payments: earned income means tests

This section describes how earned income is assessed against the main payments for unemployed people and lone parents. Each scheme has a different assessment, and for unemployment payments, there is also a different assessment for claimants and for their ‘qualified adults’ – qualified adult is the term used to describe the partner (married or cohabiting) of a social welfare claimant who is deemed to be ‘dependent’ on the claimant. 3.3.1

Unemployment Payments: Claimants

To qualify for either Unemployment Assistance or Benefit, the claimant must be unemployed at least 3 days out of 6. Working even an hour during a day can be considered a day’s employment. This means that a person who works 24 hours over 3 days will be considered unemployed, but one who works the same hours over 6 days (i.e. 4 hours a day) is considered to be employed. i)

Unemployment Assistance

60% of net earned income is assessed as means and deducted from the total household payment. Where the claimant does not have child dependents, the first !12.70 of earnings per day is disregarded; the 60% assessment is on all income in excess of this limit.

26

ii)

Unemployment Benefit

Because this is not a means tested payment the amount earned is not taken into consideration; payment is made only for days unemployed. As noted above, if a claimant works more than 3 days out of 6, they will be considered employed and will have no entitlement to payment that week. As Sunday is not considered part of the normal working week, working on Sunday does not generally lead to a reduction in payment. 3.3.2

Qualified adults: Unemployment Payments

The means assessment for the earnings of a ‘qualified adult’ is very complex. The same assessment is used for unemployment and for disability claims. The full assessment is in two stages, one based on gross income, the other based on net. For Benefit payments, only the first stage of the assessment is used, for Assistance claims, means from employment are assessed against the household payment in the second stage. • Firstly, where gross earnings are between !88.88 and !220 per week, the individual is still considered to be a qualified adult and a reduced rate of increase is paid, determined by using the Department’s Rates Book. - Where a reduced increase for a qualified adult (IQA) is paid, the full rate child dependent allowance (CDA) is paid - Where no IQA is paid, a half rate CDA can be paid - When the qualified adult’s gross earnings are more than !350 per week, no CDA is paid This rule applies to both Assistance and Benefit claims. • The second rule only applies to Assistance claims. Having calculated the reduced rate for the IQA (and CDA as appropriate), the means from employment are then assessed against the household payment. - Where the qualified adult is working 3 days or less, the first !38.09, plus travel expenses if appropriate, of net earned income is disregarded, and half of the remaining earnings are assessed as means. - If the employment is for 4 days or more, the first !88.88 (including travel expenses) is disregarded, and half of the remaining assessed as means. The means are deducted from the reduced household payment calculated under the first rule, to determine the household’s post employment entitlement. It should also be noted that where the household payment includes an unemployment payment, including an IQA, the employee is not entitled to claim Family Income Supplement.

27

3.3.3

One parent Family Payment (OFP)

OFP is unusual in that it is a means-tested taxable payment. To work out the impact of earnings on entitlement to OFP, wages are therefore assessed gross. When the reduced OFP payment has been determined, both earned and social welfare incomes are combined to arrive at total taxable income. Under the means assessment for earned income, there is no reduction in the level of the payment where wages are less than !146.50 per week. 50% of earned income over this level is assessed as means, and a reduced personal rate is determined as set out in the Department’s Rates Book. If earnings are greater than !293 per week, there is no entitlement to OFP. However, if a person has had an OFP claim for at least a year, and their earnings subsequently exceed !293, they may retain half of their weekly payment for 6 months. There is a lifetime ‘cap’ applying to the 6 month period – i.e. a person can claim this half rate transition payment for a maximum of 6 months during their lifetime.

3.4

Secondary Benefits

3.4.1

Medical Card

The Medical Card income guidelines are based on household size, composition and age, as well as other living expenses such as transport and housing. The means assessment for the Medical Card has recently been improved. Firstly, earned income is now assessed on a net income basis (it was previously assessed on gross income less PRSI). In addition, ‘reasonable expenses’ incurred on childcare costs have been added to the living expenses which can be included to determine the appropriate income limit, and the disregards previously applying to these expenses have been removed. At time of writing, it is not clear how ‘reasonable expenses’ will be determined, and whether expenses in relation to childcare, rent/mortgage payments and travel to work costs are to be included in the GP only medical card income limits.

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Full Medical Card

GP only Medical Card

Single person, under 66, living alone

! 184.00

! 230.50

Single person, under 66, living with family

! 164.00

! 205.00

Couple under 66 (lone parents are also included)

! 266.50

! 333.00

! 38.00

! 47.50

! 41.00

! 51.00

children

! 39.00

! 49.00

3 & subsequent children

! 42.50

! 53.50

In full time education & not grant aided

! 78.00

! 98.00

Additions: Per child under 16

1st & 2nd children rd

3 & subsequent children st

1 &2 Per child over 16

nd

rd

Reasonable expenses incurred in respect of childcare costs Reasonable expenses incurred in respect of rent/mortgage payments Reasonable expenses incurred in respect of travel to work costs (cost of public transport or mileage @ !0.50 per mile)

3.4.2

Fuel Allowance

The Fuel Allowance, plus a top-up Smokeless Fuel Allowance where applicable, is paid for 29 weeks of the year, at the rates of !9 and !3.90 per week respectively. Recipients of long term (over 15 months) Unemployment Assistance and One parent Family Payment are eligible for the allowance. Only one payment is made per household; where the combined means of the applicant and other members of the household exceed !50.79 per week, the allowance will be lost to the household. 3.4.3

Supplementary Welfare Allowance Scheme

In addition to the basic weekly payment, which acts as a ‘safety net’ for people unable to claim other social welfare payments, there are also a number of supplements paid under the SWA scheme. i)

Rent Supplement

One of the most important of these is Rent (or Mortgage Interest) Supplement, which is paid to unemployed people without the resources to pay their rent in the private rented sector, or their mortgage payment4.

4

To be eligible for Mortgage Interest Supplement, you must be able to show that at the time of taking

out the mortgage, you were in a position to make the payments. The Supplement will be paid in respect of the interest portion of the mortgage payment only.

29

Applicants must pay a minimum contribution of !13 per week (out of the basis social welfare entitlement) towards their rent. In addition, ceilings set out by the HSE determine the maximum amount of Supplement payable (see below). Household income above the maximum SWA rate is assessed as means and deducted from any Supplement payable. Rent Supplement is not payable where any member of the household works more than 30 hours per week, regardless of income. However, there is a !60 weekly disregard in respect of earnings from part-time employment.

It should be noted that the at risk of poverty rate for people living in the private rented sector – 26% in 2003 – are very high relative to owner occupiers, for whom the rate was 5.4%

Eastern Region

Midlands

Mid-West

North-East

NorthWest

South-East

Western

Southern

Maximum weekly rent levels in Health Service Executive Areas5

Single person, shared accommodation

!93

!63

!60

!70

!65

!80

!65

!70

Couple, shared accommodation

!93

!63

!60

!70

!65

!80

!65

!70

Single person

!115

!85-95

!95

!85-95

!85

!115

!115

!95

Couple

!178

!115

!130

!121

!115

!130

!115

!153

Couple/Lone parent, 1 child

!953*

!140

!150

!140

!140

!150

!175

!153

Couple/Lone parent, 2 children

!1,200*

!160

!170

!153

!153

!170

!200

!190

Couple/Lone parent, 3 children

!1,200*

!160

!185

!191

!170

!170

!200

!203

HSE Area

* Monthly level ii)

Back to School Clothing and Footwear Allowance

Also included is the Back to School Clothing and Footwear Allowance, an annual payment for low income families intended to assist with the costs of going back to school. Income limits are assessed gross, less PRSI and travel expenses: 1 child

2 children

3 children

4 children

Each extra child

Couple

! 368.10

! 387.40

! 406.70

! 426.00

! 19.30

Lone Parent

! 250.90

! 272.50

! 294.10

! 315.70

!21.60

5

Levels due for revision July 2005

30

Current payment rates are !80 per child aged between 2-11 years, and !150 for each child aged 12-22.

