John Adams
E-mail: [email protected]
Budget Policy Division
Department of the Treasury
Langton Crescent
PARKES ACT 2600
[email protected]
9 February 2015
Dear Treasury,
Re: 2015-16 Commonwealth Pre-Budget Submission – Voluntary use of superannuation to
retire Higher Education Loan Programme debt
Consistent with the invitation by the Treasurer, the Hon. Joe Hockey MP, I have attached a
submission relating to a specific budget initiative that I am advocating the Commonwealth
Government adopts as part of its 2015-16 fiscal budget.
Specifically, I am calling on the Commonwealth Government to introduce a voluntary opt-in
scheme, commencing on 1 July 2015, which allows individual Australians to use existing financial
capital within their superannuation accounts to either partly or wholly reduce their existing
Commonwealth Higher Education Loan Programme (HELP) balances.
The adoption of this measure would be both beneficial to individual households, the broader
economy and will contribute to the Government’s policy objectives around:
•
•
•
•
•
budget repair and debt reduction;
ensuring the sustainability of the HELP loan scheme;
assisting women balance the demands of having a career and having children;
assisting families with cost of living pressures; and
reducing the scale of ‘middle class welfare’.
I believe that such an initiative introduced on a voluntary opt-in basis and subject to reasonable
controls would receive significant and broad community support and would not undermine the
original policy intent of the superannuation system.
I believe (and can attest from my own personal financial circumstances) that such an initiative
would prove significantly beneficial to many Australian households. If introduced, this initiative
would allow me to retire all existing HELP debt that I have with the Commonwealth Government
and would personally benefit my household finances by $754 per month or $9,048 per year in
additional take home disposable income. As a household which has moved from a two income to
a single income household with the birth of our first child, the additional income would ease cost
of living pressures (particularly the costs associated with a new baby) and would allow my family
to make further contributions to reducing existing mortgage debt providing my family with
additional insurance against global economic volatility or unexpected unemployment.
The attached paper is the result of my personal authorship but several drafts have been
distributed among my network as part of an extensive consultation process including over 40
relevant policy makers, public policy experts, superannuation industry experts, academics,
financial journalists and members of the public who currently have outstanding HELP loans. These
consultations have generated several suggestions and improvements that have added to the
quality of the overall submission.
I look forward to discussing this submission with you in further detail. I can be contacted on at
[email protected].
Yours faithfully,
John Adams
Pre-Budget Submission to the
2015-16 Commonwealth Budget
Voluntary use of financial capital from superannuation accounts to
retire Higher Education Loan Programme debt
Executive Summary
This budget submission calls on the Commonwealth Government to introduce a voluntary opt-in
scheme allowing individual Australians to draw on capital within their superannuation accounts to
settle existing Higher Education Loan Programme (HELP) debt with the Commonwealth
Government to an amount specified by the individual commencing on 1 July 2015.
The implementation of this scheme will result in either individual Australians:
•
•
retiring all of their existing HELP debt, resulting in an increase in take home disposable
income; or
retiring part of their existing HELP debt, thus reducing the time horizon in which this debt
will be paid back to the Commonwealth (but won’t immediately impact net take home
disposable income).
The proposed scheme is consistent with several stated policy objectives of the Government
including:
•
•
•
•
•
budget repair and debt reduction – by providing the Commonwealth with new cash which
could be used to retire existing Commonwealth debt or offset new debt which would be
incurred through deficit expenditure;
ensuring the sustainability of the HELP scheme – by reducing the overall financial size of the
scheme through early repayments of outstanding loan amounts thereby reducing the risk of
doubtful debt;
assisting women balance the demands of having a career and having children – by allowing
women to increase their take home disposable income prior to having children that allows
them to better meet the costs of raising a family on a single household income;
assisting families with cost of living pressures – allowing either one or both working adults to
increase their take home disposable income in meeting existing cost of living pressures; and
reducing the scale of ‘middle class welfare’ – by providing the Government with an
opportunity to recalibrate its families and other assistance policies towards Australians in
lower socio-economic circumstances given that middle to higher income earners will
received a disproportionate benefit from participating in this scheme.
