Two weeks ago, we showed how wage rises matching the inflation rate actually mean real take-home pay packets go backwards. I made a mistake in keeping my example simple – the real world is much worse than reported.
At the most simplistic level, a single person on about the median wage in 2013 needed a 20 per cent bigger wage rise than the CPI to have the same take-home buying power today. The erosion of buying power has been steadily worsening as real gross wages have flatlined.
But the workforce does not consist purely of single people receiving minimal, if any, social security or tax concessions from the government.
In the real world, the interaction of the tax and transfer systems (most obviously, family tax benefits) has sharply reduced spending power.
For example, five years ago, a single parent with two children aged eight and 10 earning $55,000 a year would have needed $5000 in pay rises to keep their gross wage up with where the CPI is today. But to have the same take-home spending power, the wage rise since 2013 would have to be $10,000 – double the CPI amount.
The understatement of the fall in spending power in the earlier article was graphically demonstrated to me by David Plunkett, a former Department of Social Security policy analyst.
The first of the accompanying graphs show the difference between CPI and after-tax wages rises since 2013 for a single person across income bands up to $200,000.
The second, much more dramatic, graph shows the difference for the single parent with two children.
No wonder retail sales are flaccid after years of real disposable income going backwards, sometimes dramatically.
Nearly all discussion about our weak wages growth ignores the tax and transfer system impact. The RBA acknowledges the flat-lining of gross real wages, but seems to find the tax and transfer system interaction all too hard – or depressing.
High marginal tax rates for people coming off social security are noted frequently enough, but rarely combined with the requirement for wage rises to make up for it.
Mr Plunkett cites the example of the change in disposable income that occurs for sole parents on parenting payment when their youngest child turns eight.
“They then (usually) transfer to Newstart allowance, which is lower and taxed differently,” he wrote.
“The reduction in income is regularly complained about, but what I find particularly interesting but not discussed/realised is how much extra they need to earn to return their disposable income to its pre-transfer value.
“For example, if the sole parent was working part-time earning $15,000 a year, they lose around $5800 on transfer. But to get back that $5800, they need to earn an additional $13,300! It’s a consequence of the high effective marginal tax rates they face when increasing earnings.”
This long-term proposed income tax changes in this year’s federal budget mainly look to address some of the erosion of spending power for those at the top quartile, yet the highest effective marginal tax rates occur at the other end of the scale.
p.s. David Plunkett carefully notes a wonkish but genuine caveat that the example with the two children isn’t quite comparing like-with-like as the children grow older, impacting on transfer levels. Rather, it shows the gap for a “new entrant” on that pay level and in the same circumstance.