Reforming Child Income Supports in Ireland - Getting the right balance

Marie Sherlock

SIPTU

3rd March, 2012

Structure for Child benefit payment

system

• €2.9bn Child income support Budget for 2012

1) Child benefit- Universal payment. €140 per month per child.

• Recognises that the rearing is a public good, society should bear some of the costs.

• But there is no change in the rate over the lifetime of the child to reflect varying costs

according to age.

• Economic efficiency of payment open to question as there is varying dependence on

the payment across households.

• No clear societal view as to the extent to which the cost of raising children should be

borne.

2) Targeted payment- Social welfare dependents. CB + QCI should be 33%-35% of

main adult social welfare rate.

• But the setting of the rate is somewhat arbitrary and bears little relation to the actual

cost of raising children, given that the adult rate is itself supposed to linked to median

pay levels.

• Full costs of raising children are supposed to be borne by the sum of the universal

and targeted payment, but little or no information as to what are those precise costs.

3) Family Income supplement- those working 19 or more hours (employees). 60%

of the difference between net weekly income and income limit according to

family size.

• But cumbersome onerous application process- need to get sign off from employer.

• High benefit withdrawal rate; the additional benefit is gradually withdrawn as

family income increases beyond a threshold. Gives rise to concern that 19 hours is

as much a maximum as it is a minimum target for work hours.

• FIS is very important income support measure, but ultimately it functions as

subsidy to the employer who doesn’t pay enough to ensure worker can provide for

own family.

Current impetus for reform

Three main issues with the current system

• Weak targeting within the child income support budget- how do we better target

child poverty?

• Low take up of existing additional supports for those at work, approximately one

third of eligible population for FIS - how do we increase availability of supports to

low income families and also reduce disincentives to additional work inbuilt

within the FIS.

• Savings are being sought from the overall social welfare budget.

Public spending on family benefits as

share of GDP in 2007

0 0.5 1 1.5 2 2.5

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%Cash benefits Benefits in kind Tax break for social purposes

OECD average = 2.19%

% of GDP

Source: OECD (2011) Doing better for Families

Issues to consider in reform child

income supports

1) Adequacy of any new payment level to meet current household needs- what is the

appropriate balance between the universal and the targeted payment?

In 2010, over 30% of children were living in households experiencing some level of

deprivation, up from 23.5% in 2009, (source: CSO SILC, 2010). This increase was

driven by households not at risk of poverty- so it is likely that household disposable

income was in excess of 60% of median incomes but cut backs were being applied in

these households. No data is available for 2011 or 2012 but there is growing concern

about the incidence of households with median or higher income, but unable to meet

all household outgoings.

2) Incentives to work/participate in the labour force- what is the appropriate

balance between income supports and services?

Despite deficit of demand in the labour market at present, international

comparisons of various child income policies and poverty outcomes suggests

that the social welfare system should tackle adult poverty rather than focus on

child poverty- to ensure that parent doesn’t stay snared in a low income trap in

order to qualify for benefits.

Parental non employment appear to be a far more significant factor than family

structure- it is less the level of earnings, but more the capacity to earn along

with the provision of child care and the availability of adequate parental leave

and workplace flexibility that appears to have determined the low “at risk”

poverty levels that exist amongst families in certain countries.

Interaction of poverty targeting and

incentives to work

Denmark and Iceland spend twice as much on services as they do on income

supports, with France and Sweden spending almost double on services what is

spent on income supports. Child poverty rates across these four countries are

between one third to two thirds of the OECD average (2008 data).

Whereas, Ireland has been singled out as being the only country across the OECD

which had both above average child benefit cash transfers alongside above average

child poverty rates.

Despite increases in child income supports in 2007/2008, it has long been

considered that Ireland has generated a very poor rate of return on relatively high

child income cash transfers. In 2010, some 19% of children remained at risk of

poverty.

Options for reform- (i)tax, (ii)means test, (iii)

cut or (iv) reform the structure of the payment?

Some principals for reform:

• Simplicity of the system- in terms of access, eligibility, operation

• Vertical equity: Progressivity of the supports depending on need

• Horizontal equity: treat all those on the same income equally (p68)

• Minimise any disincentive effects

Reform Merit/Disadvantage

Tax Notwithstanding legal concerns, progress has been made on

integrating tax and social welfare system, but there is a limit to

how progressive taxing child benefit can be.

Means Test Administratively, it would be a huge task and principal of

universality is important.

Cut Does little or nothing to reform current difficulties in the system

Reform of

existing

payments

Creation of new three tier integrated payment as proposed by

the Department’s value for money review has the potential to be

the most effective and progressive of reforms. Contains (i)

universal payment, (ii) automatic payment to social welfare

recipients and (iii) means tested support for low income

families. But it all depends on (a) the benefit withdrawal taper

and (b) the income threshold set.

Services vs income support

Positive shift from cash to services:

• Early childcare supplement paid in respect of children under school going age was

abolished 2009.

• Replaced by Early Childhood Care and Education year: free pre school year for all

children aged between 3yrs 6month and 4yrs 6months. Limited hours (3hours a

day over 38weeks), but it is a positive development.

• Community childcare subvention scheme in disadvantaged areas and childcare

education and training support for Fás and VEC trainees exist, but greater reach

needed.

• However, the cost of childcare in Ireland remains second only to Switzerland when

comparing across OECD countries and in single parent and two parent two earner

families, both an average earnings, when the cost of child care is included,

families face a marginal effective tax rate of close to or in excess of 100% (Source:

OECD (2011), Doing better for families).