3.5

Welfare to Work Supports

3.5.1

Family Income Supplement (FIS)

Family Income Supplement is an in-work benefit for families earning low incomes. Where an employee (self-employed people are not eligible) is working at least 19 hours a week6, and is supporting at least one child under 18 (or aged 18-22 if in full-time education), they can apply for FIS to top-up their earned income. The D/SFA administers the supplement, which is paid at a rate of 60% of the difference between net household income and the Department’s income guidelines for families of different sizes. A person in receipt of an unemployment payment, including a qualified adult, is not eligible for FIS. However, where no IQA is paid (or claimed), the partner of an unemployed person is eligible. The working hours of both partners can be combined to make up the 19 hours per week. The minimum payment is !20 per week; FIS is not taxable. The key difficulty with the FIS scheme is its low take-up rate – the Department estimates that only 30-40% of people who are eligible for the supplement actually claim it. 3.5.2

Back to Work Allowance and Back to Work Enterprise Allowance (BTWA/BTWEA)

The Back to Work schemes are the key welfare to work supports provided by the Department of Social and Family Affairs. Claimants of a range of social welfare payments are eligible for the schemes, subject to having been in receipt of payment for a given period of time, and in some instances an age restriction and a means assessment (eligibility conditions vary by scheme, see Table 3). To participate, a person either has to have secured employment of at least 20 hours per week, or to be engaged in approved self-employment. The BTW scheme pays a portion of a person’s social welfare payment, on a tapered basis, which phases out over three years, or four years in the case of the BTWEA. In addition, secondary benefits can be retained for three years where total gross household income, excluding FIS and the BTWA payment, does not exceed !317.43 per week. Rent Supplement, one of the key secondary benefits, is retained on a tapering basis over four years.

6

Or 38 hours over a fortnight

31

For unemployed people, eligibility for the scheme has been severely restricted in recent years – to participate as an employee, a person has to have been unemployed for at least 5 years, for the self-employment option, the requirement is 3 years unemployed. 3.5.3

Revenue Job Assist

Revenue Job Assist is a welfare to work scheme administered by the Revenue Commissioners. The scheme provides additional tax credits for people on a range of social welfare schemes who take up work having been unemployed and in receipt of payment continuously for at least a year. Retention of secondary benefits is also allowed, under similar conditions as apply to the Back to Work Allowance. The key difficulty with the scheme is that people who are eligible for the scheme often don’t earn enough to be able to benefit from the additional credits. In most instances, a person who is eligible for RJA will be better off financially on the Back to Work Allowance scheme. 3.5.4

Secondary Benefit retention arrangements

Independent of the above schemes, the Medical Card and Rent Supplement can be retained by specific categories of people who have been long term unemployed and are returning to full time employment. i)

Medical Card

People who have been in receipt of either an unemployment payment or One-parent Family Payment for at least a year, and who are returning to full time employment can retain their Medical Card for three years, regardless of income. This facility is not available to people with disabilities. ii)

Rent Supplement

People who have been in receipt of a social welfare payment for at least a year, and who sign off that payment to take up full time employment, can retain their Rent Supplement, on a tapered basis over four years, subject to the !317.43 weekly household income limit.

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4:

Welfare to Work outcomes for different household types

4.1

Introduction

This section puts the provisions outlined in the previous section into practice. Examining the impact of assessments at a range of different wage levels, and for the different types of payments, illustrates the difficulties associated with current welfare to work provisions. Examples of welfare to work outcomes are detailed for each of the three payment types, at a range of income levels, ranging from part-time work at the minimum wage, to full-time employment at average industrial earnings. Household types are chosen to try to reflect ‘typical’ households within that category: •

For unemployment payments, two family sizes are illustrated – one child and three children; examples also illustrate outcomes for a single person

•

For lone parents, the examples are for families with one child, as this reflects the majority of one parent families

For each type of payment, outcomes are illustrated with and without welfare to work supports such as the Back to Work Allowance. While programmes such as BTW are specifically designed to overcome many of the barriers to returning to work, eligibility is restricted to people who are long-term unemployed. Eligibility criteria have been restricted in recent years7, further reducing the eligible population: the numbers participating on the BTW 2004 are less than a third of the figure for 20008. Given the policy context in which welfare to work policy is located, which seeks to maximise participation in employment, and identifies a job as the best route of poverty, the test of effectiveness is outcomes in the absence of these targeted supports. A job should be a route out of poverty for everyone, not just those who have suffered long-term labour market exclusion. When assessing outcomes, account is taken of ‘key living expenses’ such as the cost of housing and childcare. These are areas where costs have increased substantially in recent years, and can constitute significant barriers to in making welfare to work transitions.

7

An unemployment claimant must have been out of work for at least five years to be eligible for the

employee strand, three years for the self-employment option 8

In 2000, a total of 39,009 people were participating in the two strands of the BTW scheme, this fell to

32,191 in 2001, to 24,986 in 2002, there was a sharp drop in 2003 to a total of 17,069, and a fall of similar magnitude in 2004 when the total on both strands was 11,566

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4.2

Assumptions underpinning calculations

a)

The examples are based on being a private rented tenant, in receipt of rent

supplement where applicable. The housing cost selected is within the maximum limits set down by the ERHA for Rent Supplement recipients. It should be noted that these are generally low, and it can be difficult to find suitable accommodation at these rates; this is particularly the case for single person households, where the rates are substantially lower than market rent9. Therefore examples for single people are based on being in shared accommodation. b)

A childcare cost has been included in the examples for lone parents only. The

illustrations for couples are based on one adult working, so the working assumption is that the other parent will care for the child(ren). A nominal childcare cost of !90 per week for after school care has been included. Again, this figure is extremely low, and assumes access to publicly subsidised provision, or the use of informal arrangements. However, it will be apparent from the examples that paying more for childcare for this group is simply not feasible without significantly higher earnings. c)

Outcomes are compared to receipt of the full social welfare rate, and the 60%

poverty line. The level of the poverty line is based on the CSO’s published results of the EU Survey on Income and Living Conditions (EU-SILC) for 2003; and indication of their level in 2005 is provided by uprating them in line with the Consumer Price Index. d)

In all instances, the examples attempt to be comprehensive in the range of supports

available to a particular household type – i.e. the examples illustrated are ‘best case scenarios’. It must be stressed that many households, contrary to popular perceptions, will fail to access the full range of their entitlements. For example Family Income Supplement, where estimates of take-up range from 30-40%. e)

The tables include a row showing the value of a refundable tax credit for illustrative

purposes. Where tax due is less than the value of the tax credit, there is no tax liability, but a portion of the tax credit goes ‘unused’. The amounts in this row show the weekly value of this unused tax credit.

4.3

Reading the tables and graphs

The tables show the impact of each component of the income package at a range of income levels. Outcomes can be compared to the 60% income poverty line for that household size, and to the income received when unemployed.

9

The current maximum limit in the ERHA area for a single person household is !115 per week, which is

equivalent to just under !500 per calendar month.

34

•

‘Net income (excluding RS)’ shows total net income before housing costs, i.e. excluding both the rent supplement payment and the cost of rent.

•

‘Income after housing costs’ shows income after paying rent, and including Rent Supplement, if applicable.

Index of examples illustrated 3.5 Unemployment Payments .............................................................36 Table 3

Unemployment Assistance, single person ............................37

Table 4

Unemployment Benefit, single person................................39

Table 5

Complexity of qualified adult earned income means assessment42

Table 6

Unemployment Assistance, couple with 1 child.....................43

Table 7

Back to Work Allowance, UA, couple with 1 child..................45

Table 8

Unemployment Assistance, couple with 3 children ................48

Table 9

Back to Work Allowance, UA, couple with 3 children..............50

3.6 Lone Parents ............................................................................53 Table 10

Welfare to Work, One-Parent Family Payment, 1 child ...........54

Table 11

Back to Work Allowance, One parent family, 1 child ..............56

Table 12

Revenue Job Assist, One-parent Family Payment, 1 child ........59

35

Unemployment Payments First we look at welfare to work outcomes for those in receipt of unemployment payments, for three household sizes – a single person, a couple with one child, and a couple with three children. Earned income assessments for claimants of these payments are comparatively straightforward – the earnings assessment for UA was reformed in 1996 with this aim in mind. The examples for single people are relatively uncomplicated. However including partners and children in the analysis illustrates the complexity of the current system. Outcomes for the family with three children are a particular concern, as this household type experiences one of the highest poverty rates of all household types. The means assessment for the earned income of a qualified adult on a UA payment is particularly complicated – three different outcomes are possible depending on the method of calculation used. The examples for unemployed families are therefore prefaced with an illustration of the complexity of this particular assessment.

36

Table 3

Unemployment Assistance, single person

Income level

Full UA

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!0.00

!0.00

!7.16

!8.79

!25.27

!29.60

Tax due (tax - tax credit)

!0.00

!0.00

!6.39

!14.55

!46.34

!63.57

Income net of tax & PRSI

!183.60

!267.75

!292.45

!323.46

!434.14

!484.83

"18.09

"1.26

"0.00

"0.00

"0.00

"0.00

!148.80

!38.64

n/a

n/a

!0.00

n/a

n/a

!79.31

!65.87

n/a

n/a

!0.00

n/a

n/a

Income tax & PRSI

!

PRSI & Health Levy

!

Value of a refundable tax credit Social welfare UA payment Rent Supplement Fuel Allowance

!7.19

Full Medical Card?10

YES

YES

YES

YES

NO

NO

NO

GP only Medical Card?

YES

YES

YES

YES

YES

NO

NO

!

