New deal for kids

by Jonathan Boston / 21 June, 2014
Jonathan Boston and Simon Chapple set out their case for new solutions to child poverty.
Corbis
Corbis


About the authors: Jonathan Boston is co-chair of a Children’s Commissioner panel on child poverty and a professor of public policy at Victoria University; Simon Chapple is a senior research fellow at the University of Otago.

In February, the Treasury and Statistics New Zealand announced they had found errors in previously published official measures of child poverty. In the new data, from 2012, it was found that New Zealand had between 15,000 and 40,000 more income-poor children than previously thought.

The disclosure caused a few red statistical faces. However, the media discussion that followed focused on a computational error, not the important issue: we have found a sufficient extra number of poor children in New Zealand to fill Forsyth Barr Stadium in Dunedin or the Westpac Stadium in Wellington.

Not everyone even accepts that any New Zealand children are living in poverty. One reason for such a response is that the word poverty can conjure up stark images of drought-stricken war zones full of starving, hollow-eyed African children. Since few New Zealand children are so badly off, some conclude that New Zealand has no child poverty.

This is not the case. At one end of the poverty spectrum there is abject poverty – that experienced by children in African drought and war zones being the archetypal example. Further along the spectrum there is relative poverty, where poverty is measured by shortfalls relative to society’s norms. If absolute poverty is limited to cases where survival is at risk, then most poverty – both in developed and developing countries – is relative. Of course, the relative poverty experienced by children in the slums of Mumbai is generally much worse than that of child­ren living in South Auckland. But in both cases, the children in question are deprived in significant ways from participating in their societies.

WHAT IT MEANS TO BE POOR


What does relative poverty mean? How can we distinguish such poverty from situations where children and their families are sufficiently well off?

There are two practical ways of defining and measuring relative poverty. One is based on low income, the other more directly on experiences of hardship. Both measures have complementary strengths and weaknesses.

The income approach involves setting particular thresholds – such as 50% or 60% of median after-tax family income, adjusted for family size and taking any welfare benefits and tax credits into account. Children in families whose incomes fall below such thresholds are deemed to be poor. These thresholds have been chosen because of evidence that families with less than this cannot attain a standard of living that most people consider essential.

Figure 1 shows the rate of child income poverty in New Zealand over time, measured by children in families falling below the most robust threshold (60% of median family income after adjusting for housing costs). During the 1980s, child poverty rates were under 15%. Child poverty rose dramatically in the early 1990s. The main reasons were large cuts in welfare benefits, changes to housing assistance and higher unemployment. In the mid-2000s, the Working for Families package reduced child poverty rates. But levels climbed again as a result of the global financial crisis. Child poverty rates are currently double the 1980s’ rates. In 2012, between 130,000 and 285,000 of New Zealand children – depending on whether housing costs are taken into account – were poor.

Figure1AWhat does this poverty mean for children’s lives? Taking the highest poverty line, for an only child living with a sole parent in 2012 it meant a net family income below $395 a week, after paying housing costs estimated at 25% of income. For two children living with two parents, it meant living with a net income below $612 a week, after housing costs. Many families, of course, spend more than 25% of their income on housing. In addition, families dependent solely on welfare benefits receive much less than the amounts just mentioned.

Table 1 shows how much additional income per week beneficiaries with children would need to cross various poverty thresholds. For those of us who are more fortunate, it is worth pausing and considering how easy we would find it to raise children under such circumstances.

Table1AESSENTIALS OF LIFE


The second approach measures poverty on the basis of whether families have enough things that most people consider to be essential. People must lack these items because they cannot afford them. It cannot be a matter of choice. In New Zealand, most people expect children to have warm winter clothes, a raincoat, sturdy shoes, clothes for a special occasion, some means of heating their homes and adequate nutrition. An absence of many of these items means child­ren are deemed to be in hardship.

Table 2 gives some concrete examples of items included in the overall hardship measure, and the proportion of children at different levels of hardship lacking the item. By such measures, about 18% of New Zealand children, or 200,000, are poor.

