Select Committee on Social Security Minutes of Evidence


CHILD SUPPORT REFORM: SOME ANALYSIS OF THE 1999 WHITE PAPER

By Gillian Paull (IFS), Ian Walker (Warwick and IFS), and Yu Zhu (Keele) (CS 43)

PRE-REFORM:

  CS is a proportion (which is variable) of combined incomes (net of housing costs)

Bad points:

  Complicated—requires lots of information that may be hard to verify.

  No IS disregard—potentially bad for CS compliance.

  Imposes a tax on the earnings of the CP (biggest for low income working CPs) and this is bad for CP's work incentives.

  Imposes a (often large) tax on the earnings of the AP and this is bad for work incentives and gives rise to an incentive to understate/conceal earnings.

  High levels of liability—bad for compliance.

  Large tax on the income of the AP's partner—bad for remarriage incentive.

  Cross subsidizes each parents' housing costs and so gives rise to an incentive for both parents to inflate their housing costs.

  Limited enforcement powers in practice.

  CSA concentrated on cases with lowest incentives to comply.

  CSA underfunded (30 per cent less than Australian CSA).

Good points

  FC/HB disregards but no IS disregard—good for work incentives.

  Complex formula good for matching CS liabilities to needs and to ability to pay.

  High levels of liabilities—good for child poverty and good for incentives to remain partnered.

  Largely ignores stepchildren—promotes fairness and implies that children are for life and not just until the CP remarries.

POST-REFORM:

  Proportion (which varies) of the income of the AP only. IS disregard. Lower liabilities.

Good points:

  IS disregard—potentially good for compliance.

  Lower liabilities—potentially good for compliance.

  Neutral with respect to housing costs.

  No tax on AP's earnings—good for work incentives.

  Unlimited disregard for FC—good for work incentives.

  Simpler formula—easier to administer, potentially good for compliance.

  Better enforcement powers.

Bad points:

  IS disregard—bad for work incentives.

  Lower liabilities, larger welfare payments—bad for the average taxpayer.

  Double dividend for step-children.

  Weaker relationship between liabilities and needs—potentially unfair and bad for compliance.

  Lower enforcement resources.

EVIDENCE

US

  US APs (Fathers) are better off after separation than before in terms of "equivalised" incomes.

  US CPs (mothers) are substantially worse off after separation.

  US CS has a large impact on child poverty amongst the children living with the mother.

  US CS has only a small adverse effect on child poverty in "second families".

  Those US states that dropped the CS disregard in their welfare systems (AFDC—the US equivalent of IS) have not suffered a fall in compliance relative to those states that kept the AFDC CS disregard.

  Some US evidence that enforcement expenditure promotes compliance—an extra $100 pa per AP on enforcement raises compliance by one per cent.

  Compliance seems very sensitive to APs perception of the "fairness" of the liability.

UK

  UK econometric estimates of determinants of compliance suggests that large liabilities do not lower compliance.

  UK (naive) simulations of work incentive effects (on lone mothers only—ie excludes the repartnered):[2]

Proportions: Not workingPart-time Full-time
Pre-reform, FC52.721.9 25.4
Pre-reform, WFTC50.4 24.425.2
Post reform, WFTC48.7 26.424.9

RECOMMENDATIONS

Find out "what works" and how well it works:

  More research—modelling the determinants of compliance and the effects of reform using information on individuals in CSA administrative database.

  Better data—identify APs in Family Resources Survey data, new DSS panel of low income families needs very careful design.

  Build evaluation capability into the implementation of the reform—eg randomise the IS disregard level.

Reconsider the new formula:

  Ensure that low income lone mothers are not disadvantaged and that perceptions of fairness by APs are promoted (by bringing back the CPs earnings into the formula).

  Do not fudge the issues with transition arrangements—the next generation of CPs are just as important as the present generation of CPs.

  Put more (not less) resources into the CSA to promote compliance—mandatory and automatic wage withholding.


2   See CS48 Ev. p. 174. Back


 
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Prepared 19 October 1999