Presentation to Queens Policy Conference
High marginal effective tax rates, intersecting rules,
and how they affect Low income Adults
Based on Metcalf Foundation Study: Why is it so tough to get ahead?
How our tangled social programs pathologize the transition to self-reliance
August 2008
Growth in Number of Working Age Adults in
39 Richest OECD Countries (Source: OECD)
1950 - 2000: 76%
2000 - 2050: 4% (projected)
This one fact changes everything…….
2
Presentation
Overview: Programs, People and Expenditures
Metcalf Foundation Study: “Why is it so tough to get
ahead?”
 The Story of Ali
 Issue 1: High Marginal Effective Tax Rates
 Issue 2: Navigating the Maze
 Issue 3: The false imposition of adulthood
 Issue 4: The failure of welfare solutions
 Further recommendations for reform
Canada Ranks 25th of 30 OECD Countries in Social Spending on Working Age Population
Income support to the
working-age population
Public social
expenditure
Total
CASH
Total
SERVI CES
Sweden (31.3)
France (28.7)
Germany (27.6)
Denmark (27.6)
Belgium (26.5)
Aust ria (26.1)
Norway (25.1)
Italy (24.2)
Portugal (23.5)
Poland (22.9)
Hungary (22.7)
Finland (22.5)
Luxembourg (22.2)
Greece (21.3)
Czech Rep. (21.1)
Netherlands (20.7)
O EC D-30 (20.7)
Swit zerland (20.5)
Spain (20.3)
United Kingdom (20.1)
Iceland (18.7)
New Zealand (18)
Aust ralia (17.9)
Japan (17.7)
Slovak Rep. (17.3)
8.0
6.2
4.8
9.5
7.3
6.1
7.8
2.8
4.5
5.2
5.8
7.0
7.8
2.2
5.0
6.8
5.0
5.1
5.1
5.6
4.4
6.2
5.3
1.5
4.4
31.3
28.7
27.6
27.6
26.5
26.1
25.1
24.2
23.5
22.9
22.7
22.5
22.2
21.3
21.1
20.7
20.7
20.5
20.3
20.1
18.7
18.0
17.9
17.7
17.3
16.1
18.2
16.3
14.8
16.4
18.9
13.1
16.5
14.7
17.6
13.8
12.5
14.2
14.5
12.6
11.9
12.1
12.0
13.3
11.2
6.8
10.7
8.8
9.7
10.8
13.9
9.5
10.2
11.2
8.8
6.5
11.2
7.0
8.1
5.1
8.5
9.1
7.8
6.6
8.4
7.7
8.0
7.8
6.3
8.5
11.8
6.9
8.7
7.7
6.2
Canada (17.3)
3.0
17.3
7.4
9.5
United St ates (16.2)
Ireland (15.9)
T urkey (13.2)
Mexico (6.8)
Korea (5.7)
2.2
5.6
2.6
0.6
0.9
16.2
15.9
13.2
6.8
5.7
8.4
9.0
8.9
1.9
2.3
7.7
6.3
4.1
4.9
3.3
CANADA: INCOME SECURITY EXPENDITURES BY PROGRAM
2005-06
($112.7 B est)
Property/Sales Tax Credits,
Rental Assistance
3%
Workers Compensation
6%
Other
2%
OAS/GIS/Allowance
27%
Social Assistance
10%
Veterans
1%
EI
11%
GST Credit
3%
CCTB
8%
CPP/QPP
29%
CANADA: INCOME SECURITY SPENDING BY TARGET RECIPIENT
CANADA 2005-06
($112.7 B est)
Other
11%
Social Assistance recipients
4%
EI recipients
11%
Seniors
47%
Disabled
16%
Children
11%
Income Security is Primarily Under Federal Control
Ontario Example
Percent of Income Security Program Spending in Ontario in 2005/06
($41.5 Billion1,2 = 100%)
Munic.
Prov.
2%
10%
18%
By Order Of Government2
80%
Federal
(1)
(2)
Doesn’t include the Canada Social Transfer from the Federal government to Ontario
Includes contributory programs (EI-and Workers’ Compensation)
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Metcalf Foundation Study
Approached Three Communities in Toronto…..
• Somali community in North Rexdale – poverty enclave.
• Chinese-Vietnamese community in Downsview – poverty
enclave.
• St. Christopher House Community Reference Group
• Gentrifying community
• Most receiving OW or ODSP, live in subsidized housing,
many aged out of Child Welfare system or lived in refugee
camps abroad.
• Discover their problems in their words – translate their
words into policy-ready recommendations.
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Report comes out of Modernizing Income Security
for Working-Age Adults
Original Issue presented as a barrier:
•
Discovery that young adults in subsidized housing are discouraged by
parents to enrol in work-study courses as “their income would go down”.
•
True story: 18+ students considered to be ‘dependent adults’. If they go
from full time to part time, their part time earnings deducted at 50% from
parents’ ODSP or OW income – also can result in rent increases.