There is a significant but far from complete overlap between children who are income-poor and children who are in hardship. The reasons lie in conceptual differences and measurement issues. What is clear for policy is that higher family income typically reduces child hardship.

Table2ATable 3 compares a measure of child hardship rates internationally. Our rate is three times higher than that of the best performers. The rate of child hardship in New Zealand is also much higher than that experienced by older people. Significantly, the hardship gap between the young and old is very large here compared with other countries.

Table3ANew Zealand’s child income-poverty and hardship figures are disturbing. If such poor absolute and relative results were found for the elderly, there would undoubtedly and rightly be a political uproar.

Does having so many children living in relative poverty matter? The answer is yes. Lacking good food and clothing, living in a cold, mouldy house and dealing with parents stressed by the daily struggle to pay regular bills are clearly bad for children’s lives in the here and now. Additionally, robust international evidence shows that children brought up in relative poverty experience worse long-term outcomes than those from better-off homes and poverty is often a cause. These outcomes include poorer educational qualifications, lower employment levels, lower lifetime incomes and more ill health. Such outcomes are bad for everyone. They contribute to reduced productivity, lower prosperity and weakened social cohesion.

COUNTING BEANS, NOT PEOPLE


If child poverty is to be significantly reduced, more effective income support for children and higher employment for parents with children both need a strong emphasis. We are not doing well on either income support or employment fronts.

On the income-support side, there are significant questions about whether the tax-benefit system currently provides adequately for children, especially for those in families who are reliant on welfare benefits. Eight temporary additional support payments to support sole parents on a benefit were handed out for every 10 such beneficiaries in 2011/12. This figure had risen from an already high four in every 10 beneficiaries in 2007/08. Temporary additional support is a payment described by the Ministry of Social Development as one of “last resort”. There is something wrong with an income-support system when a majority of sole-parent bene­ficiaries need a last-resort payment.

In 2008 Statistics New Zealand’s “General Social Survey” found 42% of sole parents who had at least some benefit reliance reported insufficient income to meet their daily needs. By 2012, the number has risen to 51%.

On the employment front, recent Government reforms to the welfare system mean that Work and Income’s performance is now primarily judged by its ability to get people off a benefit, thereby reducing the welfare bill. But getting people off a benefit is not the same thing as getting them into work, or stable work.

Further, the recent welfare reforms create no additional incentive for Work and Income to focus on finding work for those with children than they do for childless beneficiaries in otherwise equivalent circumstances. Nor is Work and Income’s success in shifting children out of poverty via placing parents in work a factor in judging their performance. We are very sceptical that the recent welfare reforms will do anything either to reduce child poverty or raise parental employment. The reforms are focused on creating incentives to achieve only fiscal goals. That may be good bean counting but it is bad economics.

So what should we do to reduce child poverty? To start with, a complete revamping of income support for children is required. Basic income support for children needs to be significantly higher and it should be indexed to match wage growth. The system needs to focus more strongly on income support for children in their earlier years, when they are likely to be more vulnerable to the impact of low incomes, and more strongly on parental employment as child­ren get older.

CHILD PAYMENT NEEDED


We propose a child payment to replace many existing child-related benefits. This benefit could be universal, related to family incomes or a mixture of both – universal in the early years and then more income-targeted as children get older. The value of this benefit would be highest for young children. It should be designed so as to share all the positive features of New Zealand Superannuation.

To encourage sole-parent employment, we suggest a full-time work test for sole parents from the beginning of compulsory schooling, coupled with extensive sole-parent employment supports. This is an approach that is commonly used, for example, among the Nordic welfare states, which have successfully achieved very high employment rates for sole parents and low rates of child poverty.

Additionally, Work and Income’s employment-related resources need to be allocated and the agency’s performance explicitly judged according to its success in generating stable jobs for parents and sustainable poverty exits for children.

