The curse of special money...

Shortly after this year’s Federal budget it dawned on me that the Government’s proposal to scrap the energy supplement for new claimants of certain transfer payments (eg, Newstart allowance) would actually make them worse off than if the supplement had never been introduced in the first place. To draw attention to this issue, on 4 May I started what has been an ongoing series of posts about it on Twitter, along with a more detailed blog post on 14 May.

Since then I’ve been writing to MPs, Senators, Ministers and their parties about it, as well as journalists in the major media outlets, mainly via Twitter. I’ve also chatted (in the good old fashioned verbal way!) with a few people about it over the intervening months.

These efforts have shown me that it can actually be a bit difficult for some people to get their head around how it’s possible to remove a no-longer-needed extra bit from a payment and in doing so have people end up with less than the original, pre-extra bit, amount. So here’s another go at explaining it; one that doesn’t use pictures or tables or discussions about the CPI. It’s a vast simplification compared to what is actually going on, but the essential mechanism is there…

Imagine that you are regularly being paid $100 a week, via a bundle of nice shiny $10 notes. The normal arrangement is that if the prices of things you buy go up, your $100 a week will be adjusted up also (more $10 notes for you). And if prices fall, you don’t need as much, and your $100 will be reduced (less $10 notes for you). Assume this has been going on for years and years, with you getting a bit more or a bit less than $100 as prices wobble about.

Fast forward a few years, and there’s an announcement that there’s going to be an ongoing change that will cost you money – an extra $10. A permanent price hike in addition to the normal up and down wobbles. Now, the normal arrangements will give you this $10 (it’s just a price increase after all), but just so you know that you’ve been properly compensated, your benefactors have decided to give you $20 instead. To make it even better, they’ll give you a $20 note instead of a couple of the usual tenners. And so it comes to pass that you are now getting $120, made of ten $10 notes and one fabulous new $20.

Time passes, and the thing that brought about the ‘permanent’ extra price hike is removed. In an act of generosity, the people giving you the $120 say you will be allowed to keep your special $20 note.

Bonanza! A windfall gain! Sounds of cheering and joy!

Except that they don’t do anything about those pesky normal arrangements, and those arrangements dutifully operate to reduce your payment by that $10 extra cost that no longer exists. So now you have $110 a week, still more than you had before all this started. And you surely can’t help but notice the nice $20 note that still makes up part of that $110.

Times get tight, and the person paying you is looking around to save money. They recall that you’re still getting a $20 note to compensate for that price thing that no longer exists. And inevitably, the pressure is on to stop giving it to you. After all, the extra cost thing went away ages ago. So the $20 note is removed, and now you find you are only getting $90 a week – less than before the whole extra cost thing started!

And there's no point in complaining, because all the great benefactor did was remove the special $20 note you no longer needed.

Essentially, this is the process underpinning my concerns about the removal of the energy supplement. Sure, the actual arrangements are more complex, but if you keep the concept in mind, my original post (here) describing what's actually happening might now be a bit less impenetrable.

Fingers crossed!