From the Cradle
Part 1: How Much Money do Middle Income Families Have?
Having children is a truly terrible financial decision. My son is 16 months old and already we’re down nearly a hundred grand in lost income and childcare costs. (Ouch, I really wish I hadn’t paused to figure that out! Maybe I’ll focus on hypothetical families for the rest of this piece.)
Let’s take a look at Family One: a mum and a dad in their late 20s or early 30s, and a baby, six months old. Let’s say mum is on unpaid maternity leave – the paid period lasts only four months – so they’re on one income. Imagine it’s a good income: a middle-class income, well above the median full-time wage, and high enough that the family is not eligible for any government assistance, say around $75,000. OK, now imagine they rent a middling-ish house in a major city, and imagine this young dad is still paying off his student loan and is also paying 3% of his salary into KiwiSaver (I’ve assumed 3% KiwiSaver throughout except where otherwise mentioned, given the high participation rates created by the opt-out scheme).
Here’s how it breaks down: if this family is paying about $400 a week in rent, which doesn’t go far in the cities, they will have a disposable income equivalent to a retired couple who own their own home but have no income other than the Government-funded superannuation – around $570 a week. So if they’re paying any more than $400 in rent, they will have less after-housing income than many superannuitants (in the latest census, 77% of those aged 70-74 owned their own home).
Let’s consider Family Two. The parents are both working, with two preschoolers in childcare. One parent works part-time – let’s say 25 hours – and the other parent works a 40 hour week. Both have outstanding student debt, but both earn a decent wage: $29 an hour, just over double the minimum wage. Their income after deductions is $1340 a week, so it looks like they’re doing fine. But they pay $350 in childcare (assuming one child is over three and eligible for the 20 hours funded childcare) and $425 in mortgage repayments, taking their disposable income down to $565 a week – less than the married super rate of $576. Their income is too high to get Working for Families (New Zealand’s means-tested system of tax credits and financial support for low and middle income families) or the accommodation supplement or the additional means-tested childcare subsidy.
Is it a problem that many young families are no better off than retirees? Either the numbers speak to you or they don’t. I suspect that many New Zealanders over a certain age would read these hypothetical case studies and scratch their heads and pull out pocket calculators. Wait, really? Housing and childcare and student loan repayments cost how much?!
Perhaps others would shrug and think “well, they’re still doing fine though”, or “kids are expensive, that’s not news”. Yep, they’re still doing fine; but yep, kids are expensive. I wanted to start with middle income couples who tick all the boxes. Well paid. Educated. Two parents. Nothing that a right-wing commentator could point to as a failing of personal responsibility. It’s easy to show that things are bad for a single parent on a benefit, but looking at middle-income families it becomes clear that the problem of financial strain on young families is endemic and can’t be attributed to the life decisions of the families in question. It is a result of external factors. The biggest factor is the costs associated with having children. Families with small children have to either reduce their total working hours so that they can look after the kids, or pay for childcare, or some mixture of the two. Effectively this means that, for many families, money will be tightest when their children are preschoolers, and then things will get better (especially if student debt is also a factor and is paid off during this period). Some families will be able to ride this out. Others will be thrust into poverty.
From the perspective of a middle class family, the gap between the end of paid parental leave and the start of universal early childcare subsidies is annoying and plain stupid. Speaking personally as one half of a couple with a combined four degrees and bucket-loads of earning potential, I would much rather pay tax at a higher rate for the rest of my life if only we could have longer paid parental leave and better childcare funding. It’s a no-brainer. Paid parental leave, Working for Families and 20 hours funded early childcare are all relatively recent policies introduced to try and address the need for additional income while children were young. But they don’t go far enough. Paid parental leave lasts for 16 weeks, and will be extended to 18 weeks next April. The 20 hours funded early childcare starts when children turn three. In between there’s a fairly long stretch of reduced income for even relatively well-off families.
