A skewed tax and transfer system actively penalises women for choosing to have children. Here are some essential changes.
A catastrophic slump in the nation’s fertility rate revealed by the Australian Bureau of Statistics last month should provoke the resumption of debate about how to secure the economic future of an ageing population.
Former treasurer Peter Costello made many important contributions to economic understanding and policy. Among them was the Charter of Budget Honesty that included a legislated commitment to release an intergenerational report every five years or so.
The fifth intergenerational report, released in the middle of last year, continued the warnings set out in the previous four – that the ageing of Australia’s population presents a daunting challenge to Australia’s future prosperity.
In 1975 the number of workers generating the incomes and paying the taxes to support each retiree was 7.3. In 1982 it was 6.6 workers. Now it’s down to four. The latest intergenerational report projects the number to fall to just 2.7 workers in 40 years’ time.
If overall living standards are to continue rising in an ageing population, Australia needs to increase one or both of the other two Ps: productivity and participation.
Since the turn of the century Australia hasn’t been performing well in the productivity stakes https://www.afr.com/policy/economy/lh-13-dec-20211212-p59gxg and there is no comprehensive plan to lift it.
If productivity were to remain the slow horse in the prosperity stakes, all the running would need to be taken up by workforce participation.
But here, too, Australia’s prospects are poor.
Last month’s data on births and fertility reveals that, on average, Australian women were having 1.58 babies each in 2020, the lowest rate on record.
And remember, this slump in fertility is based on decisions that couples made in the year before the pandemic struck.
To put that number in perspective, the fertility rate needed to replace the mother and her partner is 2.1 babies per woman. We are way below the replacement rate and far below peak fertility of 3.5 babies per woman in the early 1960s and 2.0 babies toward the end of the 2000s.
Without immigration Australia’s population will shrink.
This long-term fall in the fertility rate and the associated increase in the age dependency ratio attests to the wisdom of the Keating government’s compulsory superannuation system.
Without it, Australian workers would face a crushing tax burden to fund the age pension for those retirees who were unable or unwilling to provide for their retirement through their own savings.
And these retirees, being such a large cohort of the Australian voting population –
more than a quarter by 2060 – would successfully demand a much higher age pension.
If the precipitous fall in fertility were purely a matter of lifestyle choice, with women desiring to stay at home to bear and rear children, then in a free society that would be a matter for them and their partners.
But there is compelling evidence that many women are deciding to have fewer babies based on the costs and penalties they face in raising families.
When a mother returns to work after having babies, she faces four financial penalties: personal income tax; a reduction in both family payments and child care subsidy; and out-of-pocket child care expenses.
When these four costs are considered, mothers can lose 75 cents in every extra dollar they earn, or all of it, or even take their household budget backwards.
Better-off blokes often complain that they lose 47 cents in the extra dollars they earn above $180,000 per annum.
Yet working mothers up and down the income scale can lose more than double that.
In Labor leader Anthony Albanese’s 2020 budget reply he announced a fundamental revamp of the child care subsidy to give women much greater incentive to increase their hours of work after having babies.
In response, the Morrison government made some changes to the child care subsidy in its 2021 budget that were largely restricted to mothers with two or more children under the age of six in care.
Parliamentary Budget Office analysis has found that 86 per cent of families are better off under Labor’s reform and a further 6 per cent fare the same under both parties’ policies.
In addition to lifting the second P – participation – government policy that reduces workforce disincentives for women can increase the third P – productivity.
Australia’s tax and income support system sends contradictory signals to women. It encourages them into tertiary education by subsidising its cost, but then penalises them much more heavily than men for seeking a career in the paid workforce.
In 2020, 72 per cent of women in the 25-29 age group had attained a tertiary qualification of Certificate III or above, substantially greater than the 65 per cent of men in that age group.
More than 58 per cent of university students are women, vastly outnumbering men.
Yet the system then discriminates against women for trying to get ahead in the workforce.
We should be encouraging these highly productive women to participate in the workforce not penalising them.
Late last year, at a Melbourne Economic Forum supported by the Financial Review, leading economists urged the federal government to spend more on child care and early childhood education to boost female participation and economic growth https://www.afr.com/politics/federal/cheaper-childcare-could-reverse-record-low-fertility-rate-economists-20211208-p59fx7
If we truly wanted to increase women’s workforce participation and national productivity, we would move over time to universally available child care while adding four policies:
· Increase the period of Commonwealth paid parental leave from 18 to 24 weeks;
· Allow couples – not the parliament – to decide how much of the leave mother and father will take;
· Include the superannuation guarantee in Commonwealth paid parental leave; and
· Legalise higher employer superannuation contributions for women if employers want to recognise the time women spend out of the workforce having babies.
Some will complain that these proposals are too expensive. Yet KPMG and Grattan Institute analysis of child care reforms confirm they would more than pay for themselves. The same would likely apply to the four further reform proposals.
A universal child care subsidy and further reforms of the paid parental leave and superannuation schemes for women would be good for women, good for families and good for the economy.
Craig Emerson is managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and an adjunct professor at Victoria University’s College of Business.