About 29% of poor children have at least one parent working full-time. Thus, in-work poverty is an issue for many poor children. It is important to reduce poverty rates for children whose parents are on low wages.

Some advocate raising the minimum wage significantly to reduce child poverty. Unfortunately, lifting minimum wages will do little for child poverty. This is because most of the extra wages received by parents on low incomes will be clawed back by the Government. The most obvious losses are through income tax and ACC levies. Further, families partly reliant on welfare benefits and partly on paid employment may lose part of their benefit. In addition, Working for Families payments and housing assistance are reduced as earnings rise. Consequently, net family income may grow only marginally for many families, even after a considerable rise in minimum wages.

Furthermore, a large hike in the minimum wage can result in job losses. New Zealand’s minimum wage is among the most generous in the OECD relative to average earnings, and the most generous relative to earnings in our history. Going much higher takes us out of our zone of historical experience. Although past minimum-wage rises have not resulted in large job losses, we know that at some point they will. Advocating large rises in minimum wages means rolling the dice on the jobs of the least advantaged employed people.

TAX CREDIT WHERE IT'S DUE


A better solution to the problem of child­ren in working-poor families, in addition to a higher child payment, is providing better-designed tax credits. We currently have such a payment that includes many but not all working-poor families – the In-Work Tax Credit. It has a number of design flaws, but many of these are fixable. An in-work payment deals directly with the problem of low earnings for working families with children. In-work payments help create jobs for disadvantaged families by making their work pay, rather than putting their jobs at risk via a large minimum-wage hike. And an in-work payment is equitable. It offsets the extra costs that are often incurred by working – largely transport and childcare. These costs can have a big effect on whether paid employment is financially beneficial.

Overall, we have a serious but solvable problem of child poverty. We rightly protect the living standards of older New Zealanders. Let’s do the same for our children.

For the benefit of poor children, and ultimately for the benefit of all New Zealanders, let’s take steps to achieve child poverty rates among the lowest in the developed world.

Helping young and old


Government policy ensures elderly New Zealanders are financially well supported. Children need the same.

For almost a generation under a multiparty accord negotiated in 1993, New Zealand has pursued an enlightened approach to ensuring adequate incomes for older New Zealanders. Under the accord, the value of New Zealand Superannuation is adjusted annually to reflect consumer price changes. Additionally, superannuation is linked to wages, with the married rate adjusted regularly to ensure that it does not fall below 65% or exceed 72.5% of average wages. In this way, the value of New Zealand Superannuation moves in line with overall wage growth, thereby ensuring that older people can fully participate in society.

This approach has undoubtedly been good for our elderly. The rates of income poverty and hardship for older New Zealanders are relatively low – and far lower than for our children. The basic principle that older New Zealanders should be treated fairly and given adequate support in their retirement is both commendable and widely supported.

Thinkstock
Thinkstock


But what about our children? Is there not a strong case for applying the same principles across the generations? After all, children are no less deserving than retirees and certainly no less vulnerable. More­over, having a good start in life is likely to generate significant individual and societal benefits in the longer term.

If we can negotiate a durable multiparty accord for our elderly, surely we should do the same for our children. But what might a new deal for children include?

Ideally, any multiparty accord should cover at least four matters: policy objectives, income adequacy, the structure of social assistance and indexation.

First, in terms of objectives, a core goal should be to achieve and maintain low rates of child poverty and material hardship. Low means rates among the best in the developed world. In this regard, there is a good case for having legislation – such as a Child Poverty Act similar to that in the UK – that provides a comprehensive framework for measuring poverty, setting clear targets and monitoring outcomes. But although such an Act could be a core feature of any multiparty accord, it is not essential.

Second, central to any new deal for children must be agreement on what constitutes an adequate family income. Adequacy must, of course, take into account various factors, not least the number of children, the relative costs of housing in particular regions and specific circumstances, such as a serious disability.

Determining what is adequate is complex. Reasonable people may well disagree on where to draw the line. But we need to tackle the issue head on and seek a broadly based and enduring consensus. Critical ingredients must include robust data, explicit and well-founded principles and open, democratic debate.