!

!

!

!

!

!

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

!155.99

!222.24

!267.75

!292.45

!323.46

!434.14

!484.83

!92.31

!92.31

!92.31

!92.31

!92.31

!92.31

!92.31

!142.99

!195.80

!175.44

!200.14

!231.15

!341.83

!392.52

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

Income after key living expenses Gross earned income Net income (excluding RS) Housing cost Income after housing costs 60% income poverty line

10

Recent changes to the Medical Card guidelines mean that this individual would regain entitlement to a full Medical Card when working 35 hrs NMW, and would be entitled

to a GP

37

!600

WTW: UA, single person !500

!400

!300

!200

!100 Full UA Gross earned income

24 hrs

35 hrs

40 hrs

NMW

NMW

NMW

!183.60

!267.75

24 hrs AIE

35 hrs AIE

40 hrs AIE

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS)

!155.99

!222.24

!267.75

!292.45

!323.46

!434.14

!484.83

Income after housing costs

!142.99

!195.80

!175.44

!200.14

!231.15

!341.83

!392.52

60% poverty line

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

•

When working 35-40 hours, at any income level, entitlement to UA and Rent Supplement is lost; the latter in particular contributes to the poverty trap at 35hrs NMW. In addition, the housing cost included is low; many in this situation will have to pay a higher rent than this.

•

Before recent changes to the income guidelines for the full and GP only Medical Card, entitlement to either card was lost at the lowest earning level – 24hrs NMW. After the changes, entitlement to the full Medical Card is lost when working 24hrs at the AIE, and the GP only Card is lost when working 35 hrs at AIE.

38

Table 4

Unemployment Benefit, single person

Income level

Full UB

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

Reduced UB payment

!148.80

!74.40

n/a

n/a

!74.40

n/a

n/a

!0.00

!0.00

!7.16

!8.79

!25.27

!29.60

Income tax & PRSI PRSI & Health Levy Tax due (tax - tax credit)

!0.00

!0.00

!0.00

!6.39

!14.55

!46.34

!63.57

Income net of tax & PRSI

!148.80

!245.00

!267.75

!292.45

!372.58

!434.14

!484.83

!54.81

!54.81

!48.42

!27.98

!8.47

!0.00

!79.31

!30.11

n/a

n/a

!0.00

n/a

n/a

Entitled to Full Medical Card?

YES

YES

YES

YES

NO

NO

NO

Entitled to GP only Medical Card?

YES

YES

YES

YES

NO

NO

NO

"

"

"

"

"

"

"

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

!148.80

!245.00

!267.75

!292.45

!372.58

!434.14

!484.83

!92.31

!92.31

!92.31

!92.31

!92.31

!92.31

!92.31

!135.80

!182.80

!175.44

!200.14

!280.27

!341.83

!392.52

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

Value of a refundable tax credit Social welfare Rent Supplement

Income after key living expenses Gross earned income Net income (excluding RS) Housing cost (shared accommodation) Income after housing costs 60% income poverty line

39

!600

WTW: UB, single person !500

!400

!300

!200

!100 Full UB Gross earned income

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS)

!148.80

!245.00

!267.75

!292.45

!372.58

!434.14

!484.83

Income after housing costs

!135.80

!182.80

!175.44

!200.14

!280.27

!341.83

!392.52

60% poverty line

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

•

When working 35-40 hours, at any income level, entitlement to UB and Rent Supplement is lost; the latter in particular contributes to the poverty trap at 35hrs NMW. In addition, the housing cost included is low; many in this situation will have to pay a higher rent than this.

•

Before recent changes to the income guidelines, entitlement to either a Full or GP only Medical Card is lost at the lowest earning level; after the changes, the card is retained up to the 40hrs at NMW level.

40

Case Study in complexity: the Qualified Adult means assessment The means test applying to the partner (qualified adult) of the unemployed person is one of the most complex in the system. Before illustrating welfare to work outcomes for unemployed families, a detailed illustration of the QA means assessment is set out in Table 5 below. The assessment is done in two stages. Firstly, a decision is made in relation to whether there is an entitlement to an IQA and/or CDA, and at what level they should be paid. For social insurance based payments, this is where the means assessment stops. For means-tested payments, the earnings are then assessed for means, and the household payment reduced accordingly. The example is based on a couple with one child, in receipt of UA of !264.30 per week, living in rented accommodation, costing !215 per week (!932 pm, which is within ERHA limit). One adult secures part-time employment, for 24 hours over 3 days at the NMW of !7.65 per hour. As the definition of unemployment is being out of work 3 days out of 6, it is open to the household to have the earnings assessed as either those of the main claimant, or of the qualified adult. Depending on the nature of the assessment, three different income levels can result, as follows: • The first column shows the earnings attributed to the qualified adult. This level of earnings mean that the household remains entitled to a reduced payment for a qualified adult (IQA); however, where there is an IQA in payment, there is no entitlement to Family Income Supplement (FIS). In this scenario, weekly income after housing costs is !344.26 • The second column is also based on the earnings being assessed as the qualified adult’s, but in this instance the entitlement to an IQA is foregone, to allow the household claim FIS. In this scenario, weekly income after housing costs is !366.98 • The third column shows the calculations where the earnings are attributed to the claimant of the unemployment payment. FIS cannot be claimed in this instance either as the claimant is still in receipt of an unemployment payment. In this scenario, weekly income after housing costs is !358.96 When the household had no work, and was relying only on social welfare income, its income after housing costs was !292.71; in the income optimising scenario, having secured employment worth !183.60, the household is !74.27 better off. However, this income optimising scenario is probably the least likely outcome – it requires excellent knowledge of the social welfare system. Assuming, as is likely to be the case, that the claim is in the man’s name, if he secures employment, he will need to know that his partner should apply to become the claimant, and have his earnings assessed as a qualified

41

adult. And if they do take this course of action, she will need to know that she should forgo the entitlement to an IQA so that she can claim FIS.

Table 5

Complexity of qualified adult earned income means assessment

Income tax & PRSI Income net of tax & PRSI, per week

QA working, (IQA)

QA working, (FIS)

Claimant working

!

!

!

!183.60

!183.60

!183.60

!148.80

!148.80

"

Reduced household UA payment Full personal rate of UA Reduced IQA (where gross less than !220)

!35.10

CDA (half rate where gross between !220 - !350)

!16.80

!16.80

"

!200.70

!165.60

"

!122.51

!122.51

"

!61.26

!61.26

"

!139.45

!104.35

"

60% net wages assessed as means

"

"

!110.16

UA payment

"

"

!154.14

Family Income Supplement

n/a

!94.83

n/a

!32.68

!32.68

!32.68

!202.00

!166.52

!202.00

!1.54

!0.00

!1.54

Entitlement to full Medical Card?

NO

NO

NO

Entitlement to GP only Medical Card?

NO

YES

NO

!

!

!

Gross earned income

!183.60

!183.60

!183.60

Income from social welfare

!375.66

!398.38

!390.36

Total net income, per week

!559.26

!581.98

!573.96

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!344.26

!366.98

!358.96

!384.98

!384.98

!384.98

Subtotal QA assessment

Net earned income less disregard Means assessed UA payment

Claimant assessment

Child Benefit Rent Supplement Back to School Clothing & Footwear Allowance

Income after key living expenses

Income after housing costs 60% income poverty line

42

"

Table 6

Unemployment Assistance, couple with 1 child

Income level

Full UA

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

PRSI & Health Levy

!0.00

!0.00

!7.16

!8.79

!25.27

!29.60

Tax due (tax - tax credit)

!0.00

!0.00

!0.00

!0.00

!1.15

!15.60

Income net of tax & PRSI

!183.60

!267.75

!298.84

!338.01

!479.34

!532.80

!63.28

!46.45

!38.80

!30.64

!0.00

!0.00

!104.35

!67.77

!52.22

!18.74

!0.00

!0.00

!94.83

!66.29

!56.96

!53.55

!0.00

!0.00

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

!202.00

!166.52

n/a

n/a

!139.00

n/a

n/a

Back to School Clothing & Footwear Allowance

!1.54

!1.54

!0.00

!0.00

!0.00

!0.00

!0.00

Fuel Allowance

!7.19

!0.00

!0.00

!0.00

!0.00

!0.00

!0.00

Entitlement to full Medical Card?

YES

YES

YES

YES

YES

YES

YES

Entitlement to GP only Medical Card?

YES

YES

YES

YES

YES

YES

YES

!

!

!

!

!

!

