Conclusions and Directions of Change

Labour market and poverty alleviation objectives pull in opposite directions where policy on social welfare payment rates is concerned. On the one hand, people in receipt of social welfare may not take jobs that are offered them, though they would be good for their well-being and their futures, if the payment rates of social welfare and receipt of secondary benefits make household out-of-work incomes comparable to what they would be if people took jobs. The decision may be that ‘work does not pay’ and that a lifestyle, not high but with a degree of security attached to it, based on welfare receipt is preferable to one built around a job that may not last. On the other hand, reductions in social welfare can undermine already low living standards, increase poverty and indebtedness with their attendant (and fiscally costly) ills, lead to a growing focus on procuring additional temporary sources of income rather than a steady job, contribute significantly to severe stress and deteriorating health, and lead inexorably to lower employability. Aside from these potentially harsh impacts on individual recipients, reductions in welfare rates can have macro-level effects in reducing domestic demand, widening income inequality and undermining social cohesion generally.

Socialwelfarerates

These payments have major objectives in alleviating hardship. A generalised reduction in social welfare rates has immediate and negative consequences for the purchasing power and living standards of a much larger number of people than are ‘incentivised’ to make the transition from welfare to work because of it. As an activation measure, therefore, lowering social welfare rates is a blunt instrument. Social welfare payments, since the recession started, have had to be reduced for straightforward affordability reasons. Their payment rates had improved significantly during the years of strong revenue buoyancy occasioned by unsustainably high levels of domestic demand. The level of tax revenue estimated for 2011 is similar to what government received in 2003 when the unemployment rate was below 5 per cent, the monthly LR number averaged 172,400 and the maximum personal rate of JA was €124.80 weekly. Whether a further contribution

to meeting the social welfare savings in 2012–14 that are an integral part of the country’s rescue plan must come from lowering (some) rates remains to be seen. If current payment levels of all social welfare can be sustained, it will be a major achievement and reflect strong solidarity at the national level with social welfare recipients.

Disincentiveeffects

The payment rates of social welfare (along with other factors) impact on the level of replacement rates and concerns are consistently expressed in Ireland that replacement rates are high for a significant number of the unemployed and that they, therefore, constitute a disincentive to leave welfare for work.

‘nominal’ replacement rates (calculated on the basis of ‘representative’ individuals and without taking the impact of means-testing into account) and ‘actual’ replacement rates (what individuals actually receive in social welfare after their household means have been assessed); (ii) the distinction between replacement rates faced by people with dependent spouses and children and faced by single people or people with spouses who are earning; and (iii) the distinction between replacement rates faced by people who have been continuously on the LR for twelve months or longer and faced by people in the first months of their unemployment spells. Depending on which are being examined, Ireland’s replacement rates can be described as high or low.

The amount of social welfare paid to people reflects their particular circumstances to a significant degree (because of increases for qualified dependants, household means-testing and eligibility for secondary benefits). In some circumstances, high cumulative social welfare payments result and replacement rates are correspondingly high. But it is important to establish the proportions of the unemployed who are in the circumstances that bring them high welfare payments and lead to high replacement rates.

The circumstances in which social welfare payments are at their highest in Ireland apply to only minorities of the unemployed. The large majority of claimants on the LR, in fact, face replacement rates that are low. This is because the large majority of claimants are either single people or have spouses/partners still in employment whose earnings are taken into account in household means-testing to reduce the amounts of social welfare paid. Concerns that receipt of secondary payments and of housing supplements in particular raise replacement rates to high levels, for example, apply to only small proportions of those on the LR.

Concerns that social welfare is having disincentive effects may have a stronger basis in what can happen as people who are combining receipt of a social welfare payment with low-paid, part-time work attempt to earn more. Ireland’s social welfare code has developed to allow people on the LR (and those in receipt of other working- age payments, e.g., lone parents) to engage in part-time work while retaining some or all of their social welfare payments. The withdrawal of these payments as their earnings increase, along with higher taxes they must pay, may lead some people to decide it is not worth their while to work additional hours (a classic ‘poverty trap’).

Activation

Where replacement rates are high (the nearly 59,000 individuals or 18 per cent of all LR claimants receiving payments in July 2010 that were augmented by full increases for dependants remain a significant group), ‘activation’ measures (Chapter 7) are more effective – and less counterproductive – than generalised reductions in welfare rates in fostering transitions to employment. Some countries successfully combine high replacement rates with low unemployment, low long-term unemployment and low claimant counts because they have vigorous and effective activation measures. The disincentive effects of high replacement rates, therefore, cannot be considered in isolation from the rules and conditions governing the eligibility for unemployment payments and how they are enforced. Key features of social welfare codes and their administration mediate the potential disincentive effects of their payment levels.105 _{The best way to sustain and protect}

what are good payment levels of long-term social assistance in Ireland for people in certain circumstances is to intensify and improve activation policies.

The ongoing need to find savings in social welfare spending on the part of a state whose circumstances have changed utterly in a relatively short space of time should not be confused with the search for improved activation measures, a longer- standing challenge for Ireland’s welfare state. Effective activation (it will be seen) includes transparent and fair forms of conditionality and recourse to sanctions (lower payments for a period or their temporary suspension); the latter, however, entail ‘surgical’ reductions in welfare payments, not generalised ones.

105 ‘In the Danish case, the potential disincentives deriving from high income replacement rates are addressed by requiring the unemployed to be actively seeking jobs and by [having] mandatory full-time activation after 12 months of unemployment for adults and after 6 months for persons under the age of 25’ (Madsen, 2007: 71).

Single NMW 67% AIE AIE 150% AIE 200% AIE

Gross 17542.2 22534.51 33633.6 50450.4 67267.2 Weekly 337.35 433.36 646.80 970.20 1293.60 Tax 0.00 16.29 58.98 180.40 312.99 Income Levy 6.75 8.67 12.94 19.40 25.87 PRSI 0.00 12.25 46.66 72.54 98.41 Net weekly €330.60 €396.15 €528.22 €697.86 €856.33 LTUA 196.00 196.00 196.00 196.00 196.00 Fuel Allowance 12.31 12.31 12.31 12.31 12.31 Smokeless 2.40 2.40 2.40 2.40 2.40

Net weekly value €210.71 €210.71 €210.71 €210.71 €210.71

R/R 63.73% 53.19% 39.89% 30.19% 24.61%

Couple (one earner) NMW 67% AIE AIE 150% AIE 200% AIE

Gross 17542.2 22534.51 33633.6 50450.4 67267.2 Weekly 337.35 433.36 646.80 970.20 1293.60 Tax 0.00 0.00 23.78 108.86 241.45 Income Levy 6.75 8.67 12.94 19.40 25.87 PRSI 0.00 12.25 46.66 72.54 98.41 Spouse JA 159.7 109.4 2.0 0.0 0.0 Net weekly €490.29 €521.87 €565.44 €769.40 €927.87 LTUA 326.10 326.10 326.10 326.10 326.10 Fuel Allowance 12.31 12.31 12.31 12.31 12.31 Smokeless 2.40 2.40 2.40 2.40 2.40

Net weekly value €340.81 €340.81 €340.81 €340.81 €340.81

R/R 69.51% 65.30% 60.27% 44.30% 36.73%

Appendix5.1

Computation of Family Disposable Income in Work and Family