The scheme will also deliver significant benefits to those individual Australians participating in the
scheme as well as the broader Australian economy by:
•
•
•
allowing Australians to better cope with cost of living pressures through higher take home
disposable income;
providing Australians with a greater ability to reduce household debt; and
improving the short term marginal benefit of obtaining work or increasing work
commitments, particularly for women.
3
This submission outlines several policy design options and variations which the Government may
wish to consider in implementing this scheme. The outlined options and variations provide the
Government with an ability to design the scheme that addresses potential public policy concerns
as well as concerns from affected stakeholders.
A question and answer section has been included at the end of this submission which seeks to
address likely questions arising from this scheme.
Budget Impact
The overall impact on the Commonwealth’s financial balance sheet and fiscal budget over the
forward estimates is expected to be fiscally beneficial. The total impact on the Commonwealth
budget and balance sheet is subject to a series of factors including:
•
•
•
•
the number of individuals participating in the scheme and the amount of HELP debt retired;
second round effects including the impact of increased disposable income on consumption,
household savings and debt levels;
dynamic changes in economic behaviour by individual Australians as a result of changes in
marginal incentives; and
key economic and financial parameters used in the budget including the rate of interest on
Commonwealth borrowings and the assumed rate of return on superannuation funds.
Financial and economic modelling is required to provide a financial estimate as to the scheme’s
overall fiscal impact.
Legal implementation
To implement this scheme, the Government will be required to amend the Superannuation
Industry (Supervision) Act 1993 through a new piece of primary legislation which provides for the
inclusion of a new provision under paragraph 62(1)(b) introducing this scheme as a new ancillary
purpose of a superannuation fund.
Consultation
Several rounds of consultations were undertaken during the production of this submission
including over 40 policy makers, professional economists, public intellectuals, superannuation
industry experts, financial journalists, academics and Australians who currently have a HELP debt.
Many of those consulted raised important policy considerations as to the impact and
implementation of the proposed scheme.
The consultation undertaken to date indicated overwhelming support for the introduction of this
scheme.
4
`Voluntary
use of financial capital from superannuation accounts
to retire HELP debt
Introduction
This submission focuses on a specific budget measure which the Commonwealth Government
should adopt as part of the formulation of its 2015-16 fiscal budget.
Proposed budget measure
This submission advocates that the Commonwealth Government as part of its 2015-16 fiscal
budget introduces a voluntary opt-in scheme that allows individual Australians to retire existing
HELP debt (either part or whole) using existing superannuation capital from their superannuation
fund(s) which have been accumulated by the individual.
Under the proposed scheme, individual Australians would be able to write to their
superannuation fund (or trustee) and request that an individual payment be made to the
Australian Taxation Office (ATO) on their behalf to retire their existing HELP debt to an amount
specified by the individual.
For individual Australians who would participate in this scheme, their participation would result in
either one of two outcomes:
•
For those individuals who choose and are able to retire all of their existing HELP debt,
they will experience an increase in their take home disposable income.
•
For individuals who retire only part of their existing HELP debt, they will see no
immediate change to their take home disposable income and will continue to make
compulsory repayments through the PAYG tax system consistent with their level of
taxable income.
For these individuals, the benefit of participating in the scheme would be to reduce the
time horizon in which they would eliminate their existing HELP debt.
This submission calls on the Commonwealth Government to introduce this scheme effective from
1 July 2015.
Current state of HELP
According to the 2014-15 Commonwealth Budget Paper No. 1 (Statement 9, note 131), the
existing HELP scheme is expected to reach $AUD 29.9 billion during 2014-15 and will balloon out
to over $AUD 51.4 billion in 2017-18 (or a 71.9% increase).
