Benefit and Abatement System – a poverty trap!

What is the abatement regime?

The abatement regime is the system that progressively reduces the benefit payable to people as they transition into employment. Currently a single adult supported by a benefit can earn up to a maximum of $160 per week before their benefit is reduced. Above this threshold the benefit is reduced at a rate of 70 cents for every additional dollar earned.

Why do we need it?

The abatement regime is intended to provide an incentive for people to increase hours worked and their income toward self-sufficiency while protecting taxpayers from double-dipping. Usually transition to paid employment starts with parttime work, often on a casual employment contract, leading to increased hours or further employment opportunities.

How was it designed to support people to transition to employment?

In 1986, when the current abatement regime was designed, a review identified that sufficient income to support transition to employment would be provided if a person could rely on their benefit plus up to 15 hours at the then minimum wage before their benefit was progressively reduced (the threshold was $80 per week in 1986).

What’s changed?

Inflation has reduced the abatement threshold to the equivalent of just 6.9 hours at the current minimum wage of $23.15 (which the government increased effective 1/4/24 by much less than the rate of inflation or the wage index). If the abatement threshold was restored to 1986 levels in real terms it would be over $300 per week rather than $160. Housing/rent and other costs have increased to the extent that successive governments have introduced supplementary benefits, such as the Accommodation Supplement. Eligibility for supplementary benefits is calculated on a person’s total income so, combined with the low abatement threshold, a person may be worse off as they increase their earnings. For example, a person who earns $160 per week may lose eligibility for the Accommodation Supplement meaning that after transport costs to get to work, they have received no additional income from working. In some cases, income earned from parttime employment (that has itself been insufficient to materially improve their circumstances) has meant they’ve fallen into a lower category for social housing eligibility. These factors act as a powerful disincentive to seeking work or increasing hours.

 Why the abatement regime traps people in poverty

Increases in the cost of living have eroded the real level of support people are eligible for and benefit rates and the abatement thresholds have not kept pace. In addition, people supported by benefits must report to WINZ on their additional weekly earnings and the benefit is immediately cut if their earnings exceed the abatement threshold. When their earnings return to normal (earnings can vary greatly from week to week on a casual employment contract) there is a time lag for benefit reinstatement. In the meantime, people are then often unable to meet their basic costs for rent, food and transport or medical costs. This can lead to loss of their accommodation or debt to MSD, the repayment of which further reduces their benefit.

Another trap applies to people on low incomes living in social housing who are eligible for the Income Related Rent Subsidy (IRRS). When their income increases temporarily so does their rent[1] although this increase is accrued as a debt to MSD unbeknown to them. This debt then must be repaid, further reducing their income when their hours return to normal.

People must deplete any savings they have reserved for emergencies, unexpected expenses or retirement before they are eligible for benefit support so they can no longer survive even brief periods of reduced income. Critically, living with such income insufficiency and insecurity is very stressful leading to many poor health, mental health and social outcomes with a high long-term cost for the individual, their whanau and society.

What would work better?

Index the abatement threshold to the equivalent of 15 hours at the minimum wage. The government adjusts the minimum wage annually, but this also needs to be indexed to wages. We believe the minimum wage should be aligned with the independently calculated living wage to ensure that everyone has enough income to provide for the basics.

For people eligible for IRRS, ensure that their rent payments keep pace with their weekly earnings, so they don’t incur unexpected debt to MSD. Ensure rapid reinstatement of the full benefit payments when a person’s hours return to normal. These changes would assist many more people to move from a benefit to sustainable employment and self-sufficiency.

People on a low income who are eligible for social housing under the IRRS scheme have their rent caped at a maximum of 25 percent of their weekly income.