Part 2: Working for Families and Social Responsibility for Some
Means-tested benefits (Working for Families, the accommodation supplement, and the means-tested childcare subsidy) make an enormous difference in obliterating the income gap between middle and lower income families, especially where middle income parents are paying off student debt. Let’s add a third hypothetical family into the mix: Family Three. Like Family Two above, they have two preschoolers and housing costs of $425 a week but this time it’s rent not mortgage. The parents work the same hours, 65 combined. But unlike Family Two, these parents earn low incomes, and they do not have student loans. In fact, they have no training at all, and they each earn a couple of dollars over minimum wage – $18 an hour. Their weekly income before tax and transfers is $1170. They get an accommodation supplement of $18 per week, and they get $112 from Working for Families, and $180 in means-tested childcare assistance. After tax and transfers this family has $1243 a week, or $468 after childcare and housing. Two points leap out: first, $468 is not much for all expenses other than housing and childcare for a family of four (especially given power costs in winter); second, this family had seven hundred dollars less per week than family two to start with, but after tax and transfers it’s one hundred dollars less.
The government has chosen to drastically reduce the gap between middle and low income wage and salary earners through direct cash transfers because they are very concerned about another gap: the gap between benefits and paid work. Benefits can only go so low before they’re not enough to survive on, especially given high housing costs, so if you want to ensure a big gap between benefits and low-paid work (a questionable goal) the cash top-ups become necessary. When the Beehive says that getting families into work is the best way to get out of poverty, this is the secret ingredient: giving families in low paid work significant income assistance. I don’t want to knock these transfers, because they provide financial security for families and I’m glad my taxes are used for that purpose. I do however want to note that if families in fulltime low paid work are being given money from the government because otherwise they would be in poverty, it suggests that families who are out of work should also be given more money from the government to address poverty.
The main thing to remember about Working for Families is that it is absolutely not a universal child benefit. It is income tested and the full credits are only provided to families who work a minimum number of hours. This in effect subsidizes the stay-at-home carer or single income earner model for two-parent families on lower incomes. The calculations can be complex, figuring out whether it is worth it to seek extra hours from a second income earner, given the abatement rates and the enormity of childcare costs. For many families, bizarrely, it will be financially better to remain on one income. In short, childcare is very expensive and yet these costs are not taken into account in determining eligibility for Working for Families or the accommodation supplement. Childcare isn’t tax deductible either.
This has implications for wealth inequality. For a family in which either income earner taken separately would earn above the threshold, the lack of tax deductibility or universal funding for childcare is an annoyance that can be absorbed with a view to long term financial benefits of building two careers. And of course on a higher income childcare is a smaller proportion. Long term, returning to work when my son was 11 months old means that we will be in a far better financial position than if I’d remained out of the paid workforce (also, sidenote: I was chomping at the bit to get back to my extremely interesting and fulfilling job). We’re paying two sets of KiwiSaver contributions, and we’ll be able to buy a house sooner, and we’re developing two careers. If one of us got sick, the other would be able to carry the family’s finances. For low income families who are in a pattern of one income earner and one caregiver for extended periods, there is an added level of financial precariousness. This might not matter so much if there were decent policies in place to facilitate the re-entry of caregivers into the workforce once children started school, but this is not the case. Instead, carers who are out of the workforce for several years will often find themselves starting again at entry level positions.
Working for Families also blatantly subsidises two-parent families, to the immense detriment of sole parents, who are the most likely demographic to live in poverty. The in-work tax credit component of Working for Families is payable to two-parent families who work a combined total of 30 hours a week or more, or to sole parent families who work 20 hours a week or more (that’s right, more than half the number of hours a two-parent family must work even though there’s only one person available to do the childcare). If you’re a stay at home parent with a partner who works 35 hours a week, you get the full working for families payment. If you leave your partner, your income and standards of living will be massively reduced.
Housing costs are a particular issue for sole parent beneficiaries and other families on very low incomes. The accommodation supplement is paid at a higher rate to people living in properties with higher rents, which drives up prices across the board, leaving the poorest no choice but the absolute dregs of a rental market that is infamous for cold, damp properties and insecure tenure. Of all age groups, the people most likely to live in inadequate housing are children under five. The accommodation supplement was intended to help those on lower incomes afford a place to live, but it is a quintessential example of a policy that throws money in the general direction of a problem without regard to the root causes, and without consideration of unintended consequences. Eligibility for the accommodation supplement is contingent on having minimal cash assets, providing a disincentive for lower income families to save and therefore worsening the division between those who will one day own houses and those who will reach retirement and still be renting. Finally, because the accommodation supplement has high abatement rates, it exacerbates the already high marginal tax rates created by Working for Families and the abatement of benefit income.