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Income tax & PRSI

Value of a refundable tax credit Social welfare UA payment

!264.30

Family Income Supplement Child Benefit (weekly value) Rent supplement payable

Income after key living expenses Gross earned income Net income (excluding RS)

!305.71

!416.99

!434.48

!440.70

!442.98

!512.01

!565.48

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

!292.71

!368.52

!219.48

!225.70

!366.98

!297.01

!350.48

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

Net income after housing costs 60% income poverty line

43

!600 WTW: UA, couple with 1 child !500

!400

!300

!200

!100 Full UA Gross earned income

24 hrs

35 hrs

40 hrs

NMW

NMW

NMW

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

24 hrs AIE 35 hrs AIE 40 hrs AIE

Net income (excluding RS)

!305.71

!416.99

!434.48

!440.70

!442.98

!512.01

!565.48

Net income after housing costs

!292.71

!368.52

!219.48

!225.70

!366.98

!297.01

!350.48

60% poverty line

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

•

There is less than !30 difference in the net income (before housing costs) at the earnings level of !184 and !347.

•

Entitlement to Rent Supplement is lost when one member of household works more than 30 hours per week, regardless of means. For this household, lack of entitlement to Rent Supplement creates substantial poverty traps. In the absence of being able to secure relatively well paid employment – illustrated in this instance by a salary of approximately !30,000 per annum – this couple is better off working parttime.

•

Recent changes to the Medical Card income guidelines mean that this household should qualify for a full Medical Card at each income level illustrated. This eliminates previous inconsistencies whereby there was no entitlement at lower earnings levels, but the potential to re-qualify at a higher income level11.

11

Before the changes to the guidelines, the household exceeded the guideline at the lowest level of

earnings, but were entitled when earnings increased (35-40 hours at the NMW). However, it is unlikely that a household who exceeded the guideline would be likely to reapply when their earnings increased; it is fair to assume that such households did not access their entitlement to free health care.

44

Table 7

Back to Work Allowance, UA, couple with 1 child

Income level

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

!183.60

!267.75

!298.84

!338.01

!479.34

!532.80

"

"

"

"

"

"

Back to Work Allowance year 1: 75%

!198.23

!198.23

!198.23

!198.23

!198.23

!198.23

Back to Work Allowance year 2: 50%

!132.15

!132.15

!132.15

!132.15

!132.15

!132.15

Back to Work Allowance year 3: 25%

!66.08

!66.08

!66.08

!66.08

!66.08

!66.08

Family Income Supplement year 1

!38.51

!0.00

!0.00

!0.00

!0.00

!0.00

Family Income Supplement year 2

!78.15

!27.66

!20.00

!0.00

!0.00

!0.00

Family Income Supplement year 3

!117.80

!67.31

!48.65

!25.15

!0.00

!0.00

Family Income Supplement year 4

!157.44

!106.95

!88.30

!64.80

!0.00

!0.00

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

Secondary Benefits retained?

YES

YES

YES

NO

NO

NO

Rent Supplement year 1: 75%

!151.50

!151.50

!151.50

Rent Supplement year 2: 50%

!101.00

!101.00

!101.00

Rent Supplement year 3: 25%

!50.50

!50.50

!50.50

Rent Supplement year 4: 25%

!50.50

!50.50

!50.50

Back to School Clothing and Footwear Allowance

!1.54

!1.54

!1.54

Fuel Allowance

!7.19

!7.19

!7.19

YES

YES

YES

YES

YES

YES

Income tax & PRSI Income net of tax & PRSI, per week Social welfare

Child Benefit

Medical Card years 1-3

45

Table 7

Back to Work Allowance, UA, couple with 1 child

Income level

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

Gross earned income

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS) year 1

!461.74

!507.38

!538.47

!568.91

!710.24

!763.70

Net income (excluding RS) year 2

!435.31

!468.97

!492.40

!502.83

!644.16

!697.63

Net income (excluding RS) year 3

!408.88

!442.54

!454.98

!461.91

!578.09

!631.55

Net income (excluding RS) year 4

!382.45

!416.11

!428.55

!435.48

!512.01

!565.48

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

Net income after housing costs year 1

!398.24

!443.88

!474.97

!353.91

!495.24

!548.70

Net income after housing costs year 2

!321.31

!354.97

!378.40

!287.83

!429.16

!482.63

Net income after housing costs year 3

!244.38

!278.04

!290.48

!246.91

!363.09

!416.55

Net income after housing costs year 4

!217.95

!251.61

!264.05

!220.48

!297.01

!350.48

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

Income after key living expenses

60% income poverty line

46

!800

BTWA: UA, couple 1 child !700

!600

!500

!400

!300

!200

!100

•

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

Gross earned income

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS) year 1

!461.74

!507.38

!538.47

!568.91

!710.24

!763.70

Net income (excluding RS) year 4

!382.45

!416.11

!428.55

!435.48

!512.01

!565.48

Net income after housing year 1

!398.24

!443.88

!474.97

!353.91

!495.24

!548.70

Net income after housing year 4

!217.95

!251.61

!264.05

!220.48

!297.01

!350.48

60% poverty line

!384.98

!384.98

!384.98

!384.98

!384.98

!384.98

Full UA

!292.71

!292.71

!292.71

!292.71

!292.71

!292.71

Entitlement to retain secondary benefits is lost where income exceeds !317.43 – for this household, that means a loss of Rent Supplement worth !50 - !150 per week, causing a severe poverty trap

•

By year 4, when the household is in receipt of 25% Rent Supplement, the household’s net income after housing costs does not exceed their income on UA until earning more than !26,000 per annum.

47

Table 8

Unemployment Assistance, couple with 3 children

Earned income

Full UA

24 hrs NMW

Income tax & PRSI

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

no PRSI on earnings under !287 pw

PRSI & Health Levy

!0.00

!0.00

!7.16

!8.79

!25.27

!29.60

Tax due (tax - tax credit)

!0.00

!0.00

!0.00

!0.00

!1.15

!15.60

!183.60

!267.75

!298.84

!338.01

!479.34

!532.80

!63.28

!46.45

!38.80

!30.64

!0.00

!0.00

!137.95

!84.57

!69.02

!35.54

!0.00

!0.00

!105.27

!86.81

!77.48

!74.07

!20.00

Income net of tax & PRSI, per week Value of a Refundable Tax Credit Social welfare UA payment

!297.90

Family Income Supplement Child benefit (weekly value)

!106.27

!106.27

!106.27

!106.27

!106.27

!106.27

!106.27

Rent Supplement

!262.00

!193.08

n/a

n/a

!172.28

n/a

n/a

Back to School Clothing & Footwear Allowance

!5.96

!5.96

Fuel Allowance

!7.19

Entitlement to full Medical Card?

YES

YES

YES

YES

YES

YES

NO

Entitlement to GP only Medical Card?

YES

YES

YES

YES

YES

YES

YES

"

"

"

"

"

"

"

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS)

!417.33

!539.05

!545.40

!551.61

!553.89

!605.60

!639.07

Housing cost (!1,192 pm, within ERHA limit)

!275.00

!275.00

!275.00

!275.00

!275.00

!275.00

!275.00

!404.33

!457.13

!270.40

!276.61

!451.17

!330.60

!364.07

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

Income after key living expenses Gross earned income

Income after housing costs 60% income poverty line

48

!700

WTW: Unemployment Assistance, couple 3 children !600

!500

!400

!300

!200

!100 Full UA Gross earned income

•

24 hrs

35 hrs

40 hrs

NMW

NMW

NMW

!183.60

!267.75

24 hrs AIE

35 hrs AIE

40 hrs AIE

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS)

!417.33

!539.05

!545.40

!551.61

!553.89

!605.60

!639.07

Income after housing costs

!404.33

!457.13

!270.40

!276.61

!451.17

!330.60

!364.07

60% poverty line

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

This household experiences the same difficulties as the family with one child, but at a greater degree of magnitude: the poverty trap caused by the loss of Rent Supplement is more severe.

•

A compounding problem is that the FIS income threshold for this family size is below the 60% income poverty line

•

Recent changes to the income guidelines for the Medical Card have not improved the entitlements of this family – entitlement to the full Medical Card is lost when one adult is working 40hrs at AIE.

49

Table 9

Back to Work Allowance, UA, couple with 3 children

Income level

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

!183.60

!267.75

!298.84

!338.01

!479.34

!532.80

"

"

"

"

"

"

Back to Work Allowance year 1: 75%

!223.43

!223.43

!223.43

!223.43

!223.43

!223.43

Back to Work Allowance year 2: 50%

!148.95

!148.95

!148.95

!148.95

!148.95

!148.95

Back to Work Allowance year 3: 25%

!74.48

!74.48

!74.48

!74.48

!74.48

!74.48

Family Income Supplement year 1

!53.99

!20.00

!0.00

!0.00

!0.00

!0.00

Family Income Supplement year 2

!98.67

!48.18

!29.53

!20.00

!0.00

!0.00

Family Income Supplement year 3

!143.36

!92.87

!74.21

!50.71

!0.00

!0.00

Family Income Supplement year 4

!188.04

!137.55

!118.90

!95.40

!20.00

!0.00

Child Benefit (weekly value)

!106.27

!106.27

!106.27

!106.27

!106.27

!106.27

Secondary Benefits retained?

