Australia has the most progressive benefit system in the OECD
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Australia has the most progressive benefit system in the OECD
Transfer issues and directions for reform: Australian transfer policy in comparative perspective Peter Whiteford, Social Policy Research Centre, University of New South Wales [email protected] 1 Outline Why are we interested in the design of transfer systems? Nature and limitations of the approach The design of transfer systems Targeting, progressivity and redistribution How Australia compares Summary and some conclusions Sources and additional material 2 Why are we interested in the design of transfer systems? “The tax-transfer system is the principal means of expressing societal choices about equity. The tax-transfer system is a reflection of the kind of society we aspire to be.” Ken Henry, ACOSS National Conference, (2009). 3 Caveats and limitations Approach is descriptive and based on statistical calculations. Most analysis is static. The counterfactual effectively assumes that the welfare state has had no incentive effects, or at least is the same in all countries. Some welfare state features treated as if they are produced by market mechanisms (e.g. minimum wages). Does not include non-cash benefits (health care, education, social housing, child care); indirect taxes – VAT, employer social security contributions also not included. Employer social security contributions are paid by businesses direct to government and do not pass through the household sector. Particularly problematic as they are one of main sources of funding for the welfare state. Employer provided fringe benefits not included. The distribution of wealth, including owner-occupied housing makes a difference. 4 Australia’s distinctive tax/benefit system Total Australian spending on social protection (cash benefits, health care, social services) is about 85% of the OECD average – but this is mainly due to much lower than average spending on age pensions; health, disability and social services are a little higher than average and cash benefits for people of working age about 10% higher and for families about 40% higher; cash transfers about 70% of average. Direct taxation paid by benefit recipients is among the lowest in the OECD, as is indirect taxation of benefits. Pension tax expenditures are the highest in the OECD (not counted in figures), but other tax expenditures below average. Mandatory private social benefits (sick pay and superannuation) amongst highest. Thus, net expenditure – after direct and indirect taxes paid on benefits – is even closer to average – and tax expenditures and mandatory private social expenditure increase Australia’s ranking further. To assess distributional impacts it is necessary to look at all components of the system together – ideally. 5 Types of redistribution in social security systems The design features of social protection differ in important respects - two of the most important features relate to the funding – i.e. the different ways in which programmes are financed – and structure of benefits – i.e. the relationship between benefits received and the past or current income of beneficiaries. Redistribution can be between rich and poor (Robin Hood) or across the lifecycle (the piggy bank) – risk insurance (against unemployment, disability, sickness etc.), savings (for retirement). All welfare states are a mix of the two, but the mix varies. Other types of redistribution – notably between men and women and also across regions. Behavioural effects may undercut redistribution; private provision also redistributes across the lifecycle. Point in time, static analysis implicitly treats all measured redistribution as if it were between rich and poor. Taking account of redistribution across the life course, the level of redistribution between rich and poor is less than it appears, but is still strongly associated with progressivity of benefit structure. 6 Targeting, progressivity and redistribution Targeting is a means of determining either eligibility for benefits or the level of entitlements for those eligible. In a sense, all benefit systems – apart from a universal “basic income” or “guaranteed minimum income” scheme – are targeted to specific categories of people, such as the unemployed, people with disabilities or those over retirement age. Income and asset-testing is a further form of targeting that can be applied once people satisfy categorical eligibility criteria. Progressivity refers to the profile of benefits when compared to market or disposable incomes – how large a share of benefits is received by different income groups – e.g. do the poor receive more than the rich from the transfer system? Redistribution refers to the outcomes of different tax and benefit systems – how much does the benefit system actually change the distribution of household income? Effectiveness measured by how much redistribution is achieved; efficiency by the resources used to achieve this redistribution. 