Clawbacks squeeze the pips from a beneficiary's labour

If you were a solo mum with four children, would you work fulltime for just $41 a week more than you can earn in 17 hours?

That's the choice facing Bobbie Walker of Glen Innes, and it's no wonder she chooses to work only 17 hours a week.

She earns $10.50 an hour as a caregiver for the Christian Healthcare Trust, earning $178.50 a week.

If she earns more than $180, the Government will take 70c off her domestic purposes benefit for every extra dollar she earns.

On top of that, she will lose 18c off her family support, pay income tax of 21c plus 10c to repay her $15,000 student loan, and pay 1.2c in accident compensation levy. She would be crazy to do it.

"I would like to do what I am qualified for and work more hours," says Ms Walker, who reckons she could earn $20 to $50 an hour in the two areas she has trained in, hairdressing and security work.

"Unfortunately the more I earn, the more is taken from me by WINZ (Work and Income NZ) and the Inland Revenue Department."

Ms Walker, and a further 319,698 working-aged people like her who were on income-tested benefits on December 31, are the intended winners from the "Working for Families" package which is to come into effect this Friday.

"Working for Families is a Government package that will put more money in the pockets of New Zealand's low and middle-income families, and make work pay for parents who move off benefit into work," was the opening line in last year's Budget material.

But "making work pay" is extremely difficult with a tax and benefit system that is as narrowly targeted as ours, as Ms Walker's position illustrates.

Working for Families will lift her base benefits, even if she doesn't work at all, by almost $100 a week from $585.52 to $684.47.

But the bottom line is that Ms Walker would still get only an extra $63.21 in the hand by increasing her caregiving hours from 17 to 40 in April 2007, compared with the extra $40.80 that she would get now.

That's obviously better than nothing. But the Government has declined to act on the only element that would have had a major effect on the incentives to work - the clawback rates out of every extra dollar of income.

The result is that the price of giving Ms Walker an incentive to do more caregiving means her extra gross wages yield hardly any increase in net income - right out to $1622 a week ($84,353 a year), where Ms Walker's extra family support in 2007 will finally cut out.

Even under the current system, a $22,000 wage increase from $38,000 to $60,000 a year - the kind of money she might earn in hairdressing or security work - would give Ms Walker just $1311 extra in the hand ($25.23 a week), because of the savage effect of the clawbacks.

After April 2007, the same pay rise would yield her a mere $900 ($17.34 a week) to take home.

She already has her hands full with two girls aged 12 and 7 and two boys aged 5 and 4.

When she worked fulltime in hairdressing or shop security, with a late night on Fridays, she was paying $200 a week to someone to look after them.

"I was virtually working to pay my babysitter," she says.

So she switched to caregiving, where she can go out to help elderly people in their homes and still be there when her children get home from school.

"I love it because it's like all the jobs I pick - working with the public. That's my personality," she says.

She has already taken advantage of the first part of the Working for Families package, which increased childcare subsidies from last October.

She now gets a $75 subsidy towards the $95 weekly cost of childcare for her youngest son, Starford, who turns 5 in June.

Her $300 weekly rent qualifies her for the current maximum accommodation supplement of $150 a week. That will rise to $156 when the Auckland limit rises to $225 on Friday.

Another part of the package which took effect in October abolished the clawback of the accommodation supplement until the main benefit has gone.

That is partly how the worst clawbacks have shifted further up the income scale.

In the income range where Bobbie Walker still gets a partial main benefit as well as part-time wages, the effect of all the clawbacks is complicated.

Some of them, including the abatement of the main domestic purposes benefit (DPB) and the accident compensation levy, are taken from every extra dollar of gross wages alone.

However, most of the others (income tax, student loan repayments and family support) are based on total income, including the gross value of the DPB as well as gross wages.

There is also a further complexity.

It is the net DPB, after taxes, that is cut by 70c for every extra dollar of gross wages.

But at the standard tax rate of 21 per cent, the gross DPB is 126.6 per cent of the net DPB. So chopping 70c off the net DPB means cutting 126.6 per cent of that, or 88.6c, off the gross DPB for every extra dollar of wages.

That leaves just 11.4c in extra total income out of that extra dollar of wages.

The other clawbacks (income tax, student loan repayments and family support) all come out of that 11.4c. The family support clawback, for example, is 18 per cent of that, or just over 2c.

Adding up all the existing clawbacks, Victoria University economist Patrick Nolan reckons that Bobbie Walker would lose 95.4c out of every extra dollar of gross wages she could earn between $180 and $504 a week, where the DPB cuts out at present.

From April next year, the Government will make what looks like a major concession and lift the threshold at which it starts clawing back family support from $391 a week to $529.

But as we have just seen, in reality that will reduce the total clawback by only about 2c, from 95.4c to 93.3c.

And of course deferring the clawback until further up the income scale only worsens the problem there.

The total clawback will peak at 99.2c, leaving just 0.8c in the hand out of every extra dollar earned between $30,000 and $57,096 from April 2007.

Clawbacks: working more for less

* Abatements or clawbacks reduce income support and benefit payments as people earn more income.
* The effect of clawbacks is complicated but their impact can mean that people get a fraction of every extra dollar they earn.
* In Bobbie Walker's case, an economist has calculated that she would lose 95.4c out of every extra dollar of gross wages that she could earn between $180 and $504 a week, where the DPB cuts out at present.