HELP is recognised as an asset (advances paid) on the Commonwealth Government’s balance
sheet.
1
http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst9-01.htm
5
HELP consists of five Commonwealth loan programmes, including:
•
•
•
•
•
HECS-HELP - which helps eligible Commonwealth supported students to pay their student
contribution, amounts through a loan or upfront discounts. Before 2005, this was known
as ‘HECS’;
FEE-HELP - a loan to help eligible fee paying students to pay their tuition fees;
SA-HELP - a loan that assists eligible students to pay for all or part of their student
services and amenities fee;
OS-HELP - a loan to help eligible Commonwealth supported students pay their overseas
study expenses; and
VET FEE-HELP - a loan to help eligible students enrolled in higher-level vocational
education and training courses at approved VET providers to pay their tuition fees.
Implications for the superannuation industry
According to the Association of Superannuation Funds of Australia, superannuation assets
totalled $AUD 1.87 trillion at the end of the September 2014 quarter 2.
Given that the existing debt under the HELP scheme is expected to reach $AUD 29.9 billion for the
2014-15 financial year and that not all Australians who have HELP debt would take advantage of
this scheme, the potential leakage of funds from the superannuation system would not pose any
major financial ramifications for the industry to provide a deep pool of national savings to fund
domestic capital investment.
Later in this paper, several potential controls are outlined, which the Government could adopt to
alleviate any concerns from the superannuation industry with respect to capital leakage.
Consistency with the Government’s policy objectives
Budget repair
The Government has indicated that one of its primary policy objectives is to repair the state of
the Commonwealth budget that allows a return to surplus and a reduction in overall
Commonwealth debt. As noted by the Prime Minister, the Hon. Tony Abbott MHR:
“This government is absolutely ... determined to restore the budget to surplus as quickly
as we reasonably can.”3
This proposed budget measure can potentially make a significant contribution to the task of
budget repair and debt reduction through the repayment of existing HELP debt which can be used
to retire existing Commonwealth debt or offset new debt being incurred. This would result in the
Commonwealth saving on interest paid on existing HELP debt and a structural improvement in
the Commonwealth Government’s balance sheet 4.
2
http://www.superannuation.asn.au/resources/superannuation-statistics
http://www.news.com.au/national/abbott-does-his-penance-but-will-voters-forgive-him/story-fncynjr21227151879202
4
Note that in its 2014-15 budget the Government announced its plan to index existing HELP debt with the
real rate of interest associated with borrowing by the Commonwealth from 1 July 2016, capping the rate of
interest to 6%. On 1 December 2014, both Fairfax Media and News limited reported that the Government
was no longer pursuing this measure.
3
6
Ensuring the sustainability of the HELP scheme
The Government as well as the National Commission of Audit through its 2014 report have raised
concerns about the sustainability of the HELP scheme under existing policy arrangements given
the current size of the loan scheme and its expected growth trajectory.
The proposed budget measure in this submission would allow the Government to further ensure
the sustainability of the HELP scheme by allowing individual Australians to reduce their
outstanding loan amounts at a faster rate that would otherwise be the case.
Assisting Australian women balance between having a career and having children
In its 2013 policy titled the Coalition’s Policy for Paid Parental Leave, the Coalition stated:
“the period following the birth of a child is one of the hardest financially for parents. With
the majority of mothers now in paid employment immediately prior to giving birth, many
families cannot easily forgo a second income, even temporarily, without putting the
financial security of their family at risk”
For the reasons outlined above, the Government had been pursuing the introduction of a 26
week paid parental leave scheme, however has not been successful in securing sufficient support
in the Senate to date. The proposed budget measure in this submission may act as an alternative
mechanism that allows the Government to assist women and their partners, who have existing
HELP debt to better balance the demands of having a career and having children.
