13 April 2013

The price of love

Back in July 2006, parenting payment rules were changed so that new applicants could only be paid if their youngest child was under 6 years (for partnered parents) or 8 years (for single parents).  At the time I remember a friend suggesting that every cloud has a silver lining, insofar as the change would at least have a positive impact on the partnering penalty.
The partnering penalty is a murky subject that seems to have an almost “dare not speak its name” air about it.  In an earlier form it was described by its reverse – a financial incentive to separate – a concept almost too ugly to consider, at least publicly.  The basic idea was that if the financial assistance for low income single parents was too generous compared to the entitlements for low income couple parents it might provide an inducement of sorts for relationship breakdown.  These days if the idea is discussed at all it’s usually in terms of whether differences in the assistance packages between singles and couples might be a barrier to the reconciliation of estranged couples or the formation of new cohabiting couple relationships – a partnering penalty.

I was reminded of the partnering penalty issue by the repeated demands to undo the changes to single parents introduced this year.  Those changes abolished the special rules for parenting payment that had applied to people who had been getting it since before the July 2006 rule changes.  But a change that is only applied to single parents will almost inevitably alter the relativities between them and partnered parents and hence affect the partnering penalty.
So, do we have a partnering penalty under the current arrangements, and if so, how big is it?

The first point to make is that there’s no single number that can capture this concept.  The amount of any financial loss (if any) from partnering varies depending on the income of the parties involved and also the household characteristics (for example, the number of children and cost of accommodation).  That said, it’s still possible to illustrate the issue using an example household.
Here’s a chart that shows how much the disposable income of a single parent household increases or decreases over a range of earnings amounts if they repartner.  It’s a 2 child example and I’ve done separate traces for the result depending on the payment type the sole parent was receiving before the change in status.   Note that the earnings are those of the sole parent – the partner is assumed to be unemployed – I’ll do the reverse scenario next.

Chart 1


We can see that at zero private income, acquiring the unemployed partner increases the income going into the household by almost $8,000 a year if the sole parent was on Newstart allowance or about $4,000 if the old payment was parenting payment.  However, this fairly rapidly declines for higher levels of sole parent earnings with a worst case of a $4,000 reduction in income where the parenting payment recipient is earning around $42,000 a year.
There’s also a small reduction at all income levels from around $50,000 a year.  This is because in my calculation I’ve assumed that the sole parent is receiving child support at the minimum rate.  It’s minimum rate because the new partner (or old partner returning) is assumed to be unemployed and so is having child support deducted from their Newstart.  Obviously, post-reconciliation, this stops.

These losses are quite significant on their own, but there’s an even bigger issue.  The household also has an extra (adult) present.  Reconciliation or repartnering has resulted in less money for a larger household.  This makes the before and after comparison tricky.
One way to try to adjust the gain/loss calculation to take the change in household size into account is to use equivalised incomes.  This is a fairly standard method of adjusting income based on the number of adults and children in the household using an equivalence scale (although which equivalence scale to use is more contentious). 

(I've explained equivalising a little more in the second half of this post, along with a link to some detailed material from the Australian Bureau of Statistics on the topic.)

The next chart shows the result after adjusting for household size. It was calculated by equivalising the household incomes before and after reconciliation using the modified OECD equivalence scale and then subtracting one from the other. 

Chart 2


In this case, taking into account the extra adult in the household results in post-reconciliation financial loss at all levels of private income.
These results are based on the sole parent being the worker.  The outcomes are rather different if it is the non-resident parent who is working instead.

Chart 3 shows the result for the same household type as in the previous examples, but with the sole parent unemployed and all earnings being those of the estranged partner.

Chart 3


The change at zero income is (obviously) the same as in the first example.  However instead of losses with increasing income, the gain to the household increases.  Again, the non-resident partner is assumed to be paying child support – the calculation of the gain on reconciliation takes into account the loss of these amounts.
These are the “raw” numbers, not taking into account the change in household size.  If this is done the equivalised results look like this:

Chart 4

Here we have relatively small financial losses at zero private income but still have net gains where the formerly estranged partner has private income.
As a generalisation it appears that if the sole parent is working and reconciles with a non-working partner the household will suffer significant reductions in income.  Conversely, there is a financial gain for non-working sole parents to partner with someone who is employed, even at very modest wages.   Obviously these two results are at opposing ends of the employment spectrum – cases where both are working will produce a different set of results reflecting the melding of these disparate influences.

Of course, these results simply reflect the financial outcomes.  Having a partner brings a host of other rather less measurable benefits (and negatives too) which will influence the decision to (re)partner or not.  Those who do repartner despite financial loss are perhaps demonstrating the price (or value) of love.
I’ll end on a point that has probably occurred to you if you’ve read this far.  There has been a lot of media attention to the substantial reductions in income that occur when a sole parent’s youngest child turns 8, resulting in the transition from parenting payment to Newstart allowance.  But for sole parents who reconcile with a non-working partner the financial penalty is even greater and yet is rarely mentioned.  I hope that if/when some reworking of the entitlements of sole parents is considered, this very common life transition is also kept in mind.

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