Presentation to Queens Policy ConferenceHigh 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

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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…….

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 theworking-age population

Public socialexpenditure

TotalCASH

TotalSERVICES

Sweden (31.3) 8.0 31.3 16.1 13.9France (28.7) 6.2 28.7 18.2 9.5Germany (27.6) 4.8 27.6 16.3 10.2Denmark (27.6) 9.5 27.6 14.8 11.2Belgium (26.5) 7.3 26.5 16.4 8.8Austria (26.1) 6.1 26.1 18.9 6.5Norway (25.1) 7.8 25.1 13.1 11.2Italy (24.2) 2.8 24.2 16.5 7.0Portugal (23.5) 4.5 23.5 14.7 8.1Poland (22.9) 5.2 22.9 17.6 5.1Hungary (22.7) 5.8 22.7 13.8 8.5Finland (22.5) 7.0 22.5 12.5 9.1Luxembourg (22.2) 7.8 22.2 14.2 7.8Greece (21.3) 2.2 21.3 14.5 6.6Czech Rep. (21.1) 5.0 21.1 12.6 8.4Netherlands (20.7) 6.8 20.7 11.9 7.7OECD-30 (20.7) 5.0 20.7 12.1 8.0Switzerland (20.5) 5.1 20.5 12.0 7.8Spain (20.3) 5.1 20.3 13.3 6.3United Kingdom (20.1) 5.6 20.1 11.2 8.5Iceland (18.7) 4.4 18.7 6.8 11.8New Zealand (18) 6.2 18.0 10.7 6.9Australia (17.9) 5.3 17.9 8.8 8.7Japan (17.7) 1.5 17.7 9.7 7.7Slovak Rep. (17.3) 4.4 17.3 10.8 6.2

Canada (17.3) 3.0 17.3 7.4 9.5United States (16.2) 2.2 16.2 8.4 7.7Ireland (15.9) 5.6 15.9 9.0 6.3Turkey (13.2) 2.6 13.2 8.9 4.1Mexico (6.8) 0.6 6.8 1.9 4.9Korea (5.7) 0.9 5.7 2.3 3.3

CANADA: INCOME SECURITY EXPENDITURES BY PROGRAM 2005-06

($112.7 B est)

OAS/GIS/Allowance27%

CPP/QPP29%

CCTB8%

GST Credit3%

EI11%

Veterans1%

Social Assistance10%

Workers Compensation6%

Property/Sales Tax Credits, Rental Assistance

3%

Other2%

CANADA: INCOME SECURITY SPENDING BY TARGET RECIPIENT CANADA 2005-06

($112.7 B est)

Seniors47%

Children11%

Disabled16%

EI recipients11%

Social Assistance recipients4%

Other11%

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Income Security is Primarily Under Federal ControlOntario Example

By Order Of Government2

10%

Percent of Income Security Program Spending in Ontario in 2005/06($41.5 Billion1,2 = 100%)

Federal

Prov.

Munic.

80%

18%

2%

(1) Doesn’t include the Canada Social Transfer from the Federal government to Ontario(2) 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.

99

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.

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 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

o 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……

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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.

2020

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.

2121

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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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 non-necessities

“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

The Importance of a Different Lens

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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.