Normative Bases

The proposal is simple and requires only a modest Egalitarian feeling: working-age welfare payments should not by default erode over time either in purchasing power or in their relation to average income. If cost-of-living pressures intensify in ways that the CPI does not capture, income support payments should respond; if the average wage increases, working-age payments should increase along with it. The common argument for setting working-age welfare payments at a low level is to incentivise people to seek work. Adopting an indexation scheme more in line with pensions would not in any way undermine this objective; it would simply ensure that welfare payments remain in line with cost-of-living (by including a direct cost-of-living measure rather than just the CPI) and at a consistent gap with wages (by adopting benchmarking against the average male wage).

Empirical Context

A core empirical claim underlying this argument is that relying on CPI indexation alone produces a significant long-run divergence from the combined CPI / cost-of-living / wage indexation approach of pensions in Australia. As the below Parliamentary Budget Office graphic shows (sourced from here), this has been borne out since the late 1990s when the government first introduced automatic wage-benchmarking for the Age Pension:

A sizeable gap has emerged between where the Age Pension is and where it would be if following the same indexation method as income support payments (pink line).

The pension indexation methodology is specifically to take MAX(CPI, PBLCI) and then adjust for the MTAWE benchmark, as applicable.^[1] An obvious question is what drives the greater part of the divergence between this method and CPI indexation – the use of PBLCI in the indexation calculation or the benchmarking against MTAWE. A relevant fact is that the use of PBLCI was only introduced by the Rudd government in 2009. (The chart above thus tells us that wage-benchmarking alone was driving divergence in the period before this.) In order to understand the exact effect of the PBLCI introduction, we must determine the frequency and strength of divergence between the CPI and direct cost-of-living measures like the PBLCI. As you might hope, these two measures do not systematically diverge over time but there are periods where one grows faster than the other, sometimes considerably so. The ABS gives us a visualisation of their respective annual growth rates over the last decade:

It's a little tricky to distinguish the colours – see the original source for a closer look – but a simplified description is that the purple CPI line stayed roughly around the middle of the pack between 2015-2020, then raced ahead of the LCIs until the second half of 2022 and has since been near the bottom of the pack. Of relevance to our current policy discussion, it has been growing consistently slower than the PBLCI since 2023, resulting in a considerable divergence over this period. In short, the deceleration of the CPI since 2023 has been understating cost-of-living pressures for the cohort measured by the PBLCI (and most other cost-of-living indices). It is in periods like this that the Age Pension will tend to jump ahead of income support payments.

The underlying factor driving this divergence over the last few years is the transition to increased interest rates, feeding into the interest payments of mortgage holders (excluded from the CPI) and helping drive up rents and utility costs (underweighted in the CPI compared to the cost-of-living indices). This illustrates a general phenomenon that the CPI has a tendency to understate cost-of-living pressures on mortgage-holders and renters during such periods of interest rate adjustment. On the other hand, under more typical circumstances, the wage benchmarking drives most of the divergence.

Why a specific cost-of-living index (PBLCI) over the CPI alone?

The purpose of CPI indexation for welfare schemes was always to make sure that people's standard of living didn't erode over time but, as the above shows, it doesn't do a perfect job for renters or mortgage-holders, especially during periods of adjustment to a higher interest-rate regime. The introduction of the PBLCI into the pension indexation scheme was a simple, rational policy move to increase the accuracy of the indexation with respect to the affected cohort.

Is the PBLCI the right index to proxy cost of living for the cohort of people who receive income support payments like Jobseeker? It's not perfect but it would be an improvement on the CPI. The “B” stands for “beneficiary household” so it is calibrated to proxy cost of living for the cohort of people receiving permanent government benefits in general, not just those on the Age Pension. Simplicity recommends using the same index for both pensions and working-age payments.

Why wage benchmarking and at what level?

Where the use of a specific cost-of-living index helps maintain pensioners' current standard of living, the use of wage benchmarking prevents them from falling behind the rest of the population when the average standard of living increases. The implicit assumption is that pensioners should never become worse off over time relative to the average (male) wage earner. Why should we not extend this notion to income support payments? A common view is that income support payments need to be low to incentivise the seeking of work. But this is no objection: an average-wage benchmark simply ensures that this “incentive” remains uniform over time rather than potentially increasing in severity.

Assuming that the MTAWE (Male Total Average Weekly Earnings) is the most appropriate metric for the wage benchmark, what should be the exact percentage? For pensions, the benchmark has been set since 2010 at 27.7% of MTAWE for singles and 41.76% for “combined couples”.^[2] Because there is now a large gap between the pensions and income support payments, if we applied the exact same benchmark thresholds to income support payments overnight, it would result in a large jump in those payments. The current MTAWE is approximately ~$1,791.10.^[3] The current base Jobseeker rate (Single, no children) is $793.60 per fortnight (as at 10 January 2026). Half of this (the weekly payment) is ~22% of the MTAWE. The most politically conservative route to introducing this reform would be to simply fix the benchmark to more or less this level, i.e. 22-23% of MTAWE. A slightly more ambitious approach would be to set it closer to the pension, more like 25%.

An appropriate (smaller) percentage would have to be chosen for the other working-age welfare payments. (Or perhaps wage benchmarking should only be adopted for Jobseeker.)

Whether one prefers a more conservative benchmark or a more aggressive one, the goal is the same: preventing income support payments from falling further below the living standard of the rest of the population.

Fiscal Considerations

We will not enter into a detailed budgetary analysis for the purpose of this argument, only to make the point that the fiscal burden of such a modified indexation approach is inherently in equilibrium with the state of the economy. Higher inflation will push up the index but it also devalues existing government debts. Wage increases will similarly push up the index but also lead to greater tax revenues. This is not a dramatic new fiscal drag.

Furthermore, unemployed people are likely to be in a better position to find work if they are not on the edge of ruin.

Conclusion

If our assumption is that income support payments are not overly generous right now – and it's hard to argue otherwise^[4] – then it stands to reason that they should at least maintain their current level, relative both to the cost of living and to rising standards of living. A simple, politically palatable way of doing so would be to change the indexation methodology to better match Australia's pensions, integrating the PBLCI and using a wage benchmark based on MTAWE for Jobseeker, if not all income support payments.

^{^}
A simple explainer can be found here.
^{^}
https://guides.dss.gov.au/social-security-guide/5/1/8/50
^{^}
Male “All employees average weekly total earnings” as at May 2025, sourced from ABS.
^{^}
See, for example, this Australia Institute article.

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