Childcare benefits disincentivise work and should be changed, says report


A government policy that affects workplaces across Australia could be doing a better job of helping parents.

A new report by accounting and consulting firm KPMG calculates that the value to the Australian economy of improving the way we pay childcare benefits could boost GDP by close to $700 million and generate almost 30,000 additional workdays per week.

How is this possible? For parents looking to return to work after taking time off to start a family, getting the right childcare arrangements can make all the difference. It can also be expensive.

The idea of childcare is that a parent can use the time they would otherwise use to care for their own child to earn more money than it costs to have someone else look after the child.

Of course every family is different, but this is often a good thing; work can be personally and professionally fulfilling, and returning to the workforce quicker after having children helps reduce the disruptive effects that result from breaks in a career, such as lower pay, less opportunity to build skills and access promotions, and a cumulative reduction in superannuation benefits.

In a two-parent family, those disruptive effects are particularly experienced by the partner who takes on the greater share of the childcare responsibility. That partner is usually a woman.

The KPMG report says Australia’s system of childcare benefits frequently makes it uneconomical for the secondary earner of a family – usually mothers – to return to work, especially full time work. 

But that doesn’t need to be the case.

Changing how we do things 

KPMG’s report proposes to address what it calls the workforce disincentive rate, or WDR, by changing the way Australia calculates income tax and benefits for recipients of childcare subsidies.

“Our main proposal is to cap the WDR at the secondary earner’s — usually a woman — marginal income tax rate, plus 20 percentage points,” explains KPMG Australia Chairman Alison Kitchen.

“There would then be a top-up payment through the CCS system. This would benefit households across the income scale, but especially those at modest incomes who can least afford to be prevented from working more hours.”

The problem, according to the KPMG report, is caused by what happens when a secondary income earner in part-time work looks to take on extra work. The childcare subsidy is calculated based on family — rather than individual — income. This means many working parents who are the secondary income earner in their family will find that the extra money they earn from working will result in an associated loss of income, because they have to pay more tax while receiving fewer benefits from the childcare subsidy. 

For some secondary income earners, this income loss can add up to more than 100 per cent, meaning it actually costs them money to spend more of their time working.

Take, for instance, a couple with two children in childcare. The mother works four days a week, while her partner works five, and each earns the full-time equivalent of $100,000 per year. For the mother to move to full-time work, she would actually lose $89.20 — what the report refers to as a 121 per cent WDR. 

In this scenario, both partners are on an above average income, and the effect is particularly pronounced because of what KMPG calls a child-care subsidy “cliff” — caused by the introduction of a cap in the amount of subsidy the couple can receive when family income reaches $188,163. Another “cliff” comes in at a combined income of $352,453 per year.

However, the report highlights another case study demonstrating how families on much lower incomes can be affected:

A woman healthcare worker earning $50,000 and working 4 days a week has a marginal day’s income of $12,500. She might currently lose 88 percent of the income by working that fourth day — $6,200 in income tax and withdrawn family tax benefit and $4,800 in additional childcare costs for two children (net of CCS). So she would currently keep just $1,500 of the $12,500 earned by the fourth day’s work each week over the year.

To address these problems, KPMG proposes subsidising 100 per cent of childcare costs, up to the capped hourly rate, regardless of income levels, and tapering off payments rather than allowing the cliffs to take hold.

However, the report says a preferable, albeit more complex, option, which is progressive in nature and targeted at the people most affected by WDR. This option would be to introduce a WDR cap that enters at the secondary earner’s marginal tax rate plus 20 per cent. That would be implemented using a top-up payment to families. This top-up would be capped at $10,000.

KPMG’s recommendations are far from being policy, but some employers have taken note of the way parenthood can discourage workers from working and have taken their own steps to address the problem.

Going above and beyond

One example is online property exchange network PEXA. This past July, the company introduced a new policy designed to support workers with families that includes six-months of paid parental leave for the primary carer, three months of paid leave for secondary carers, childcare assistance of up to $1000 per month per child, and paid superannuation for unpaid parental leave. 

Linda Hibberd, PEXA’s EGM, people experience, says that as a relatively young company, PEXA sees itself as having an obligation to lead the way and challenge the status quo.

“We kicked off this initiative, which focused on our employees and how we could actually support them and support young families with the obligations of parenthood,” she says.

Hibberd says PEXA employees have welcomed the new policy.

“There was a bit of a celebration and people were really excited about what we were doing in this space,” she says. “Probably 40 employees have accessed our childcare support from 1 July and we’ve also seen a handful of employees who accessed our parental leave support.”

But according to Hibberd, the policy is already affecting how workers — both current and potential — see the company.

“What I do hear consistently is how proud people are of the investment PEXA is making to them and their peers,” she says. “We have a number of examples of people who have accessed it or are about to access it and feel as though that what this means for them is that they can make decisions based on their own personal circumstances, as opposed to a financially driven decision.”

Hibberd says that the policy has only been made known to the employment market “over the last couple of weeks”. Even so, they are already seeing interest in PEXA and what the employee proposition might look for them.

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jason
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Surely paternity pay needs to play a larger role. Having the father supported to stay home so the mother can return to work has more benefits, including addressing the gender-pay gap.

Nicky
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@ jason – Aside for a 6 week post birth recovery period, the leave (paid or unpaid) is available to the primary carer as opposed to the mother vs the father. The reality is that women take the primary carer’s leave in greater numbers than men, usually due to cultural expectations, but also often because the father has a higher income than the mother.