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The Story of Ali – A Closer Look
o
Ali lived in subsidized housing with parents receiving Ontario social assistance –
father a person with disabilities
o
Takes part time job at age 17 ($600 net per month) – no income recovery except EI,
CPP
o
Turns 18:
o
o
Accepted to University – applies for student aid (OSAP)
o
Parents lose child benefits ($150 or so)
o
$300 (50%) of his net earnings deducted from parents social assistance
o
Subsidized rent increases by $75 (METR now at 70%)
o
Student Aid (OSAP) assesses student based on gross earnings
Loss leads to choice to move out of the parental home as ‘couch rider’
o
Away from home, can only attend university part time
o
Student aid declines with part time status
Ali’s case: A closer look
o
Parents social assistance rises by $300 and rent reduces by $75 a month
o
Ali now “unknown to the system” and cannot reveal that he lives in a friend’s
apartment or rent would go up, public assistance down just like living with parents
o
Ali learns of work/study program available to young adults living in subsidized
housing – must turn it down or reveal himself to the system.
o
Couch riding not conducive to studies – quits university in favour of saving for
studies to be undertaken later on
o
Six Months later:
o
Ali gets notice to repay his student aid at prevailing interest rates
o
Parents get notice of eviction as Ali moving out results in them being judged to
be overhoused
o
Ali quits job – moves back in with parents; apartment reinstated; can’t pay student
aid, defaults, loses credit cards and credit rating
o
Ali begins again……
Issue 1: High Marginal Effective Tax Rates (METRs)
METRs are caused by the way government departments are organized and by the
METRs themselves.
Social Assistance recovers
50%
(starts at first dollar)
Subsidized housing charges 15 to 30%
(starts at first dollar)
EI
1.4%
(starts at first dollar)
CPP
4.95% (starts at $4500)
Lowest Federal Tax Rate
15%
(starts at $9600)
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Issue: The Current Process - confusing, difficult and
conflicting
•
Undocumented program interaction (e.g., overall result of earnings on welfare and
housing).
•
Unavailability of program rules (e.g., OSAP).
•
Collection of information that is not used for any purpose (e.g. Housing insists on
reporting of Child Benefits yet not counted in rent).
•
‘Shock & Awe’ notifications for minor infractions (e.g., ‘termination’ and
‘eviction’ notices in OW and housing).
•
Byzantine sets of rules: (e.g., Toronto Community Housing Corporation, 213 page
manual on calculation of rents geared to income).
http://www.toronto.ca/housing/social_housing/rgi/rgi-guide-july2005revision.pdf
•
‘Immediate’ terminations and reductions followed by ‘glacial’ period for
reinstatement of benefits.
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Recommendation: METRs
Reduce METRs
Ensure that combined, METRs do not
exceed 75% of net earned income.
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Recommendation: A TIME OUT
We can't "solve" high METRs, but
we can take a "time out" at crucial
times to allow young people to
break the cycle of poverty.
e.g. Suspend rent increases and OW
payment reductions.
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Issue 2: More Than One Maze to Navigate
“Navigating the maze” is a common expression
For low income people:
The mazes are larger and there are
many more to navigate.
Navigation advice is non-existent or
poor.
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Recommendation: Government Structure
Create a government ‘responsibility centre’
- i.e. A permanent Cabinet Committee not unlike
the Cabinet Committee on poverty
- Supported by Deputies and Directors
Responsibility Centre
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Recommendation: Government Structure
Through a Responsibility Centre, share and pool data.
The Responsibility Centre should consult with civil society,
agencies, and activists questioning the “business model” of
governance.
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Recommendation: Improve Service Navigation for Clients
Create transition-friendly programs that strive towards common
definitions.
Improve the quality of advice on program interactions.
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Issue 3: Children in Their Transition to Adulthood
An underclass is ‘second generation poverty’.
As children become adults, programs produce upheaval, thwarting
efforts to break the cycle.
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Underclass and the Myth of Adulthood
At 18, children are independent.
This myth has been rejected
by every reasonable parent living
in Canada.
Governments often enforce
adulthood at age 18.
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Recommendation: Support Children
in Their Transition to Adulthood
Redefine adulthood: Don’t take on adult status while in post-secondary education, up to age
24.
Suspend rental increases where student income is included in the calculation including:
•
Any non-government funded scholarship, award, or grant from a recognized
educational institution; and
•
Any award, scholarship or grant received from a non-government group (such as a
Children’s Aid Society, charitable organization, or company).
Stop collecting information on student assistance from government sources.
Clear up misunderstandings about receiving OSAP resulting in rent penalties.
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Issue 4: Policy and Welfare
People should only access the
mainstream after they have left
welfare - the logic of "making the
leap".
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How society views welfare
Welfare will continue to
erode to inflation, because
the system rejects many
of society’s fundamental
values.
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The Importance of a Different Lens
Behaviour
“Welfare cheat” lens
Achieving self-sufficiency lens
Acquiring a spouse
“She’s got a boyfriend”
Forming a viable economic and family
unit to escape poverty
Help from family
“Getting illicit money”
Reinforces role of families helping their
own members – helping build a base to
escape poverty
Having a bank account
– being seen in a bank
“Hiding money from the system”
Returning to normalcy – building assets
– demonstrating money management
skills – building a base to escape poverty
Getting a job
“Working and not reporting it working under the table”
The first major building block in
becoming self-sufficient and returning to
normalcy and self-sufficiency
Spending on nonnecessities
“How can they afford that if they
are supposed to be poor?”
Returning to normalcy – taking
responsibility for a household budget –
making choices for better or worse –
weighing risk and responsibility
consistent with adult behaviour
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Other Policy Recommendations
Short term
Raise assets limits for all social assistance recipients with an approved employment plan
for the purpose of financing sustained employment.
Stabilize households in transition to greater self reliance.
Establish a transition planning system among Ministries.
Grant a 1 year renewable moratorium on rent increases, OW reductions, losses in child
care subsidies and student assistance.
Longer term
Raise asset levels for OW recipients to $5500 single and $9000 for families. Use the TFSA vehicle
to help
Devise a public education initiative to resolve misperceptions.
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