YES

YES

YES

NO

NO

NO

Rent Supplement year 1: 75%

!196.50

!196.50

!196.50

Rent Supplement year 2: 50%

!131.00

!131.00

!131.00

Rent Supplement year 3: 25%

!65.50

!65.50

!65.50

Rent Supplement year 4: 25%

!65.50

!65.50

!65.50

Back to School Clothing and Footwear Allowance

!5.96

!5.96

!5.96

Fuel Allowance

!7.19

!7.19

!7.19

YES

YES

YES

YES

YES

YES

Income tax & PRSI Income net of tax & PRSI, per week Social Welfare

Medical Card years 1-3

50

Table 9

Back to Work Allowance, UA, couple with 3 children

Income level

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

Gross earned income

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS) year 1

!580.44

!630.60

!641.69

!667.70

!809.03

!862.49

Net income (excluding RS) year 2

!550.65

!584.31

!596.74

!613.23

!734.55

!788.02

Net income (excluding RS) year 3

!520.86

!554.52

!566.95

!569.46

!660.08

!713.54

Net income (excluding RS) year 4

!491.07

!524.73

!537.16

!539.67

!605.60

!639.07

Housing cost (!1,192 ??) pm within limit)

!275.00

!275.00

!275.00

!275.00

!275.00

!275.00

Net income after housing costs year 1

!501.94

!552.10

!563.19

!392.70

!534.03

!587.49

Net income after housing costs year 2

!406.65

!440.31

!452.74

!338.23

!459.55

!513.02

Net income after housing costs year 3

!311.36

!345.02

!357.45

!294.46

!385.08

!438.54

Net income after housing costs year 4

!281.57

!315.23

!327.66

!264.67

!330.60

!364.07

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

Income after key living expenses

60% income poverty line

51

!900 BTWA: UA, couple 3 children !800

!700 !600

!500

!400

!300

!200

!100

•

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

Gross earned income

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS) year 1

!580.44

!630.60

!641.69

!667.70

!809.03

!862.49

Net income (excluding RS) year 4

!491.07

!524.73

!537.16

!539.67

!605.60

!639.07

Net income after housing costs year 1

!501.94

!552.10

!563.19

!392.70

!534.03

!587.49

Net income after housing costs year 4

!281.57

!315.23

!327.66

!264.67

!330.60

!364.07

60% poverty line

!512.66

!512.66

!512.66

!512.66

!512.66

!512.66

Full UA

!404.33

!404.33

!404.33

!404.33

!404.33

!404.33

The sharp poverty trap after housing costs at 24hrs AIE is caused by the !317.43 cut off point for retention of secondary benefits

•

The low level of the FIS guideline (!497) is a contributory factor

52

4.4

Lone Parents

This section looks at welfare to work outcomes for lone parents. The treatment of earned income for lone parents changed substantially with the introduction of the One parent Family Payment in 1997. A generous disregard was introduced, and the level at which payment is withdrawn entirely was set at !293 per week (approx £230), which was roughly equivalent to average industrial earnings at the time. This ‘generosity’ was intended to take account of the cost of childcare. However, these amounts have not been increased since 1997, with the effect that the upper eligibility threshold for OFP is now less than full-time NMW earnings; the cost of childcare has increased significantly since 1997. A nominal childcare cost has been allocated where the examples involve full-time work i.e. !90 per week, assuming after school care only. It must be stressed that a childcare cost this low could only be secured in an informal or subsidised context – the cost of private /‘commercial’ childcare can be substantially higher. This section includes an additional table illustrating the impact of Revenue Job Assist.

53

Table 10

Welfare to Work, One-Parent Family Payment, 1 child

Earned income

Full OFP

25 hrs NMW

35 hrs NMW

40 hrs NMW

25 hrs AIE

35 hrs AIE

40 hrs AIE

Reduced One Parent Family Payment

!168.10

!153.10

!113.10

n/a

n/a

n/a

n/a

!

!

!

!

!

!

!

!0.00

!0.00

!7.16

!9.37

!25.27

!29.60

!0.00

!0.00

!0.00

!0.00

!0.00

!15.96

!30.41

!168.10

!344.35

!380.85

!298.84

!351.88

!464.53

!517.99

"16.32

"9.02

"23.99

"12.94

"0.00

"0.00

"

"

"

"

"

"

!60.99

!39.09

!88.30

!56.47

!0.00

!0.00

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

!202.00

!24.76

n/a

n/a

!21.75

n/a

n/a

Income tax & PRSI PRSI & Health Levy Tax due (tax - tax credit) Income net of tax & PRSI, per week Value of a refundable tax credit Social Welfare

"

Family Income Supplement Child Benefit Rent Supplement Back to School Clothing & Footwear Allowance

!1.54

Fuel Allowance

!7.19

Entitlement to Full Medical Card?

YES

YES

YES

YES

YES

YES

YES

Entitlement to GP only Medical Card?

YES

YES

YES

YES

YES

YES

YES

!

!

!

!

!

!

!

!191.25

!267.75

!306.00

!361.25

!505.75

!578.00

Income after key living expenses Gross earned income Net income (excluding RS)

!209.51

!438.02

!452.62

!419.81

!441.03

!497.20

!550.67

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

!90.00

!90.00

!90.00

!90.00

Childcare cost (nominal) Net income after housing & childcare 60% income poverty line

!196.51

!247.78

!147.62

!114.81

!247.78

!192.20

!245.67

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

54

!600 WTW: One Parent Family, 1 child !500

!400

!300

!200

!100

!0 Full OFP

Gross earned income

•

25 hrs NMW

35 hrs NMW

40 hrs NMW

25 hrs AIE

35 hrs AIE

40 hrs AIE

!191.25

!267.75

!306.00

!361.25

!505.75

!578.00

Net income (excluding RS)

!209.51

!438.02

!452.62

!419.81

!441.03

!497.20

!550.67

Net income after housing & childcare

!196.51

!247.78

!147.62

!114.81

!247.78

!192.20

!245.67

60% poverty line

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

The poverty trap that occurs in income before housing costs at 35hrs NMW/25hrs AIE is due to the complete withdrawl of OFP

•

When rent and childcare costs are taken into account, the current incentive structure clearly favours part-time work

•

Even when working 25hrs, there is effectively no benefit from securing higher wages – the net outcome at the NMW and AIE are almost the same before housing, and are exactly the same after paying rent due to the effect of the Rent Supplement means test

•

Recent changes to the income guidelines mean that this household remains entitled to both the full and GP only Medical Card at all income levels illustrated. The full card was previously lost when earning the equivalent of 35-40hrs AIE.

55

Table 11

Back to Work Allowance, One parent family, 1 child

Earned income

25 hrs NMW

35 hrs NMW

40 hrs NMW

25 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

!191.25

!267.75

!298.84

!351.88

!464.53

!517.99

!

!

!

!

!

!

Back to Work Allowance year 1: 75%

!126.08

!126.08

!126.08

!126.08

!126.08

!126.08

Back to Work Allowance year 2: 50%

!84.05

!84.05

!84.05

!84.05

!84.05

!84.05

Back to Work Allowance year 3: 25%

!42.03

!42.03

!42.03

!42.03

!42.03

!42.03

Family Income Supplement year 1

!77.21

!31.31

!20.00

!0.00

!0.00

!0.00

Family Income Supplement year 2

!102.42

!56.52

!37.87

!20.00

!0.00

!0.00

Family Income Supplement year 3

!127.64

!81.74

!63.08

!31.26

!0.00

!0.00

Family Income Supplement year 4

!152.85

!106.95

!88.30

!56.47

!0.00

!0.00

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

Secondary benefits retained?

YES

YES

YES

NO

NO

NO

Rent Supplement year 1: 75%

!151.50

!151.50

!151.50

Rent Supplement year 2: 50%

!101.00

!101.00

!101.00

Rent Supplement year 3: 25%

!50.50

!50.50

!50.50

Rent Supplement year 4: 25%

!50.50

!50.50

!50.50

Back to School Clothing & Footwear Allowance

!1.54

!1.54

!1.54

Fuel Allowance

!7.19

!7.19

!7.19

YES

YES

YES

YES

YES

YES

Income tax & PRSI Income net of tax & PRSI, per week Social welfare

Child Benefit

Medical Card years 1-3

56

Table 11

Back to Work Allowance, One parent family, 1 child

Earned income

25 hrs NMW

35 hrs NMW

40 hrs NMW

25 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

Gross earned income

!191.25

!267.75

!306.00

!361.25

!505.75

!578.00

Net income year 1 (excluding RS)

!435.94

!466.54

!486.32

!510.63

!623.28

!676.74

Net income year 2 (excluding RS)

!419.13

!449.73

!462.17

!488.61

!581.25

!634.72

Net income year 3 (excluding RS)

!402.32

!432.92

!445.36

!457.84

!539.23

!592.69

Net income year 4 (excluding RS)

!385.51

!416.11

!428.55

!441.03

!497.20

!550.67

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

Net income after housing & childcare year 1

!372.44

!403.04

!422.82

!295.63

!408.28

!461.74

Net income after housing & childcare year 2

!305.13

!335.73

!348.17

!273.61

!366.25

!419.72

Net income after housing & childcare year 3

!237.82

!268.42

!280.86

!242.84

!324.23

!377.69

Net income after housing & childcare year 4

!221.01

!251.61

!264.05

!226.03

!282.20

!335.67

!448.82

!448.82

!448.82

!448.82

!448.82

Income after key living expenses

60% income poverty line

(!257.30 ??)

