February 13, 2014
As benefit creep meets wage shrink, what's the point in anyone working?Posted in Behavioural Economics · 46 comments ·
This day last week a letter posted in Connacht came into the Irish Independent addressed to me. Its contents were disturbing. It describes the “new poor”– people with good jobs in our country who can’t make ends meet and who are advised by people working for the State that they’d be better off working part-time and taking benefits. I will transcribe it for you.
I think you may be interested in my story. I am a stay-at-home mother with six children and my husband is a PAYE public sector worker earning a salary of €88,000.
Yesterday, after having forked out €100 to the GP to see two of the children on two separate occasions, I went to the Citizens Advice Bureau to enquire about a GP card only to be told that not only are we eligible for one but that we are also entitled to Family Income Support.
The adviser looked at me in the eye and told me directly: “You people are the new poor.”
He told me that it is costing my husband to go to work. To my shock he then asked me whether my husband could go on a three-day-week so that he could claim the other two days and be just as well off and hence get grants for our two children to go to college. He was most helpful and also informed me that if we were ever stuck for a few bob we could always “touch” the SVP (St Vincent de Paul).
I have to say I left the meeting feeling like I wanted to emigrate!
The letter went on to say that her husband was extremely well educated and so was she. She was so shocked because, as she said herself, she thought he had a “good job” and here was someone working for the Department of Social Welfare advising him to skive off in order to be better off.
This is an extraordinary place to arrive at for a country, where the hardworking are told to slacken up and not only would they not suffer, but they’d be actually better off.
This letter could have come from many thousands of people all over the country. Take what appears to be a good wage, indeed a very good wage, then throw in 46pc income tax with all the deductions at source, including things like VHI, then what’s left goes to childcare, commuting, mortgages and the everyday bills that everyone, or at least working people with kids, have to pay. There is very little left at the end of the month.
Now imagine that we have constructed a system whereby the individual worker knows that he or she would be better off working Monday to Wednesday and taking Thursday and Friday off, claiming benefits and giving the welfare cash to their kids.
Yet this is the system we have created. It is not that people are bad or lazy, they are just responding to the incentives they see in front of them. If you give people incentives to behave in a certain way and they do, who is to blame – the people or the architects of the system?
But what if there are no architects? What if bits have been added on to the structure here and there on the whim of some political expedience or other? Think about constructing a building where there was no overall plan, but one piece of contradictory engineering layered over another bit and we went on like that all the time marvelling at how the thing stood up at all, until one day it fell down.
The nexus where the Irish PAYE system meets the Irish welfare system is not too dissimilar. Years of politicians paying off each constituency in the Noughties with the “rented” proceeds of a transient credit boom has left us with a mishmash of good intentions, promises which can’t be rolled back electorally and a country that can’t pay its way as we rob Peter to pay Paul and hope some foreigner will lend us the shortfall.
This leads to a perversion in the way the economy works because every good intention needs to be paid for and this implies raising taxes on someone or something.
This leads to what could be called “benefit creep” as the cut-off point for qualifying for a benefit creeps up to meet the falling disposable income which equally, could be called “wage shrink”, as income taxes rise. In time, these both meet and a woman goes to a Citizens Advice Bureau and finds out, to her shock, that her hard-working husband might be better off on a three-day week.
This kicks off a conversation in the kitchen, when the children are in bed, one of those “what is it all for/who is the bigger fool?” conversations which thousands of ordinary people have every night when they are not anaesthetised by the latest box set, the Champions League, a bottle of Blossom Hill or the weather.
Once these conversations start, it is very hard to stop them – unless of course you suppress them.
Last year, a paper written by the ESRI, the Government-funded think tank, was rapidly withdrawn with Orwellian haste when it claimed that: “The cost of working in Ireland is around €140 per week, or €7,000 annually, for people without children – which increases to €9,000 per year for a family with children.”
The report suggested that around 15pc of people without children and 44pc of people with children would be better off not working given the costs involved with working including transport, childcare costs (which are among the most expensive in Europe) and clothing.
It was withdrawn immediately, God knows why, your guess is a good as mine. Maybe because it dared to say what many other ordinary citizens have the cop-on to know.
At a certain point, the marriage of benefit creep and wage shrink produces an unholy matrimony where people wonder what’s the point of working.
The only solution is divorce. Either benefits go one way and wages the other or the union is doomed to failure. The choice over which way to go is the biggest political choice of the next few years.
David McWilliams writes daily on international economics and finance at www.globalmacro360.com