In February 2015, after putting forward a pre-budget submission to the Commonwealth Treasury for the 2015-16 budget, the national media covered my proposal and call for the Federal Government to introduce a voluntary opt-in scheme whereby individuals with a Higher Education Loan Program (HELP) debt are able to draw down on their superannuation capital to an amount of their choosing to retire their HELP debt. This scheme is what I now refer to as ‘Super for HELP’.
My original February 2015 submission to Treasury can be found here.
The media articles can be found here:
The Australian: Budget Call to Tap Super to Pay Off University Debt
Note that Super for HELP is not ‘Super for Housing’ (which was floated by former Treasurer Joe Hockey in March 2015, although according to one Minister I was apparently the inspiration for his thought bubble). While both proposals are early release of superannuation schemes, the impact to the Commonwealth budget and the broader economy are very different and therefore each proposal should considered on their separate merits.
(For the record, I do not support for Super for Housing as it will cost the Commonwealth Budget money and potentially inflate an already overheated housing market worsening housing affordability for those people struggling the most).
There are many arguments that explain why ‘Super for HELP’ is good public policy. The main arguments is that ‘Super for HELP’ delivers a simultaneous public-private benefit for both the Commonwealth and individual participants. Through this scheme, the Commonwealth is able to receive cash upfront from the repayment of HELP loans (which is an account receivable on the Commonwealth Government’s Balance Sheet) which can be used to pay down public sector debt or reduce the size of the deficit. Moreover, individuals, particularly in their late 20s and early 30s, who experience major life events such as cohabitation (i.e. getting married), household formation (i.e. purchasing real estate) and child rearing are able to obtain a significant increase in their disposable income at a time when they need the cash the most.
The rapid growth in HELP is also becoming an emerging policy problem that policy makers need to get their heads around. According to this year’s Commonwealth Budget Papers, the balance of HELP is expected to increase by more than 387% on 2007-08 levels to $62.9 billion by 2018-19. This is largely due to the Gillard demand driven reforms to higher education and the expansion of HELP into vocational education. What this means is that in future years, there will be a much larger cohort of individuals who will be experiencing major life events and will be saddled with relative large HELP debts.
Without major structural changes to monetary policy, this means that future Governments will be dealing with a larger number of Australians struggling with cost of living pressures at the same time as having to repay their HELP debt. This represents a potentially diabolical political mix for future Governments that don’t have any easy policy solutions with little political downside.
Therefore, it stands to reason that policy makers should seek to address this issue now before it becomes an acute public policy problem.
Note that currently most people within the late 20s/early 30s demographic are not actually reducing their consumption when they become cash constrained during these major life events. Rather many Australians are taken up large volumes of personal debt to meet their rising costs. According to the Reserve Bank of Australia’s own website, household debt as a proportion of disposable income is now exceeding 180%. From my understanding, this figure is at an all-time in the history of the Australian economy and imposes significant macroeconomic risks to the Australian economy (which some have likened to the Australian economy being in a pre-depressionary state – aka 1888 or 1928).
As noted by Senator Chris Back in an adjournment speech to the Senate on 2 December 2015 (available on Hansard) in which the Senator again publicly endorsed Super for HELP as policy which the Government and Parliament should enact, Senator Back and I have been working with the Parliamentary Budget Office (PBO) since March examining the implications of the Super for HELP policy under different scheme design models.
From the design models examined by the PBO, it would appear that the most attractive and palatable design scheme to policy makers is where individual participants are able to draw down on their superannuation capital to repay their HELP debt but are required to repay that capital back as well as earnings which would have been generated otherwise (i.e. the opportunity cost) from the time of participation up until preservation age (which is currently age 60).
Under this model, individual participants would be no worse off at preservation age than under current policy arrangements.
From my extensive consultations among policy makers in Canberra, the biggest underlying policy concern is to not implement structural reform which may result in individuals becoming a greater burden on the age pension system in the decades to come. Unfortunately, the belief that individual Australians can manage their financial affairs prudently is not high in the halls of federal power.
Discussions with policy makers and Treasury officials to date have been fruitful and productive. Many people who I have spoken are open to considering the virtues of the Super for HELP scheme under the pay back design scheme. As one Treasury official said to me, Super for HELP is ‘not bad [public] policy’ and that there legitimate reasons why a Government would enact this version of the Super for HELP scheme.
One question which came up several times in discussions and is worth noting is whether Super for HELP establishes a precedent for other interested parties to call on the policy makers to open up superannuation for other purposes such as housing. My position has consistently been that the litmus test for introducing an early release of superannuation scheme is the net impact on the Commonwealth budget, particularly given the state of the Commonwealth’s debt and deficit position. This is why Super for HELP is an attractive option for fiscally conservative policy makers whereas Super for Housing is not.
Using this litmus test, for those who want access to their own money or who believe that superannuation should be opened up to individual choice, Super for HELP is the only game in town. The current political reality of our times is that any policy proposals that are put forward to Government which will cost the Commonwealth money will struggle to gain traction.
As the policy & costing task has largely been done, the road forward on the super reform journey will be largely political in getting members of parliament to embrace Super for HELP as reform in 2016.
For those who read my previous oped in the Daily Telegraph from 30 November 2015 as mentioned by Sinclair on this blog, the political calculus for the Government in 2016 is not necessarily just winning re-election in the House of Representatives but it must be to strengthen their position in the Senate. Of the 40 senators up for re-election at the next election, 18 of those senators are from the Coalition. The Government’s strategic political task is to hold all 18 senators and pick up additional senators. To do so, the Government needs a political narrative enforced by a policy program which will have wild appeal across the political spectrum encouraging people to vote Coalition for both houses of Parliament at the next election.
From the feedback I have received to date, I believe that Super for HELP will resonate to a large group of Australians from the far left of the political spectrum to the far right within this late 20s/early 30s demographic. So whether it is the Coalition or other political parties, Super for HELP in my view represents good politics as well as good policy in 2016.
While I am not at liberty to release the PBO numbers as of yet, what I can say is that with very conservative assumptions regarding the take up rate of eligible individuals, Super for HELP has been shown to deliver an increase in disposable income multiple times larger than the repeal of the carbon tax and would deliver significant revenue for the Commonwealth over the forward estimates.
With the state of Australia’s debt and deficit situation as spelt out by the recent MYEFO statement released by the Treasurer, the Government has very few budgetary saving options which will lead to an increase in political capital or at the very least be political neutral.
As a member of the Canberra Press Gallery agreed with me in the past few days, Super for HELP represents a once in a generation to open-up access to superannuation for working people on a sound public policy basis. Fail here and compulsory superannuation in its current structural form will continue for decades to come.
The next 6-12 weeks will be critical as to whether historic reform to superannuation can be achieved in the context of the 2016-17 Commonwealth Budget. If you have an interest in learning more about the policy and/or helping with making the case to Government and Federal Parliamentarians, please feel free to write to me.