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
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Sources and additional material
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Why are we interested in the design
of transfer systems?
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“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).
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Caveats and limitations
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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.
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Australia’s distinctive tax/benefit system
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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.
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Types of redistribution in social security systems
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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.
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Targeting, progressivity and redistribution
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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.
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Australia relies on income-testing more
than any other OECD country
% of GDP spent on income-tested benefits, 2005
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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
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Progressivity of transfers, 2005
Concentration coefficient of transfers
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Australia has low levels of churning
Churning as % of equivalent household disposable income
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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
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Australia has the most progressive direct taxes
on retirement age households
Concentration coefficient for direct taxes on retirement age households
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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
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Australia is the most efficient country in the
OECD in reducing poverty
Point change in mean poverty gap per unit of transfer spending
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Net redistribution to the poor
Net transfers received by poorest quintile as % of household disposable
income
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Summary
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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.
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Conclusions
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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.
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Inequality of earnings among households of
working age, 2005
Gini coefficients for different earnings measures
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Conclusions
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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.
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Moving from individual to household earnings has a more significant effect.
…
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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).
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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)
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Sources
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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
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