Uh-oh, the kids are getting bigger

This week Parliament passed legislation removing the special arrangements ("grandfathering") for parents getting parenting payment since before 1 July 2006.  I've done a few posts on this already so I won't repeat the details (see here and here if you want the earlier raves on this subject).  The gist of it is that the grandfathered group will now have the same payment arrangements applied to them as everyone who has come on to parenting payment since 1 July 2006.  These arrangements are rather less generous for single parents, who will consequently have significant reductions in their incomes when the change takes effect on 1 January 2013.  (It's of less significance for partnered parents because they have always had lower Newstart allowance-linked payment rates.)

Parents in the income support system, partnered or single, face changes in the total assistance package provided to them when their children reach significant birthday milestones.  Sometimes it's up, sometimes it's down, but the final result is down.  By final result, I mean that eventually the parent is no longer considered to have a dependent child, and a significant age for this purpose is 22 years.  A 22 year old child becomes eligible for Newstart allowance in their own right (subject to the usual rules about being unemployed, etc) and a 22 year old student child gets a youth allowance that is no longer affected by parental income.  If the parent is single then, in the usual case, they will get the single rate of Newstart allowance.

So, under the current arrangements a single parent who still needs income support will typically end up on single Newstart allowance, simply as a consequence of the passage of time.  If we compare the assistance package for a single parent with a newborn to that of a single Newstart recipient the size of the eventual transition that must occur is stark.

Chart 1

As noted above, in the current system this transition does not occur in one hit.  There are a number of changes as the child ages, which we can see in Chart 2.

Chart 2

The first difference occurs simply because newborns attract a baby bonus (or paid parental leave - I've gone with baby bonus here).  The child age 0 data includes this and is consequently higher than the assistance for ages 1 to 4, which is otherwise identical. 

When the child turns 5 there is a reduction in the overall assistance package due to a lowering in the rate of Family Tax Benefit Part B.  This is slightly offset by the commencement of the school bonus payments, but the net effect is lower overall assistance. The rationale for this reduction is that with the child now of school age there is a greater capacity for the parent to work.  Capacity to work also seems to be the rationale for the next reduction, when the child turns 8. 

At the child's 8th birthday, entitlement to parenting payment is lost and the parent must apply for some other type of income support.  In the chart I've assumed this is Newstart allowance, giving a picture of the parenting payment to Newstart transition that has been in the news of late.  Note that this is the transition for those without private income - as canvassed in my other posts, it's a substantially larger reduction for working families.

The next change occurs when the child turns 13, but this time it's an increase.  This is done to reflect the fact that older children are more expensive to run.  The increase pops up in two places on the chart - the Family Tax Benefit Part A rate is higher, but so too is the school bonus which I'm showing at the secondary school student rate.  This rate package persists until the child turns 16.

At age 16 there is a slight reduction in income support as the parent no longer attracts the pharmaceutical allowance component of the Newstart allowance rate.  They also lose access to the telephone allowance.

The child turning 18 produces the biggest change, at least in the case I've shown here.  I've assumed the child is now a tertiary student and so has taken up youth allowance.  They no longer attract the school bonus, but instead can pick up a student start-up scholarship.  Significantly, the payments for the child are now paid to the child, not the parent (they are, after all, legally an adult at this point).  For this reason I'm showing the student payments separately (next to) the parent's payment.  Note that the parent's Newstart allowance has reduced again. That's because the parent is not considered to have a dependent child for Newstart allowance purposes which results in them getting the lower single rate (up to this point the Newstart was paid at the higher single rate).

This exclusion of the child from the Newstart rate calculation process is somewhat one-sided though.  If the parent is working, their "parental income" can still affect the youth allowance rate for the student.  Arguably, the dependency rules are misaligned from age 18 until the child reaches 22 years.  At that point the child is not a dependent for either scheme and so the parent is now a "vanilla" single Newstart allowance case (ie, does not attract rate add-ons).

So that's the perhaps inevitable transition "journey" as children get older for people granted parenting payment on or after 1 July 2006.  And from 1 January 2013 they will be joined by the grandfathered group, albeit sooner than they were led to believe would be the case back in 2006. 

And now for something completely different....child support! (Actually, it's related but short, so I thought I'd throw it in on the end here.)

I was discussing the changes to parenting payment (ie, the loss of grandfathered status) with a friend who is rather an expert on matters child support.  He chastised me and the world more broadly for not taking child support into account when discussing the incomes of single parents.  After all, most single parents get child support, so any analysis of a "typical" case without including child support is arguably not that typical.

In my defense, it's hard to do child support analysis because of the number of variables in play in the child support formula.  It's affected by the individual incomes of the two separated parents, the combined incomes of those same parents and the percentage of care of the children that each parent has.  Nonetheless, he has a point and so to a little (aka cursory) examination of the effect child support has on the change in disposable incomes experienced at the age-8 transition.  (Besides, it gives me an opportunity to take the child support calculating parts of my spreadsheet out for a spin!)

The issue we were discussing was the extent to which the reduction in income experienced by the single parent at the age-8 transition is offset by an increase in child support.  I thought I could do this using the same net loss chart that I did in my earlier posts on this subject, but including the effect of child support from payers (the separated parent without the care of the child) at a number of payer incomes.

The results are in Chart 3 and suggest that, at least for the cases I modelled, child support payments won't increase enough to come to any kind of rescue.  (Note that the following material is based on January 2013 rates and income test arrangements.)

Chart 3

In fact, at this scale there's no real discernable difference between the 5 cases I've plotted, apart from the trace where the child support payer's income is $100,000 a year.  This result is due to an interesting interaction in the child support formula.  First, the reduction in income following the age-8 transition means the combined income of the separated parents has fallen.  A lower combined income actually means a lower child support liability (or costs of a child) would arise.  However, the paying parent now has a greater proportion of the combined income, meaning the percentage of the costs of the child they must meet rises.  This bringing together of a higher individual liability with a lower total liability results in no or little change overall.

However, there is one obvious way in which the child support does affect the outcome.  The higher the child support, the lower is the reduction in income in percentage terms at the age 8 transition.  You can see this in Chart 4.

Chart 4

However, the losses are still large in dollar terms (as per Chart 3), regardless of whether they represent over 13% or under 11% of disposable income.

So there you go, Mr X, a tiny bit of child support discussion at last.  I promise to try and include more in future.