If introduced, this measure will allow:
•
women, who choose to retire their outstanding HELP debt prior to having children, with
greater ability to save additional income that can be utilised in meeting the costs of
having children and being out of the workforce; and
•
the partners of women having children (i.e. husbands or de facto partners) to boost their
take home disposable income through the retirement of HELP debt and therefore better
meet the financial demands of sustaining a family on one income.
For these reasons, the proposed budget measure may act as a financial incentive for women and
their partners who have existing HELP debt to choose to have children. This scheme, if enacted,
can assist the Government meet the policy objectives which underpin its paid parental leave
policy for those women affected.
Assisting families with cost of living pressures
The Government has stated its desire to assist Australian families with existing cost of living
pressures. This is demonstrated by comments made by the Treasurer, the Hon Joe Hockey MP on
19 January 2015, in which he stated:
“I want to give families a bit of a break with cost of living. That’s certainly Tony Abbott’s
view. There is a very strong wish to put more money into the pockets of Australians”5.
5
http://www.theaustralian.com.au/opinion/columnists/fine-words-joe-now-for-some-direction/storye6frg75f-1227190072370
7
For those families in which one or both parents have incurred a HELP debt, the introduction of
this scheme may act as a significant contributor to meeting existing cost of living pressures if one
or both of those parents participate in the scheme and are able to increase their take home
disposable income.
Reducing the scale of ‘middle class’ welfare
In 2014, the Treasurer indicated the Government’s desire to reducing the extent of ‘middle class
welfare’ provided by the Commonwealth. In a speech on 6 February 2014 to the Lowy institute,
the Treasurer said:
“Too many taxpayers' dollars have been spent on corporate and middle-class welfare and
too often previous governments have been drawn into areas that are better left to the
private sector.
Not only are these policies an unsustainable use of taxpayers' funds, they also undermine
economic incentives, our productivity and ultimately our national prosperity.
We must restore our own fiscal position to a sustainable long-term path."
Given that the HELP scheme contains a progressive repayment schedule6, the benefit obtained by
an individual participating in this scheme and retiring their HELP debt will be larger as their
taxable income is higher. Moreover, those Australians who have received a tertiary education are
likely to be employed in roles that require specialised skills and therefore attract higher levels of
remuneration.
If introduced, the scheme, if a significant take-up rate was experienced, would deliver a
significant increase in take home disposable pay to many middle to higher income Australians.
Under this scenario, the Government would have greater scope to recalibrate its family and other
assistance policies (including the Government’s paid parental leave scheme policy) towards
Australians in lower socio-economic circumstances and wind back assistance payments to middle
to high income Australians (i.e. reducing middle class welfare).
6
Repayments under the HELP scheme commence with a starting threshold of $53,345 (in 2014-15) and a
repayment rate of 4% rising to 8% as taxable income increases to $99,070.
8
Benefits to the Australian economy and Australian households
Both the macro and micro economic implications of this scheme would be dependent on both the
uptake of the scheme and whether individual Australians choose to retire either part or all of
their existing HELP debt.
Some of the benefits of this scheme to the Australian economy and to households are outlined
below.
1. Better coping with cost of living pressures
As noted by the 2014 Choice Consumer Pulse Report, Australians are struggling to cope with
existing cost of living pressures. As reported by the ABC:
“The Choice Consumer Pulse Report has highlighted a range of cost-of-living pressures
facing Australians with one third of people surveyed saying they find it difficult to get by
on their current income, and two-thirds saying they have cut back spending on non7
essential items.”
For those Australians who have incurred a HELP debt, the introduction of this scheme may act as
a significant contributor to meeting existing cost-of-living pressures for those individuals who
participate in the scheme and are able to increase their take home disposable income.
The benefit of this scheme is likely to be felt by families, in particular, who have been (or are
planning to) reduced to a single income due to the introduction of new children.
While this scheme will not benefit all Australian individuals and households who are struggling
with cost of living pressures, given that Australians are attending and completing university study
(as well as attending and completing study at other tertiary institutions which are supported by
the HELP scheme) in increasing numbers, this scheme may potentially benefit large numbers of
Australian individuals and households who have a HELP loan.
