Social assistance families will not get an increase in their netchild benefits. Rather, they will see only an increase in the proportioncoming from the federal Canada Child Tax Benefit and a decline in the sharefrom provincial social assistance. In some provinces, these householdswill see new income-tested child benefits. By contrast, the working poorand other low-income families not on social assistance will enjoy an increasein their child benefits.
To make matters worse, the supporters of the National ChildBenefit had been arguing that it was a key anti-poverty measure. But itarrived after several years of cuts to social assistance benefits that hadshrunk drastically most families’ income. It also was introduced amid growing efforts on thepart of most provinces to require recipients to enter the workforce.These efforts took the form of ‘workfare’ and tightened eligibility rules in many provinces.
This criticism misses the essential point of the National ChildBenefit. Its purpose is to restructure income security by equalizingchild benefits for all low-income families. It seeks to raise paymentsfor poor families not on social assistance to the level paid to socialassistance families.
Social assistance families are receiving the same increase intheir federal child benefits as other poor families, though their socialassistance-delivered child benefits typically are reduced accordingly.This process has given rise to a great deal of anxiety on the part ofvulnerable social assistance recipients and anger on the part of critics.
A key issue here is strategy. Ottawa should have fullyimplemented the reform (as proposed in a 1995 Caledon report5 ) rather than phasing it in through anincremental, multi-year approach. The federal government also should haveput enough money on the table. It could have displaced socialassistance-delivered child benefits immediately. It could have raised thelevel of the new Canada Child Tax Benefit high enough to exceed the previousamount of combined federal and provincial child benefits paid to socialassistance families.
Social assistance families still would have seen a smaller netincrease in child benefits than the working poor. But at least the formerwould have been a little better off than before. The idea that one typeof benefit was simply replacing another would have been apparent and easilyexplained. The incremental strategy that was adopted instead hascontributed to the criticism of the National Child Benefit.
However, even without a real increase in child benefits for socialassistance families, it can be argued they will be better off under theNational Child Benefit than before. Social assistance is a highlystigmatizing program prone to overt cuts or steady erosion on the part of theprovinces.
For example, a get-tough-on-social assistance approach was aprominent part of Ontario’s Conservative government election platform. It followedthrough with a 21.6 percent cut in social assistance for most recipients inOctober 1995. The cuts did not harm the government’s political fortunes, and indeedthey may have helped. The Ontario Conservatives residualists in theirphilosophy of social policy were easily re-elected, unlike the previous two provincialadministrations, which had raised social assistance rates.
Income-tested social programs, in contrast to social assistance,have seen real and substantial increases in benefit rates for lower-incomerecipients, with broad public support. The Canada Child Tax Benefit,which was fully indexed as of 2000, is in a far better position than socialassistance to enjoy further increases in the coming years. If one istruly worried about the adequacy of social assistance recipients’ incomes, the best option is toprovide a larger proportion of their incomes out of a politically popular andexpanding program, such as the Canada Child Tax Benefit.
It is also essential to remember that the social assistancepopulation is a dynamic, ever-changing group. About half of socialassistance recipients leave for the workforce every year. Under the oldsystem, these recipients lost all of their social assistance-delivered childbenefits. But the Canada Child Tax Benefit is a ‘portable’ benefit that accompaniesfamilies no matter what their primary income source.
Social assistance families will no longer lose child benefits ifthey move to the workforce. Working poor families will continue toreceive their child benefits from the federal government even if they go onsocial assistance or Employment Insurance. If they improve theirearnings, families will continue to receive the Canada Child Tax Benefit though in asmaller amount if their income increases enough far up the income scale.
Another important factor is that social assistance familiesreceive the Canada Child Tax Benefit without stigma, just like the largemajority of Canadian families. Payment is automatic and painless.It involves little or no contact with government officials. Moreover,some social assistance families will benefit from some of the provincialreinvestments, though more so if they move into the workforce.
The National Child Benefit holds out the promise of more than justa restructuring and enhancement of child benefits. By removing a largegroup (children) from social assistance caseloads, it marks a major stepforward in the essential task of dismantling the social assistance system andreplacing it with more effective programs. The aim should be to transformadult social assistance from its current conception as a last-resort familyincome support program for families. It should be modernized in the formof a wage substitution program for adults, more suitable to an ‘active’ income securitysystem.
b. The welfare wall is more than childbenefits
Social advocates complain that the National Child Benefit does notdeal with the variety of obstacles that make it difficult for families to movefrom social assistance to the workforce. A major barrier is the lack ofaffordable and accessible child care. Another obstacle is the fact thatmany jobs typically available to low-income parents do not pay a livingwage. Many families are worse off financially than if they were on socialassistance.
While these are important problems, the National Child Benefit onits own cannot solve them. It is intended to lower the part of thewelfare wall that results from differential child benefits and to reduce thedepth of poverty.
Under the National Child Benefit, some provinces are reinvestingsocial assistance savings in child care. They are also extendingsupplementary health care to the working poor. But these initiativescannot substitute for the range of reforms that are needed to combatpoverty. Such reforms include a national early childhood developmentsystem, supplementary health benefits, employment programs and decent adultincome supports replacing traditional social assistance.
c. The incentives issue: Marginal tax rates
Some economists claim that the National Child Benefit reform couldbe defeating its own purpose by imposing high effective marginal taxrates. These supposedly discourage the work ethic of the very families itis intended to help. (By ‘effective marginal tax rate,’ we mean the percentage ofadditional income paid in income and payroll taxes or forgone due toincome-tested programs’ reduction rates.)