7 Australia relies on income-testing more than any other OECD country % of GDP spent on income-tested benefits, 2005 8 Australia has the most progressive benefit system in the OECD Ratio of benefits received by poorest quintile to benefits received by richest quintile, total population, 2005 9 Progressivity of transfers, 2005 Concentration coefficient of transfers 10 Australia has low levels of churning Churning as % of equivalent household disposable income 11 The progressivity of direct taxes is highest in the English speaking countries and lowest in the Nordic countries Concentration coefficient for direct taxes around 2005 12 Australia has the most progressive direct taxes on retirement age households Concentration coefficient for direct taxes on retirement age households 13 Reduction in inequality due to public cash transfers and household taxes Point reduction in the concentration coefficient Public transfers in cash Household taxes SWE SWE DNK DNK BEL BEL CZE CZE IRL IRL AUS AUS SVK SVK NOR NOR DEU DEU GBR GBR NZL NZL NLD NLD OECD-22 OECD-22 ITA ITA LUX LUX FIN FIN CAN CAN FRA FRA AUT AUT JPN JPN USA USA KOR KOR 0.00 0.05 0.10 0.15 0.00 0.05 0.10 0.15 14 Australia is the most efficient country in the OECD in reducing poverty Point change in mean poverty gap per unit of transfer spending 15 Net redistribution to the poor Net transfers received by poorest quintile as % of household disposable income 16 Summary Australia relies on income testing more than any other OECD countries, and has the most progressive structure of benefits of all OECD countries. As a result, as a percentage of household income, net benefits to the poorest 20% of the population are among the highest in the OECD. Australia also has one of the most progressive systems of direct taxes in the OECD, and has low and very progressive taxes on retirement age households. Australia has less “middle class welfare” than any other country, lower churning than nearly all other countries, and the highest level of transfer efficiency in reducing inequality. Australia (and Ireland) prove to be nearly as effective in reducing inequality as the Nordic countries, while the United Kingdom and New Zealand are about as effective as Germany in reducing inequality. Australia is the 8th most effective in OECD at reducing the poverty gap (about the same as Denmark), and the most efficient in reducing poverty gaps. But these are measures of programme efficiency, not economic efficiency. Efficiency is a means to an end – the goal is more effectiveness. 17 Conclusions The broad architecture of the Australian system has considerable strength, so that in looking at reform options we should consider refurbishment and modernisation, not demolition and rebuilding. Despite impressive design features of tax and transfer systems, disposable income inequality in Australia is only just below the OECD average; if Australia is one of the most effective countries in the world at reducing inequality, then income inequality before taxes and transfers is higher than in most countries with better inequality outcomes. If Australia wants to be more effective it could either increase its high level of progressivity, or tax and spend more while at least maintaining effective progressivity, or identify the factors associated with its relatively high level of market income inequality and address these problems more directly. 18 Inequality of earnings among households of working age, 2005 Gini coefficients for different earnings measures 19 Conclusions Inequality among full-time male and female wage earners is around average for the OECD; including part-time workers significantly increases earnings inequality, but this is true for most OECD countries. Moving from individual to household earnings has a more significant effect. The distribution of earnings of spouses is the most unequal in the OECD (individuals are ranked by household disposable income so this means that higher income primary earners are more likely to have high earner spouses). Gini coefficient for all full-time workers is around 0.28, that for