The Rankin File: #4

What is it?

The prize for the most complicated benefit ever implemented must surely go to the Accommodation Supplement (AS), which was introduced in New Zealand in 1993 to replace the former system of public housing assistance based on income­related rents.

The AS is payable to both beneficiaries and fulltime workers, but not to students or part­time workers. (Students who have been students for more than 5 years find the New Zealand income support system a particularly difficult nightmare, while part­time workers can usually only gain supplementary assistance if they claim a primary benefit in addition to their part­time work.)

The AS paid to beneficiaries is virtually a different benefit from that paid to wage and salary earners. It is paid as if it is a part of the main benefit, so that many beneficiaries do not even realise they are receiving an AS as a separate benefit.

When beneficiaries find a job and come off the benefit, more often than not they are still eligible for an AS. Furthermore, their AS records are eliminated from the Department of Social Welfare computer. Thus a full reapplication must be processed, when the former beneficiary realises that they are entitled to a workers' AS. The reinstated AS cannot be backdated; it is paid from the date that the applicant contacts the New Zealand Income Support Service to apply for an AS.

For a beneficiary, the AS is reduced by 25 cents in the dollar of all earnings from zero to 80 dollars per week. At higher levels of earnings, there is no further reduction in the beneficiaries' AS.

For a wage worker, the maximum AS payable is determined by family type; ie whether single, couple, or family with children. The AS is also abated in accordance with income (effectively adding 25% to the recipient's tax rate on additional income) and with "cash assets" (with 25 cents deducted from the annual AS payment for every dollar of savings in excess of $2,700 for individuals and $5,400 for families).

For both beneficiaries and workers, the maximum AS payable is limited in accordance with location. There are three regions: "Auckland", which includes Great Barrier Island; "Wellington", which includes Palmerston North and Hamilton, and "Other".

Anomalies

The following list of anomalies that apply to the workers' AS should not be regarded as exhaustive:

1. In combination with ordinary taxation and Family Support tax credits, a family with an income between $20,000 and $34,000 receiving an AS can expect to keep at best 33 percent of additional gross earnings. (This means that they have an "effective marginal tax rate" [EMTR] of at least 67%.)
2. For moderately valued properties, there is no difference in the AS payable, no matter where in New Zealand the recipient lives. Thus a family earning $400 per week, with 1 child, and paying rent of $180 per week, will get an AS of $61.72, wherever in New Zealand they live. Such an Auckland family paying $180 per week is likely to be in a much lower standard of accommodation than a similar family in, say, Wanganui.
3. When a first child is born, the amount of AS payable typically falls. This is not always the case because the maximum AS rises when a first child is born. Considering the same family but without children, their AS would be $52.32 if they live in Wanganui, and $70.12 if they live in Wellington or Auckland. Thus the family, if they live in Wellington, have their AS cut by $8.40 per week when they have their first child.

Recommendations

The presently structured AS is biased towards the interests of landlords and banks - especially Auckland landlords - in two ways. As the rent or mortgage is increased, the AS pays 70% of the extra rent or mortgage. Thus, a $50 per week rent increase typically means a $50 increase to the landlord, but only a $15 increase on the part of the tenant receiving an AS. Thus the incentive towards raised rents and mortgages is very strong, and the market forces resisting such increases are comparatively weak.

The ideal solution, I believe, is a universal benefit structure, combined with a higher rate of income tax. Even then, in the absence of a full universal basic income (which would require a flat tax rate of over 45%), there would still need to be specific assistance for the housing requirements of low income recipients.

Tim Hume - newsgroup "nz.politics" (18 September, in response to my own contribution) - suggests that the AS should be payable only with respect to private sector housing, and that state houses should be charged at income­related rents. I agree, but I think that the AS for private sector housing assistance should be simpler and better integrated with other forms of supplementary income support.

A range of public housing options - involving a partnership between central and local government (and including such options as "sweat equity") - is needed to "anchor" the housing market. By this I mean that public housing would effectively compete with private housing. When the average rents in the private rental market grow raster than the income­based rents in the public housing sector, then there will be an increased demand for public housing and a diminished demand for private housing. Empty homes in the private sector will limit voracious landlords more than any form of moral suasion.

New Zealand successfully tried this approach in, for example, the insurance industry in the 1890s and 1900s. With the introduction of State Fire Insurance and Government Life, the Government was able to "anchor" the market for insurance, thereby eliminating the huge economic rents gained by the private suppliers. The private insurance companies had to keep their charges down in order to retain their customers.

The contrast between State Insurance in its early days and Housing New Zealand today couldn't be more striking. Housing New Zealand has in fact become one of the greedier landlords, swallowing up Accommodation Supplements as its main source of profit. Housing New Zealand acts as a vehicle that recycles Accommodation Supplements while ratcheting up the private housing costs of low income families. The solution is to regulate the private housing market through competition from a genuine welfare­maximising rather than a profit­maximising public alternative.

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