In our view, all children should have the opportunity to fully participate in and belong to New Zealand society. Social inclusion is pivotal. In practice, inclusion means that in the normal course of events all families should have sufficient income and access to important in-kind services, such as early childhood education and healthcare, so that children do not miss out on those things that most people regard as essential.

Third, we should seek a cross-party consensus on a broad framework of policies, including tax credits, welfare benefits and in-kind provision, which gives expression to the agreed standard of adequacy. Plainly, parties of the centre-left and centre-right are likely to disagree on some aspects, including the particular mix of income support and in-kind provision. But it should be possible to reach agreement on broad principles to guide policy settings. One such principle, for example, would be to rely more heavily on income support when children are very young, while emphasising the importance of parental employment as children get older.

Fourth, any new deal for children must include an agreement on how the basic structure of income support should be adjusted to reflect movements in prices and wages. As with New Zealand Superannuation, fairness suggests that there should be an explicit link to average wages. This would ensure income support for children moves in line with the overall standard of living of the wider community.

Securing a cross-party consensus along these lines would ensure better outcomes for our children. It would also avoid arbitrary policy changes and a gradual decline in the real level of income support due to inconsistent and inadequate indexation.

Of course, any new deal for children will involve additional fiscal costs. This reality must be faced. But the current and future benefits of better fed, clothed, housed and educated children must be taken into account.

There are various options for finding the necessary resources, including additional tax revenue and expenditure switching. The central point is this: if we can guarantee a decent standard of living for our elderly, we should also do so for our children. They deserve nothing less.

Child support that works


The existing system of child support is next to useless at reducing poverty.

Child support is money paid by non-custodial parents to sustain their children’s living standards. The money is paid to custodial parents who have the primary responsibility for caring for the children. Child support is a legal obligation. Given the high child poverty rates of those growing up in separated families, it is reasonable to ask how effective the legislated child support system is in reducing child poverty.

The answer is next to useless. Most poor children in separated families are supported by a sole-parent benefit. In this context, Inland Revenue’s recent claim that child support provides financial assistance to around 210,000 children is misleading. About 130,000 of these children get no financial support passed on from the IRD because their parents receive a welfare bene­fit. The Government simply takes the child support to offset the benefit.

Getty Images
Getty Images


The current system of child support has many problems. First, effectively no child support is paid to the poorest children. By not passing on any child support to many children, our approach contravenes the United Nations Convention on the Rights of the Child and indeed the 1991 Child Support Act. Both of these state that parents have an obligation to support their children’s living standards.

Second, because the Government takes the money as a benefit offset, child support functions as an additional tax for many non-custodial parents, thereby discouraging payments. Third, using child support as a Government revenue-raising device contravenes well-established principles for efficient revenue collection, such as having a broad base and a low rate.

How might we redesign child support to help reduce child poverty? We should have a Child Support Act that is focused on meeting the needs of children, especially poor children.

As in many other countries, we should simply pass on much, if not all, child support to custodial parents. This would generate a rise in incomes for the poorest children, thereby complementing other policies to mitigate child poverty. Non-custodial parents would pay money to directly support their children, for which they would have a strong incentive, as the money goes to the child not the Government. As for the lost tax revenue, there are many better ways of raising it than taking the money off the poorest children.

We also need to design a child support system that pays more for younger children, who are more vulnerable to poverty and who require more parental time. Unfortunately the currently legislated system (in force from 2015) sets higher rates for older children.

We need to make the payments system more stable for custodial parents, with the Government acting as insurer and advancing payments when non-custodial parents do not meet their obligations.

Finally, we need to provide more employment support to non-custodial parents to pay child support, including access to in-work payments and additional active employment assistance over and above that granted to those without such obligations.

Jonathan Boston and Simon Chapple are co-authors of Child Poverty in New Zealand, published by Bridget Williams Books.

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