57

!700

BTWA: One Parent Family, 1 child !600

!500

!400

!300

!200

!100

•

25 hrs NMW

35 hrs NMW

40 hrs NMW

25 hrs AIE

35 hrs AIE

40 hrs AIE

Gross earned income

!191.25

!267.75

!306.00

!361.25

!505.75

!578.00

Net income year 1 (excluding RS)

!435.94

!466.54

!486.32

!510.63

!623.28

!676.74

Net income year 4 (excluding RS)

!385.51

!416.11

!428.55

!441.03

!497.20

!550.67

Net income after housing & childcare year 1

!372.44

!403.04

!422.82

!295.63

!408.28

!461.74

Net income after housing & childcare year 4

!221.01

!251.61

!264.05

!226.03

!282.20

!335.67

2003 60% poverty line, CPI uprated

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

Full OFP

!196.51

!196.51

!196.51

!196.51

!196.51

!196.51

Again, the sharp poverty trap in income after housing costs at 25hrs AIE is a result of crossing the secondary benefit retention threshold of !317.43.

•

When the additional income from the BTW scheme is almost completely phased out, earnings of over !26,000 are required to take the family out of poverty

58

Table 12

Revenue Job Assist, One-parent Family Payment, 1 child

Income level

30 hrs NMW

35 hrs NMW

40 hrs NMW

30 hrs AIE

35 hrs AIE

40 hrs AIE

!153.10

!113.10

n/a

n/a

n/a

n/a

!

!

!

!

!

!

Income net of tax & PRSI, year 1

!382.60

!380.85

!298.84

!412.57

!480.49

!537.53

Income net of tax & PRSI, year 2

!382.60

!380.85

!298.84

!412.57

!477.57

!531.03

Income net of tax & PRSI, year 3

!382.60

!380.85

!298.84

!412.57

!471.05

!524.51

Income net of tax & PRSI, year 4

!382.60

!380.85

!298.84

!411.06

!464.53

!517.99

"

"

"

"

"

"

Family Income Supplement: year 1

!38.04

!39.09

!88.30

!20.06

!0.00

!0.00

Family Income Supplement: year 2

!38.04

!39.09

!88.30

!20.06

!0.00

!0.00

Family Income Supplement: year 3

!38.04

!39.09

!88.30

!20.06

!0.00

!0.00

Family Income Supplement: year 4

!38.04

!39.09

!88.30

!20.96

!0.00

!0.00

Child Benefit

!32.68

!32.68

!32.68

!32.68

!32.68

!32.68

Secondary benefits retained?

YES

YES

YES

NO

NO

NO

Rent Supplement year 1: 75%

!151.50

!151.50

!151.50

Rent Supplement year 1: 50%

!101.00

!101.00

!101.00

Rent Supplement year 1: 25%

!50.50

!50.50

!50.50

Rent Supplement year 1: 25%

!50.50

!50.50

!50.50

Back to School Clothing & Footwear Allowance

!1.54

!1.54

!1.54

Fuel Allowance

!7.19

!7.19

!7.19

YES

YES

YES

YES

YES

YES

Reduced OFP payment Income tax & PRSI

Social Welfare

Medical Card years 1-3

59

Table 12

Revenue Job Assist, One-parent Family Payment, 1 child

Income level

30 hrs NMW

35 hrs NMW

40 hrs NMW

30 hrs AIE

35 hrs AIE

40 hrs AIE

!

!

!

!

!

!

Gross earned income

!229.50

!267.75

!306.00

!433.50

!505.75

!578.00

Net income (excluding RS): year 1

!462.05

!461.35

!428.55

!465.30

!513.16

!570.21

Net income (excluding RS): year 2

!462.05

!461.35

!428.55

!465.30

!510.24

!563.71

Net income (excluding RS): year 3

!462.05

!461.35

!428.55

!465.30

!503.72

!557.19

Net income (excluding RS): year 4

!462.05

!461.35

!428.55

!463.80

!497.20

!550.67

Housing cost (!932 pm within limit)

!215.00

!215.00

!215.00

!215.00

!215.00

!215.00

!90.00

!90.00

!90.00

!90.00

!90.00

!90.00

Income after housing & childcare costs: year 1

!308.55

!307.85

!275.05

!160.30

!208.16

!265.21

Income after housing & childcare costs: year 2

!258.05

!257.35

!224.55

!160.30

!205.24

!258.71

Income after housing & childcare costs: year 3

!207.55

!206.85

!174.05

!160.30

!198.72

!252.19

Income after housing & childcare costs: year 4

!207.55

!206.85

!174.05

!158.80

!192.20

!245.67

60% income poverty line

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

Full OFP

!196.51

!196.51

!196.51

!196.51

!196.51

!196.51

Income after key living expenses

Childcare cost (nominal)

60

!600

RJA: One Parent Family, 1 child !500

!400

!300

!200

!100 30 hrs NMW

35 hrs NMW

40 hrs NMW

30 hrs AIE

35 hrs AIE

40 hrs AIE

Gross earned income

!229.50

!267.75

!306.00

!433.50

!505.75

!578.00

Net income (excluding RS): year 1

!462.05

!461.35

!428.55

!465.30

!513.16

!570.21

Net income (excluding RS): year 4

!462.05

!461.35

!428.55

!463.80

!497.20

!550.67

Income after housing & childcare costs: year 1

!308.55

!307.85

!275.05

!160.30

!208.16

!265.21

Income after housing & childcare costs: year 4

!207.55

!206.85

!174.05

!158.80

!192.20

!245.67

2003 60% poverty line uprated by CPI

!257.30

!257.30

!257.30

!257.30

!257.30

!257.30

Full OFP

!196.51

!196.51

!196.51

!196.51

!196.51

!196.51

•

The additional tax credits available under the RJA do not result in increased net income until 35-40hrs AIE – below this level, earnings are not high enough to benefit from the extra credits

•

PRSI becomes payable on earned income over !287, and entitlement to any OFP is lost when income exceeds !293, which contributes to the poverty trap at 40hrs NMW

•

The sharp poverty trap in post housing and childcare income at 30hrs AIE is a result of exceeding the secondary benefit retention threshold.

61

•

62

63

64

65

!600

BTWA: DA/UA, single person !500

!400

!300

!200

!100

!0

Gross earned income

24 hrs NMW

35 hrs NMW

40 hrs NMW

24 hrs AIE

35 hrs AIE

40 hrs AIE

!183.60

!267.75

!306.00

!346.80

!505.75

!578.00

Net income (excluding RS): year 1

!302.39

!386.54

!411.24

!435.06

!545.74

!596.43

Net income (excluding RS): year 4

!190.79

!274.94

!299.64

!323.46

!434.14

!484.83

Income after housing costs: year 1

!279.31

!363.46

!388.16

!342.75

!453.43

!504.12

Income after housing costs: year 4

!121.56

!205.71

!230.41

!231.15

!341.83

!392.52

2003 60% poverty line, CPI uprated

!193.46

!193.46

!193.46

!193.46

!193.46

!193.46

Full UA/DA

!155.99

!155.99

!155.99

!155.99

!155.99

!155.99

•

This example also illustrates the poverty trap caused by the !317.43 threshold for retention of secondary benefits

66

5:

Towards an effective welfare to work system

5.1

Introduction

Looking at the outcomes of welfare to work transitions for recipients of different payments and different household types in the previous section, it is clear that the progression from welfare to work contains a number of unemployment/poverty traps. Further, in some instances, employment is not necessarily a route out of poverty. Failure to keep welfare to work provisions up to date mean that in many instances, unless welfare recipients can secure relatively well paid jobs, they are better off financially limiting their working hours – working full-time for the minimum wage simply doesn’t generate enough income. The situation is particularly difficult for families – both for two parent and one parent families, and that is assuming full-take up of benefits, which is too often not the case in practice. This section of the paper highlights a number of problematic elements of the current system, and overviews some of the potential solutions. However, it should be stressed that continuing an incremental, piecemeal reform process is unlikely to yield satisfactory or sustainable outcomes. To put in place a comprehensive and effective welfare to work structure requires a root and branch review of the current system.