The Canada Child Tax Benefit has resulted in higher marginal taxrates for some working poor families because of the wish to target limited newspending on low-income families. (Families in the $21,000 - $30,000 netfamily income range have been affected.)
For example, an Ontario family with net income of $27,000 saw itseffective marginal tax rate rise from 39.5 percent to 54.2 percent as a resultof the high reduction rate imposed on the National Child BenefitSupplement. At the same time, recipients of social assistance who movedinto the labour market enjoyed a large reduction in their marginal taxrates.
The impact of this mix of higher and lower effective marginal taxrates on labour market behaviour remains an open question. The factorsthat can influence families’ decisions regarding paid work are complex. These decisionscannot simply be assumed as given according to the usual interpretations ofeconomic theory. Issues such as social expectations, opportunities,transportation, child care, workplace policies and many other factors fit intothe equation. It is not clear, nor does economic theory suggest, that themarginal tax rate is the most important of these variables.
The National Child Benefit has objectives beyond the labourmarket, unlike ‘pure’income supplements for the working poor. The new childbenefit’s impact onthe depth of poverty and disposable income is equally - if not more - important than its effect on labourmarket behaviour.
d. Lack of responsiveness to changes inincome
One of the long-standing concerns about using the income taxsystem to deliver social benefits is its lack of responsiveness to changes inincome. There can be a considerable lag - up to 18 months - between assessment of income andcalculation of amount of the Canada Child Tax Benefit. The program canadjust quickly to change in family composition, such as marriage breakdown ordeath of a spouse. But it is not designed to respond rapidly to changesin income due to getting or losing a job.
Despite the stated concerns, lack of responsiveness has not been aproblem in practice. Indeed, the case might be the opposite. In afocus group held by the Caledon Institute in British Columbia, the reaction tothe possibility of more regular (e.g., monthly) income testing wasnegative. This was seen as reintroducing the much-reviled socialassistance monthly reporting requirements. Recipients were more thanwilling to give up any potential benefit of improved responsiveness in returnfor lack of intrusiveness.
Responsiveness may be a ‘non-issue’ because of theprogram’sdesign. There is a significant range of income before there is anyreduction in benefits. Many people with low incomes will always receivethe maximum benefit, whether in or out of the workforce. So the issue ofresponsiveness does not arise for them. Aside from change in familycomposition (usually due to marriage breakdown to which the system does adjustsoon after notification), there could well be relatively few families that dropin one year from a comfortable income to a low income and thus need maximumchild benefits as fast as possible. Unfortunately, this question has notyet been investigated.
A work in progress
The National Child Benefit has not reached its goal of fullyreplacing all social assistance-embedded child benefits throughoutCanada. Families on social assistance still receive some child-relatedbenefits in most or all provinces.
If the federal government gradually were to boost the Canada ChildTax Benefit towards the $4,200 level which Caledon and other social groups haveproposed, then getting rid of all remaining social assistance benefits forchildren would help pay for such a costly program. Other cost-shiftingchanges, such as the reform of the shelter allowance component of socialassistance and the elimination of secondary child benefit programs, also mustbe considered.
In addition to a sizable increase in the maximum payment, Caledonhas advocated returning the Canada Child Tax Benefit to a single-tierstructure, as was used in the original refundable child tax credit. Therewould be a moderate reduction rate on benefits for non-poor families.
This design offers several key advantages. It makes thechild benefits system easier to understand. It boosts child benefits forpoor and non-poor families alike, thus respecting both the anti-poverty andhorizontal equity objectives. Finally, a single tier would resolveconcerns about the potential work disincentive effects of high effectivemarginal tax rates.
From UnemploymentInsurance to Employment Insurance
Employment Insurance used to be known as Unemployment Insurance,one of Canada’s firstmodern social programs based on the universalist model. Introduced in1940, Unemployment Insurance originally was meant to replace earnings forworkers who are temporarily between jobs.
Initial coverage under the program was limited to jobs deemed tohave a risk of unemployment generally, in industry and commerce. This coverage extendedto less than half 42 percent of thelabour force. The majority of jobs were not covered, including those inagriculture and forestry, fishing, transport, teaching, health care andgovernment service, as well as part-time work.
Over the next 31 years, the federal government expandedUnemployment Insurance beyond its original purpose of short-term joblessinsurance for only part of the workforce. By 1971, almost all workers,including self-employed fishermen, were covered. Qualifying requirements the number ofweeks of work necessary in order to receive benefits were reduced and benefits wereraised.
Benefits also were extended to cover workers who lose wagesbecause of illness, maternity or retirement. ‘Regionally extendedbenefits’ wereintroduced as well. The latter increased the duration of benefits forrecipients living in areas in which the unemployment rate exceeded the nationaljobless rate. A sliding scale was used, adding weeks of benefit accordingto the severity of unemployment in the region. A portion of UnemploymentInsurance funds was set aside for developmental purposes to help unemployedworkers participate in approved training or job creation projects.
Employers and employees financed most of the program throughpremiums. Employers contributed a certain percentage of their payrollwhile employees contributed a set proportion of their wages up to a designatedmaximum. The federal government paid for regionally extended benefits,fishermen’s benefitsand developmental programs.
But the 1971 Unemployment Insurance Act, which had expanded andenriched the program, collided with mounting inflation, deficits andunemployment throughout the 1970s. As a result, Unemployment Insuranceexpenditures rose substantially and became one of the federalgovernment’s mostexpensive programs. Moreover, its costs increase at the worst possibletime duringrecessions. The time had come to start reining in theprogram.
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