full and part-time workers is around 0.35 and that for household earnings is around 0.40. Including working-age households where no-one is in paid employment significantly raises inequality. Australia has the eight lowest non-employment rate for working age individuals, but the fifth highest joblessness rate for households, and for households with children the fourth highest joblessness rate. Inequality of household earnings including households with no earnings is the second highest in the OECD with the Gini coefficient at around 0.47. To more effectively reduce inequality then it is unequal access to paid work that needs to be addressed, particularly the concentration of joblessness (not the overall level of joblessness). 20 ADDITIONAL MATERIAL 21 Danemark Suède Luxembourg Autriche République tchèque Suisse République slovaque Finlande Pays‐Bas Belgique France Islande Norvège Hongrie Allemagne Australie OCDE Corée Japon Pologne Canada Espagne Grèce Irlande Nouvelle‐Zélande Royaume‐Uni Italie États‐Unis Portugal Turquie Mexique Levels of inequality, OECD countries, 2005 Gini coefficient for disposable income 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 22 Spai n Gree ce Italy Luxe mbo urg Aust ria Portu gal Belg ium Fran ce Norw ay Swe den Effective tax UK USA New Zeal and Germ any Japa n Denm ark Finla nd Switz erlan d Cana da Neth erlan ds Aust ralia Irela nd Effective contributions to public pensions, redistributive and actuarial components, mid-1990s % of wages Contribution 60 50 40 30 20 10 0 23 Net incomes of social assistance recipients, 2005 % of median equivalent household income, with and without housing benefits Lone parent, two children 80 70 60 50 40 30 20 10 0 ITA TUR GRC USA CHE ESP SWE HUN PRT FIN FRA DEU CAN IRL LUX NLD AUT GBR BEL POL CZE NZL JPN DNK NOR AUS 24 Relative to their high overall employment, the UK and Australia do worst for joblessness among families with children Percentage point difference between actual and predicted joblessness among families with children 5 -10 -15 -20 Nor w ay A u st ralia Unite d Kin gdom Czec h Denm ark Ger m an y Net h erlan ds New Z ea l and d en Swe USA da Cana Aust ria Finl a nd OEC D Ir ela nd ce Fran g al Portu n Ja p a mbo urg Pola nd n Spai L u xe -5 Gr ee ce Belg ium It aly 0 It aly Gr ee ce Uni te d St a tes A u st ralia Fran ce Ir ela nd Unite d Kin gdom Nor w ay Portu g al Cana da New Z ea l and Kore a Pola nd Hung ary OEC D Finl a nd L u xe mbo urg Slov ak R e pu b lic Ja p a n Swe d en Ger m an y Belg ium Denm ark Czec h Re publi c Spai n Aust ria Net h erlan ds Swi tz erlan d Effective tax rates for parents seeking parttime work are lower in Australia than most other countries AETR from zero to 33% APW, 2004 120 100 80 60 40 20 0 Gr ee ce d St a tes Hung ary Cana da A u st ralia Slov ak R e pu b lic Ir ela nd Kore a OEC D Nor w ay Swe d en Pola nd Portu g al Czec h rep ublic Finl a nd Ja p a Unite n d Kin gdom L u xe mbo urg Aust ria Belg ium Icela nd Net h erlan ds New Z ea l and Ger m an y Denm ark Swi tz erlan d Fran ce Uni te Effective tax rates can be high for parents seeking full-time work, but are lower in Australia than most other countries AETR from zero to 67% APW, 2004 100 90 80 70 60 50 40 30 20 10 0 -20 Gree ce Hung ary Uni te d Sta tes Nor w ay Aust ralia Por tu gal Swe den Pol a Slov nd ak R epub l ic Kor e a Finl a nd Bel g ium Luxe mb o urg OEC D Aust ri a Net h erlan ds Japa Czec n h rep ublic Icel a nd Ger m any New Zeal and Denm ar k Fran ce C ana Uni te d Kin da gdom Swi tz erl an d Ir ela nd Child care costs can increase effective tax rates AETR from zero to 67% APW, plus child care costs, 2004 140 120 100 80 60 40 20 0 Effective marginal tax rates can be high in Australia but over specific income ranges 29 In contrast, the Nordic approach has much higher EMTRs at lower income levels 30 Social insurance does not necessarily reduce EMTRs (for lone parents and single people) 31 Sources OECD Family database www.oecd.org/els/social/family/database OECD Social Expenditure database http://www.oecd.org/document/2/0,2340,en_2649_33933_3 1612994_1_1_1_1,00.html Net Social Expenditure – Adema and Ladaique (2005) http://www.oecd.org/findDocument/0,2350,en_2649_33933 _1_119684_1_1_1,00.html OECD, Benefits and Wages http://www.oecd.org/department/0,2688,en_2649_34633_1 _1_1_1_1,00.html OECD study of income distribution (2005) http://www.oecd.org/dataoecd/48/9/34483698.pdf Benefit recipiency - Employment Outlook (2003) OECD Social Indicators http://www.oecd.org/department/0,2688,en_2649_34637_1 _1_1_1_1,00.html 32