5.2

Are social welfare payments too high?

The graph below charts total social welfare income against the relevant poverty lines for that household type. The social welfare income includes all benefits paid in addition to the basic weekly payment (excluding Rent Supplement, which is a supplement directly offset by a cost). The graph shows that social welfare rates are below even the 50% poverty line. This is consistent with measurements of poverty – people reliant on social welfare experience extremely high rates of poverty. The problem is not that social welfare rates are too high, but that the return from employment is too low. At a minimum, working for a living should guarantee that a person’s income after key living expenses will be above the poverty line.

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Social welfare payments & poverty lines !550 !500 !450 !400 !350 !300 !250 !200 !150 !100

5.3

2 adults + 3

1 adult

1 adult + 1 child

2 adults + 1 child

Social weflare

!155.99

!209.51

!305.71

!417.33

50% line, uprated

!161.21

!214.41

!320.82

!427.22

60% line, uprated

!193.46

!257.30

!384.98

!512.66

children

Towards more effective welfare to work transitions

This section overviews some of the elements of the current system that are problematic in relation to progression from welfare to work. They are all inter-related, and the comments below should be approached with that in mind.

5.4

Means tests

i)

Over reliance on means tests

The Irish social security system, in common with most, is a combination of universal benefits, social insurance benefits, and benefits which are means tested. One of the factors contributing to the complexity of the current system is its disproportionate reliance on means testing. A recent NESC report notes: “The most unusual characteristic of Ireland’s welfare state in a comparative context, however, is its high degree of reliance on means-testing” … “Ireland is exceptional for the high proportion of its social protection expenditure which is meanstested. The degree of reliance – 24.5% of all social protection expenditure was means tested in 2001 – was more than nine times greater than the country which least resorted to it (Belgium) and ahead of the UK, the second heaviest user of means testing, by a full nine percentage points”12.

12

The Developmental Welfare State, NESC (2005), p.98

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Means tests reduce the transparency of the social protection system due to its discretionary nature. This lack of transparency contributes to the commonplace ‘myths’ about social welfare which significantly undermine those decisions that are made from a well-informed perspective. This is an important element in addressing the risk aversion of the target population for welfare to work. Over-dependence on means tests is also administratively burdensome and costly. The argument in favour of means testing is that it ensures resources are effectively targeted at those in greatest need. However, comparative data from Eurostat, showing the proportion of the population below the 60% poverty line before and after social transfers, highlight the inefficiency of Irish means-testing. Figures for Ireland and Denmark – another small, open, high performing European economy – are compared in the table below. Ireland Reliance on means testing

Denmark

24.5%

2.8%

Before social transfers

36

39

After all social transfers

21

11

15

28

7,934

9,492

16,662

19,933

% below 60% poverty line

Reduction in poverty after social transfers 60% poverty line (PPS) One adult Two adults, two children

Despite the fact that Ireland is almost nine times more reliant on means testing than Denmark, and that Denmark has a higher pre-transfer poverty rate, Irelands poverty rate drops by just over 40% after transfers, while Denmark’s rate drops by over 70% - almost twice the Irish rate, with only a marginal reliance on means tests.

ii)

Multiplicity of means tests

A related issue is the multiplicity of means tests used in the social security system – each payment has its own means assessment, using different income thresholds, different rates of assessment and on the basis of different measurements of income. This is a long-standing problem with the Irish social welfare system, and was flagged for reform as long as the 1986 Commission on Social Welfare. Take for example the range of means test used to calculate the welfare to work transition for a qualified adult on an unemployment payment: a)

Assess earnings to determine if a person qualifies as a QA, and whether there is an entitlement to receive a CDA, at full or half rate. Rate of IQA is determined using the Department’s Rates Book

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b)

Assessment of means to be deducted from household payment includes two different disregards depending on the number of days worked13

c)

Entitlement to Family Income Supplement is assessed on the basis of its own means test

d)

Different payments under the SWA scheme e.g. Rent Supplement and Back to School Clothing and Footwear Allowance have their own means tests

e)

A further means test is used to determine entitlement to Fuel Allowance

f)

Another means test is used in relation to the Medical Card

Many of these benefits, for example Family Income Supplement, Back to School Allowance, Fuel Allowance, and the Medical Card, are intended to benefit the same population profile i.e. low-income families. In addition, effect of each means test is similar – they are all intended to identify households on very low income, it’s just that the exact amount of income, and what counts as income, varies between each scheme. The multiplicity of means tests all intended to identify the same thing is inefficient, yielding no significant policy benefits. The cost, in terms of civil servant hours alone, of administering this myriad of means tests could be channelled into improving the benefits paid out, and making the system more efficient and more transparent and user friendly for the client.

iii)

Means tests use different assessments of income

The basis of assessment for the wide range of means tests also varies: sometimes net income is used, other times gross income, sometimes less PRSI and/or ‘reasonable’ travel expenses. In some means tests, all income is counted, including social welfare income, other means tests exclude specific social welfare payments. To illustrate, consider the means tests detailed above in respect of the earnings of a qualified adult: a)

The first part of the means test for QA’s is based on gross earned income

b)

The second part is based on net earned income

c)

The FIS means test is based on total net income, but doesn’t include Child Benefit

d)

Means tests for any of the payments under the SWA scheme are based on total gross income, less PRSI and reasonable travel expenses

e) 13

The Fuel Allowance means assessment is on the basis of total net income

!38.09 + reasonable travel expenses where working 3 days or less; !88.88, including travel expenses

where working 4 days or more

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f)

The means test for the Medical Card has recently been changed to a total net income basis, and excludes FIS and Child Benefit

The efficiency and transparency of the welfare to work system would be much enhanced by using a consistent assessment of income.

iv)

Failure to index link

Most means tests include income disregards and/or income thresholds/ceilings of some sort. In some instances, the level at which these are pegged is of itself a ‘moving target’ e.g. ‘income in excess of the maximum SWA rate’ will automatically be updated each time there is an increase in the payment. Many of the income limits are not of this nature however, and they need to be updated to ensure that they continue to serve the purpose for which they were intended. Updates obviously need to take account of the factors they are intended to cover – for example, not only growth in earnings, but the increase in take home pay as a result of tax cuts, as well as the growth in the cost of key services such a housing, health and childcare. One of the most obvious problems with the current system is that many of these income limits have not been updated – in many instances the number wasn’t even rounded up to be more user-friendly after the changeover to the Euro. For example: • The !146.50 disregard and the !293 ceiling set at the introduction of the One-parent Family Payment in 1997 were set at these levels to take account of the cost of childcare, the upper limit was related to average industrial earnings at the time. These have not been increased during 8 years of strong economic growth. The threshold at which payment is withdrawn - !293 – is now less than the earnings of a full-time worker at the NMW. • A similar situation applies in relation to the threshold to retain secondary benefits under the BTWA – what’s included in the £250 limit has been changed (to exclude social welfare payments) but the level remains at !317.43 – just over !10 more than a full-time NMW worker earns. • In some cases the income thresholds have been increased, but are nonetheless not at a level that allows them to be effective. For example, Family Income Supplement income

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ceilings are actually below the 60% poverty line for families with three or more children – households which are long established as experiencing a very high risk of poverty14. If income limits, disregards etc. are not linked to a relevant ‘moving target’ they must be regularly updated to ensure that they remain effective.

v)

The structure of some means tests creates unemployment traps

Some means tests are structured on the basis of a fixed disregard, after which there is a 100% withdrawal rate. This means that all income over this fixed level is clawed back by the social welfare system. For example, there is a !60 disregard for earnings from part-time work in the Rent Supplement means test; all income above this limit is deducted from the Rent Supplement payment. For an individual reliant on the payment, unless they can command relatively good wages, this means test presents an incentive to work for no more than !60 per week). A particularly sharp example of this is the !317.43 gross earnings ceiling for retention of secondary benefits on welfare to work schemes – once this level is exceeded, all secondary benefits are lost in their entirety. The resulting poverty trap is clearly evident in the examples detailed in the previous section15. This 100% withdrawal rate creates poverty traps, effectively creating a ceiling on the amount that a person is incentivised to earn.

5.5

Definitions of unemployment

Access to some of the benefits available within the social welfare system is determined on the basis of employment status, often in a manner which is out of step with the realities of

14

15

Family size, 2 adults +

60% poverty line, uprated

FIS income threshold

1 child

! 320.82

! 446

2 children

! 448.82

! 472

3 children

! 512.66

! 497

4 children

! 576.50

! 522

5 children

! 640.34

! 554

6 children

! 704.18

! 580

7 children

! 768.02

! 601

8 children

! 831.86

! 623

!60 is equivalent to less than 8 hours work at the National Minimum Wage. A full-time worker earning

marginally more than the NMW will exceed the !317.43 threshold.

