Paid Parental Leave – worth cutting eligibility to $100,000?

Tony Abbott’s paid parental leave policy is one of the most expensive pieces of social policy Australia has been offered recently. It is a $5.5 billion scheme funded by a 1.5 per cent levy on big business. It proposes full replacement salary to new mothers, for six months, up to a maximum of $150,000.

But nobody thinks the PPL scheme is well-designed or good value for money.

The jaw-dropping part of the scheme is the $150,000 salary cap, which works out at a maximum rate of pay of $600 per weekday. That’s wildly expensive childcare – even in Sweden, people taking parental leave get only €105/day.

If this policy had been proposed by the Motoring Enthusiasts, the Greens, or the Palmer United Party, everybody from Janet Albrechtsen to Ross Gittins would be arguing they had no concept of how the economy works and were demonstrably unfit to govern. Arguably, Albrechtsen, Gittins et al would be right.

But would cutting the generosity of the scheme deliver a big saving? The Coalition thinks not. This quote is from an article by Phil Coorey, of the Australian Financial Review.

“The difference between a $100,000 and $150,000 salary cap is not seen as a major impediment to reaching a deal because about 90 per cent of women of child-bearing age earn under $100,000.

The Coalition has been looking at ways to make its policy more affordable and dropping the salary cap to $100,000 was not deemed worth it in terms of savings.”

The truth is that while plenty of Australians make over $100,000 – over 837,000 people, statistics say – only 18 per cent of them are women.  And of course, earning power tends to increase with age.

Screen Shot 2014-01-29 at 10.53.24 am
Number of women earning over $104,000, sorted by age and state. (Incidentally, in WA and QLD, women aged 15-24 are more likely to make the big bucks than those over 65. One guess why.)

Women’s earning peak happens after their fertility peak. Earnings peak around age 40, while the most common age to give birth is 32.

Screen Shot 2014-01-29 at 10.11.29 am

That means only 5,400 women earning over $104,000 would be eligible for the payment each year, according to my calculations. [Don’t thank me for making the data category end at $104,000, thank the ABS.]

Births, categorised by state of residence and age of mothers
Births, categorised by state of residence and age of mothers

[This link will take you to a big google drive spreadsheet where you can check my calculations and see some interesting graphs.]

The Greens are proposing a similar policy to the Coalition, but with a $100,000 eligibility cut off.

So what would be the saving of cutting eligibility to $100,000?

Assume the average claimed salary is $130,000. The net cost of 6 months extra pay is $15,000. 5,400 births @ $15,000 =

Just $81.2 million, or 1.48 per cent of the total cost of the $5.5 billion scheme. (Likely a conservative estimate, given some assumptions I had to make.)

That’s a rounding error in the Australian Government’s social policy budget. Do we just blink and move on?

I say no. The Commission of Audit is currently moving through the Government’s books, trying to find savings everywhere. They are likely to have a very fine-tooth comb. An $80 million saving is one they would pocket with delight. The government also has a social welfare review running, looking at Newstart and the Disability Support Pension.

Politically, $80 million seems like a small price to pay to garner headlines and combat a “women problem.” But from a policy perspective it makes sense to cut the rate. If you frame the question as “how can the Australian people best spend a spare $80 million,” the answer is never “funnel it via the government to the very rich.” 

Realistically, Paid Parental Leave is unlikely to be introduced in the same format it was sold to the Australian people.

If I was advising the government, I’d say: pledge to introduce it slowly. Start off paying up to a salary cap of $60,000 and say you intend to ramp it up by 10 per cent a year.

Then wait.  Something will come up for which there is great public support. It might be rebuilding after a flood. It might be sending troops off to the South Pacific to help restore stability somewhere. It might be a surge of support for pre-K education. Then you can raid the PPL cookie jar to fund that.

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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