Part 3: Security and the Real Meaning of Independence
Right-wing politicians and commentators have claimed the language of independence. An independent person is apparently the best kind of person, and independence is conceptualised as needing no-one, doing his or her own thing, not mooching off the state, financially buttressed by savings alone.
Except that we are all born completely dependent. And we remain that way for years. We need our parents, our whānau, our communities. And when a child is very small, it is effectively impossible for one person to both earn money and do the day-to-day care (which is why the criticism “don’t have kids unless you can afford them” is so incoherent). Anyone who has ever spent significant time caring for children can be in no doubt that this is challenging work, rewarding work, and an essential contribution to society. But when parents do it, it’s not paid. In two-parent families, a leading option is for one person to earn money while the other person looks after the new little person. Without wishing to erase the experience of same-sex couples and stay at home fathers, it remains true that many, many, many adult women experience a time of financial dependence on their male partners, usually coinciding with the time that their children are youngest.
My husband is of an age to have been born to a second-wave feminist mother. He sees the money as “our” money (and I manage it); and he sees a lack of paid parental leave as a “family” issue not a women’s issue. As he puts it, of course he would support a policy that would give us more money when we need it. Of course he reckons it’s bullshit that we had to rely on his income alone while I stayed home with our son after the end of New Zealand’s paltry paid parental leave. That’s great for me, but feminism should not be about the enlightenment of individual men: it needs to be about changing the whole of society. All long-term relationships require interdependence, and periods where one might rely on the other, and a pooling of resources in the face of life’s twists and turns. Having a baby is poorly accounted for in this supposedly neutral scheme. Either we see it as a period where the family as a whole is poorer, or we see it as a time where the stay at home parent is financially dependant on the employed parent. In most cases, this is a woman dependent on a man, at precisely the time her child is youngest and most in need of attentive round-the-clock care. This can be seen as a feminist issue, the modern day equivalent of a time when married women were unable to own property. But my husband is right too: of course it is a family issue as well – if, for example, he became sick and unable to work, I would have to increase my hours and we would have to pay childcare from one income. By operating on the principle that dependence on a partner is not really dependence, many women are left vulnerable and many families are left financially precarious.
The funny thing is that predictable, guaranteed, regular income from the government can be used to support real independence: that is, individual self-determination. This is what we do for over-65s. My grandparents’ independence is only possible because of the money they receive each fortnight by virtue of their age.
The guiding principle of this is security. That’s why we have a universal pension – because we value security. Security is not having to worry about your financial situation, present or future. Not having to expend energy thinking about how much money you are saving for retirement. Not having to budget with exacting precision to get through the unpaid portion of parental leave. Having a prospect of buying a house without yoking yourself to decades of sky-high mortgage repayments. Being able to spend money on things that make life nice, like an occasional holiday, not just necessities. Being able to get a higher education without amassing so much debt that you’ll be paying it off for decades to come.
Financial security enables autonomy. If we believe that it’s a good thing for people to have the ability to control the direction of their own lives, then we need to care about financial security. From the perspective of many (on the right and left of mainstream politics, in liberal and even in more radical circles), individual autonomy is significant. What is a life without scope to make it your own? Yet without an assurance of financial security, we are stuck. Some places are considerably worse to be stuck in than others – the woman stuck in an abusive relationship because a benefit is not enough to give her kids a warm house and food on the table is in a dire position; much worse than the young family stuck in cold rental accommodation for just a few more years until the children are in school and childcare costs aren’t eating up so much money. The 60 year old stuck on a sickness benefit and forced to sell his house because he can’t afford the rates is in a much worse position than the 60 year old stuck in a job he doesn’t much like because he needs it to pay off the rest of the mortgage before his retirement. Those of us who remain financially secure without government assistance can afford to be generous. We should be called upon, morally, to provide more to people who are really truly stuck in awful circumstances and unable to escape because of finances. Compassion has an abiding importance in politics.