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modern patterns of working and living. Distinctions are also made between people working part-time and full-time (defined in various different ways). For example: •

Unemployment is defined within the social welfare system as being without work on 3 out of 6 consecutive days. However, an hour’s work is considered a day’s employment; a person who worked an hour a day for 4 days would be considered employed! This definition is out of step with changing employment patterns, which increasingly involve atypical patterns, shift work etc.

•

If one adult in a household works for more than 30 hours a week, no-one in that household is entitled to Rent Supplement, regardless of the level of income earned

5.6

Welfare to work programmes

Specific welfare to work programmes are intended to address the poverty and unemployment traps in moving from welfare to employment. They are also designed to compensate people for the participation costs involved in going back to work, and to recognise that people who have been long-term unemployed may be able to command only relatively low wages when first re-entering the labour market. The time-limited nature of these programmes assumes that over a period of time earnings will increase to sufficiently meet needs. However in some instances, high costs e.g. childcare, health or housing and/or the low level of wages, this will not prove to be the case; therefore cannot be considered a solution to the issue of making work pay in the long run. Welfare to work programmes have lost effectiveness over recent years, due to a number of reasons. Firstly, some programmes suffer intrinsic design flaws, for example Revenue Job Assist. This programme provides additional tax credits, but in practice is often of little value, as many people moving from welfare to work (especially those who have been long-term unemployed) do not earn enough to benefit from the additional credits. As the credits are not refundable, they don’t support people on low incomes. A second issue is that where such programmes incorporate means tests e.g. the !317.43 income ceiling for retention of secondary benefits on Back to Work Allowance, and where these limits are not appropriately updated, they lose effectiveness as another poverty trap is created. Thirdly, in recent years, government policy has restricted access to these programmes, for example, people on unemployment payments are not eligible for BTWA until they have been unemployed for at least 5 years, increased from the previous duration of 15 months. We know that the longer the duration of unemployment, the harder it is to re-enter employment; in the current economic climate, a person 5 years unemployed is likely to have more barriers to employment than simply financial ones, e.g. literacy problems, addiction issues etc. This

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reduces the eligible population considerably16, denying access to people better positioned to benefit from such support. Therefore it can create an incentive to remain on social welfare longer, so as to qualify for further employment support programmes. A further example relates to ‘qualified adults’. The partners of people in receipt of the eligible social welfare categories can participate on the programme, but only if they ‘swap’ their entitlement with their partner i.e. only one adult in the household can have access to the BTWA programme. Increasing participation in employment is a key economic goal, and at the core of antipoverty policy. While recognising that there are deadweight considerations in determining eligibility to such programmes, it is important to ensure that those who can benefit have access. In addition, the provisions of the programme must be appropriate to the needs of the target group.

5.7

Information provision

Ready access to reliable information is a critical component of an effective welfare to work system. Moving from welfare to work requires considerable knowledge of the intricacies of the social welfare system, and a lot of calculations. The target population for welfare to work information is more likely to experience literacy and numeracy difficulties, making the challenge even greater. The experience of coping with poverty can make people risk averse, and a job isn’t a route out of poverty in every instance. To make the decision to take up employment requires clear, comprehensive and reliable information on all aspects. The complexity of the current system makes it extremely difficult to provide easy to understand information to the people who need it most – even those administering the system can find its complexity challenging to negotiate. In addition to the myriad of means-tests and eligibility requirements, different elements of the system are administered by different Departments and agencies. For example, while the SWA scheme is funded by the DSFA, it is administered by Community Welfare Officers in local Health Centres. Local authority rent schemes vary from one area to another, and Medical Cards are administered by the Department of Health. An individual on social welfare may therefore have to contact a range of different agencies, and know the right questions to answer, in order to establish a comprehensive picture of their post-employment income.

16

In 2004, just over 18,000 people, out of a total of over 154,000 on the Live Register were in receipt of

payment for more than 3 years. No data is provided on the numbers on the Live Register for more than 5 years. (Statistical Information on Social Welfare Services, 2004)

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It is critical that people who are considering moving from welfare to work have ready access to a source of reliable information to support well-informed decision making. In addition, simplifying the system to make it more user-friendly would facilitate better information provision for both information providers and target groups.

5.8

Administration

Some difficulties with welfare to work transitions are related to the administration of the system. Another dimension is that some supports designed to sustain welfare to work transitions suffer from a low rate of take-up e.g. the take-up rate for Family Income Supplement is estimated to be as low as 30-40%; the Minister for Social & Family Affairs recently highlighted low take-up of the Back to School Clothing & Footwear Allowance. Access to such benefits is dependent on people making applications – the system is not proactive in ensuring that people have access to all the supports for which they are eligible, even where the information to establish entitlement is already available. One way of addressing this issue could be to deliver supports via the tax system, through refundable tax credits17. Finally, the use of discretion in administration of benefits e.g. in establishing entitlement to a Medical Card, can make the system less transparent. The current guidelines allow for ‘reasonable’ expenses incurred on housing, transport and childcare. No guidance is available on how ‘reasonable’ expenses are determined, and people’s understanding of what constitutes ‘reasonable’ can vary. While allowing administrators to use discretion can be helpful in some instances, it also creates uncertainty and inconsistency in accessing benefits. Informed decision making requires clear and reliable information and guidelines.

5.9

Reforming the welfare to work system

Most of our current framework of welfare to work supports was designed for a very different labour market to that which exists today. Incremental adjustments to different elements of the framework have complicated an already complex system. In some instances the failure to adjust has rendered supports ineffective. A systematic and holistic review of all elements of welfare to work support could generate an integrated package of recommendations to ensure that policy is both efficient and effective

17

There are a number of examples of such administration in social welfare systems not dissimilar to

Ireland’s which could be drawn upon in designing such a system e.g. the UK which has introduced a system of tax credits to support working families in recent years, and New Zealand proactively delivers some supports for low paid workers.

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in addressing poverty by maximising participation in employment and making work pay. To support these goals, the following objectives are put forward: • Work must be a route out of poverty. Unemployment and poverty traps should be eliminated so that progression into and in employment always yields a financial reward, regardless of the duration of unemployment or social welfare contingency, for all potential workers in the household • The system should be as simple as possible, clear and easy to understand, to support well informed decision making and efficient administration • Welfare recipients should have ease of access to reliable, clear and comprehensive information • Administration should be proactive to ensure full take-up of benefits and prioritise decision making to facilitate participation in employment The table below summarises how these objectives might be realised for the areas identified: Too many means tests

Use the same means test to access a range of related schemes i.e. use one means-test as a ‘passport’ to a range of benefits.

Different assessments of income

Adopt a uniform basis of assessment e.g. net earned income, certain social welfare payments consistently disregarded. This will probably require the raising of income thresholds to ensure no-one loses out.

Failure to update disregards

Re-base disregards, income thresholds, ceilings etc. to ensure that they are at an appropriate level to achieve their objectives. Update on an ongoing basis in line with relevant developments e.g. increases in social welfare and/or net incomes

100% withdrawal

Withdraw benefits on a tapered basis e.g. as for FIS, UA

Definitions of unemployment

Assess entitlement on basis of needs and means only, rather than social welfare contingency.

Specific welfare to work schemes

Ensure that work always pays; eliminate poverty and unemployment traps, for all adults of working age low income households, regardless of social welfare contingency. Specific welfare to work programmes should address particular difficulties faced by people who are long-term unemployed, and must be appropriate to the needs of the target group.

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Information

Simplify the welfare to work system, to make it more transparent, easier to understand and administer Resource information providers who can address welfare to work transitions comprehensively – the community and voluntary sector has established expertise in this area, and is often considered more approachable by the target group.

Administration

Reduce the application of discretion Prioritise time-critical administration e.g. approval of rehabilitative employment Be proactive in ensuring take-up of benefits and supports Examine the potential of refundable tax credits as a more effective way of administering in work benefits

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6:

Glossary

AIE

Average Industrial Earnings

BTWA

Back to Work Allowance

CDA

Child Dependent Allowance: the increase to a claimant’s weekly payment paid in respect of a child

CWO

Community Welfare Officer

D/SFA

Department of Social and Family Affairs

FIS

Family Income Supplement

IQA

Increase for a qualified adult: the increase to a claimant’s weekly payment paid in respect of an adult dependent

NMW

National Minimum Wage

OFP

One parent Family Payment

QA

Qualified Adult: the term used in the social welfare system to describe the partner of a claimant, where the partner is not independently in receipt of payment

SWA

Supplementary Welfare Allowance

UA

Unemployment Assistance

UB

Unemployment Benefit

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