Instead of encouraging people to work, however, the benefits systemfails to provide many with meaningful financial reward for low-paidjobs.
The way in which benefit payments are reduced as earnings increasecreates an effective tax rate for low earners that often exceeds 75 percent, and is sometimes 90 per cent or more.
Consider the example of an unemployed single mother on benefits. If shemoves into a part-time minimum-wage job earning 80 per week, herbenefit would be reduced by 60 for a net gain of 20 -little more than 1 per hour. And this is before any additionaltravel or childcare costs associated with working. Not working is oftenthe most sensible financial choice for her.
Last month, the Centre for Social Justice published the report DynamicBenefits. Under its proposals, low earners will get to keep theirbenefits until they are earning higher wages, and then they will bereduced more gradually as earnings rise. People will also know that theyhave the safety net of the benefit, still being paid, should things notwork out. Because of the greater incentive, the report predicts that600,000 households who are currently without work would enteremployment, and more than 800,000 would move out of poverty. While thereis an upfront cost of 2.7 billion in the short term, lower levelsof unemployment would mean lower costs dealing with crime and health,and the simpler system would reduce fraud.
By focusing on making work pay rather than just giving people morebenefit money, the proposals will help people to help themselves.
- Dr Brien is a partner at management consulting firm Oliver Wyman, andauthor of Dynamic Benefits. For information or for copies of the report,visit www.centreforsocialjustice.org.uk.