More on HRM

Childcare benefits disincentivise work and should be changed, says report


A government policy that affects workplaces across Australia could be doing a better job of helping parents.

A new report by accounting and consulting firm KPMG calculates that the value to the Australian economy of improving the way we pay childcare benefits could boost GDP by close to $700 million and generate almost 30,000 additional workdays per week.

How is this possible? For parents looking to return to work after taking time off to start a family, getting the right childcare arrangements can make all the difference. It can also be expensive.

The idea of childcare is that a parent can use the time they would otherwise use to care for their own child to earn more money than it costs to have someone else look after the child.

Of course every family is different, but this is often a good thing; work can be personally and professionally fulfilling, and returning to the workforce quicker after having children helps reduce the disruptive effects that result from breaks in a career, such as lower pay, less opportunity to build skills and access promotions, and a cumulative reduction in superannuation benefits.

In a two-parent family, those disruptive effects are particularly experienced by the partner who takes on the greater share of the childcare responsibility. That partner is usually a woman.

The KPMG report says Australia’s system of childcare benefits frequently makes it uneconomical for the secondary earner of a family – usually mothers – to return to work, especially full time work. 

But that doesn’t need to be the case.

Changing how we do things 

KPMG’s report proposes to address what it calls the workforce disincentive rate, or WDR, by changing the way Australia calculates income tax and benefits for recipients of childcare subsidies.

“Our main proposal is to cap the WDR at the secondary earner’s — usually a woman — marginal income tax rate, plus 20 percentage points,” explains KPMG Australia Chairman Alison Kitchen.

“There would then be a top-up payment through the CCS system. This would benefit households across the income scale, but especially those at modest incomes who can least afford to be prevented from working more hours.”

The problem, according to the KPMG report, is caused by what happens when a secondary income earner in part-time work looks to take on extra work. The childcare subsidy is calculated based on family — rather than individual — income. This means many working parents who are the secondary income earner in their family will find that the extra money they earn from working will result in an associated loss of income, because they have to pay more tax while receiving fewer benefits from the childcare subsidy. 

For some secondary income earners, this income loss can add up to more than 100 per cent, meaning it actually costs them money to spend more of their time working.

Take, for instance, a couple with two children in childcare. The mother works four days a week, while her partner works five, and each earns the full-time equivalent of $100,000 per year. For the mother to move to full-time work, she would actually lose $89.20 — what the report refers to as a 121 per cent WDR. 

In this scenario, both partners are on an above average income, and the effect is particularly pronounced because of what KMPG calls a child-care subsidy “cliff” — caused by the introduction of a cap in the amount of subsidy the couple can receive when family income reaches $188,163. Another “cliff” comes in at a combined income of $352,453 per year.

However, the report highlights another case study demonstrating how families on much lower incomes can be affected:

A woman healthcare worker earning $50,000 and working 4 days a week has a marginal day’s income of $12,500. She might currently lose 88 percent of the income by working that fourth day — $6,200 in income tax and withdrawn family tax benefit and $4,800 in additional childcare costs for two children (net of CCS). So she would currently keep just $1,500 of the $12,500 earned by the fourth day’s work each week over the year.

To address these problems, KPMG proposes subsidising 100 per cent of childcare costs, up to the capped hourly rate, regardless of income levels, and tapering off payments rather than allowing the cliffs to take hold.

However, the report says a preferable, albeit more complex, option, which is progressive in nature and targeted at the people most affected by WDR. This option would be to introduce a WDR cap that enters at the secondary earner’s marginal tax rate plus 20 per cent. That would be implemented using a top-up payment to families. This top-up would be capped at $10,000.

KPMG’s recommendations are far from being policy, but some employers have taken note of the way parenthood can discourage workers from working and have taken their own steps to address the problem.

Going above and beyond

One example is online property exchange network PEXA. This past July, the company introduced a new policy designed to support workers with families that includes six-months of paid parental leave for the primary carer, three months of paid leave for secondary carers, childcare assistance of up to $1000 per month per child, and paid superannuation for unpaid parental leave. 

Linda Hibberd, PEXA’s EGM, people experience, says that as a relatively young company, PEXA sees itself as having an obligation to lead the way and challenge the status quo.

“We kicked off this initiative, which focused on our employees and how we could actually support them and support young families with the obligations of parenthood,” she says.

Hibberd says PEXA employees have welcomed the new policy.

“There was a bit of a celebration and people were really excited about what we were doing in this space,” she says. “Probably 40 employees have accessed our childcare support from 1 July and we’ve also seen a handful of employees who accessed our parental leave support.”

But according to Hibberd, the policy is already affecting how workers — both current and potential — see the company.

“What I do hear consistently is how proud people are of the investment PEXA is making to them and their peers,” she says. “We have a number of examples of people who have accessed it or are about to access it and feel as though that what this means for them is that they can make decisions based on their own personal circumstances, as opposed to a financially driven decision.”

Hibberd says that the policy has only been made known to the employment market “over the last couple of weeks”. Even so, they are already seeing interest in PEXA and what the employee proposition might look for them.

2
Leave a reply

avatar
100000
  Subscribe to receive comments  
Notify me of
jason
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jason

Surely paternity pay needs to play a larger role. Having the father supported to stay home so the mother can return to work has more benefits, including addressing the gender-pay gap.

Nicky
Guest
Nicky

@ jason – Aside for a 6 week post birth recovery period, the leave (paid or unpaid) is available to the primary carer as opposed to the mother vs the father. The reality is that women take the primary carer’s leave in greater numbers than men, usually due to cultural expectations, but also often because the father has a higher income than the mother.

More on HRM