However, there is also a claim for greater wealth distribution based on self-interest. From the financial vantage point of myself and my husband, we are standing on the edge of a squelchy swamp and can see a clear meadow across the other side. For the next few years, assuming we have more children, our finances will be a bit bogged down. But across the other side, once the youngest is three and the early childcare subsidy kicks in, we will havedecades of dual-income financial hay-making. Even people like us who stand one day to gain enormously from New Zealand’s extremely low taxes on high income earners may actually prefer to sacrifice this gain for a bit more social spending at a different stage of life.
Part 4: A Social Contract for Young and Old
Politicians and commentators from the right often dismiss worries about inequality provided there is social mobility. David Farrar for example says things like “I believe social mobility is the more important thing to measure than income inequality. Of course a 16 year old school leaver earns a lot less than a 45 year old executive.” Social mobility is thus perceived in terms of people moving up the ladder, but it is a relative measure and so it goes both ways. A lack of support for families with young children can create the sort of mobility that no-one should endorse: temporary poverty when children are preschoolers. I started this piece with a comparison between young families and retired couples. Without social assistance for superannuitants, we could have another form of negative income mobility, the elderly could live in poverty. I’m glad to live in a country that wouldn’t stand for this. And I’m puzzled that we put up with child poverty, and set things up so that even relatively well-off couples with small children may find themselves struggling to make ends meet, or making really difficult compromises.
The comparison with retirees is not meant to suggest that they had things easier back in their day by the way, or that they are undeserving of social support. My grandmother received a universal family benefit. On the other hand, she grew up in a tenement during a war. My father never had to take out a student loan; on the other hand, he left home at 16 and had no parental support while he was at uni. It’s not about what they had then versus what I have now; the point is simply that if we can support people in retirement, we can support people when their children are small. New Zealand is richer now than we were when my parents were my age in the late 80s, and we can afford higher standards of living across the board.
So far I haven’t mentioned the impact of taxes on incomes of young families. It deserves a mention if for no other reasons that to preemptively answer anything Jordan Williams or other right-wing commentators might say. The problem isn’t that middle income earners with kids pay too much tax in absolute terms. It’s that we pay too much tax relative to the total tax take, which is itself too low to support the social spending needed to pay for the policies that would help us – most notably, an extension of paid parental leave and an extension of early childcare subsidies. A principled and comprehensive capital gains tax is part of the picture, as is a tax on higher incomes. It’s ludicrous that a young doctor or engineer or lawyer on $70,000 with a student loan pays out 30% of their income as deductions (excluding KiwiSaver!), while that same person ten years down the track earning $150,000 and having paid off the student debt will pay only 27% effective tax. If retaining a universal pension is a financial strain on the government books and reduces the amount available for other spending, and a large proportion of the people receiving superannuation are asset-rich but cash poor, an obvious tool is the reintroduction of an estate duty (or inheritance tax). This is a debate we need to have.
Retirees do relatively well in New Zealand not only because of the pension, but because of their high rates of home ownership. This protects them from the effects of rising housing costs. In contrast, people who are just getting started in adult life have no choice but to rent while we save a house deposit, and in many areas of the country rents are high, and rental property standards are low, and tenancies are insecure, while the prospect of buying in the cities is a distant dream for anyone on a low-to-moderate income. It’s ludicrous that my husband and I pay tax on the interest earned from our home-deposit savings in the bank, while capital gains on properties go tax-free.
So if you’re reading this and you’re a baby boomer and you’re banking on the government pension to fund a comfortable enough retirement, you need to be aware of the situation that’s going on right now for young people, especially those of us with children. We’re working long hours and paying phenomenally high housing costs (whether rent or mortgage), and we’re the future of the tax base. Us and our children. Not to put too fine a point on it, but if you care about the long term sustainability of superannuation, you need to care about the extent to which the social contract is supporting the people whose taxes are going to pay for it when you need it. I don’t say this to pit generation against generation, or from a point of antagonism. Quite the opposite. Those of us who are facing a stage of life where we need extra support need to recognise each other and work together.
Magnanimity, no matter how pure hearted, is not a sustainable basis for a social welfare state. The only sustainable basis is mutual interdependence – stemming from the knowledge that we are in the same boat. We need to pull together. Are you with us?