In order to address the cost of living pressures face by individual households who do not have a
HELP debt, the Commonwealth Government will be required to consider and adopt other policy
measures.
2. Reduction of household debt and making capital available for the Australian financial system
As noted by the Reserve Bank of Australia (RBA), Australian households are currently holding
record levels of household debt relative to household disposable income. Data published by the
RBA indicates that Australian household debt stands at over 150% of household disposable
income which is at historical levels.
Several economic commentators have warned that existing levels of household debt may not be
sustainable if interest rates or unemployment were to increase8.
For those Australians who are able to increase their take home disposable income through this
scheme, they will have an ability to use some (or all) of this additional income to retire existing
7
8
http://www.abc.net.au/news/2014-08-08/australians-anxious-about-cost-of-living-survey/5655660
http://www.abc.net.au/pm/content/2007/s2043185.htm
9
forms of household debt whether they be credit card debt, personal loans, car financing loans or
mortgage loans. Otherwise, they may avoid taking on new forms of household debt.
Where this to occur, individual Australian households would improve their standard of living by
reducing the interest payments incurred on their existing debt and would further insulate
themselves from adverse economic conditions, unexpected economic shocks and/or
unemployment by holding lower levels of household debt.
Household debt deleveraging would also inject new capital back into the Australian financial
system which could be used to either finance other forms of domestic investment or could be
retained by financial institutions thereby provide additional stability to the financial system from
external shocks. This latter outcome of financial institutions holding additional capital would meet
one of the central policy objectives outlined by the recent Financial System Inquiry chaired by Mr
David Murray AO9.
Household debt deleveraging would also provide individuals Australians with a stronger platform
in which to prepare for their retirement. The existing burden of household debt and other
financial commitments has been identified by Australians as a significant inhibitor to adequately
preparing for an individual’s retirement. This has been confirmed by HSBC’s, Future of Retirement
report, which according to reporting by Fairfax Media10 on 19 January 2015 stated:
“More than 45 per cent of Australian pre-retirees told the survey they cannot afford to
prepare adequately for retirement. They say they have more immediate financial
commitments. Just over half of these said repayment on their mortgage and other debts is
stopping from preparing adequately for retirement.”
3. Increasing female labour participation rates
For individual females who have exited the workforce for the purposes of childrearing,
participating in this scheme, would improve the marginal benefit of re-entering the labour
market, given that they will be able to increase their take home disposable income on a per hour
basis.
This marginal improvement may act as an incentive to some females in finding work or increasing
their work commitments. For females with young children, the additional income may be used to
better meet the cost of childcare thereby improving the overall financial benefit of returning to
the workforce.
This is consistent with the policy intentions of the Government as outlined by the Minister for
Social Services, the Hon. Scott Morrison MP, who indicated on 3 February 2015 11:
“we believe we need to put the focus on the support going into childcare because that’s
what we believe will have the biggest impact on supporting families by allowing
particularly mothers to go back to work and to be able to have two incomes which can
support that family”.
9
http://www.sbs.com.au/news/article/2014/12/07/banks-should-hold-more-capital-financial-systeminquiry
10
http://www.smh.com.au/money/super-and-funds/australias-retirement-savings-gap-among-the-worldsbiggest-20150119-12t2l0.html
11
http://scottmorrison.dss.gov.au/transcripts/sky-news-richo
10
Increasing female participation in the labour market will have beneficial macroeconomic impacts
by:
•
•
•
allowing firms to obtain access to workers with high levels of human capital and skills;
contributing to economic growth through higher levels of production; and
positively impacting Commonwealth revenue through additional income tax receipts.
11
Implications to Commonwealth and State & Territory government budgets over the forward
estimates
The introduction of this scheme has implications on the Commonwealth budget and potentially
on the budgets of State and Territory Governments. Assessing the scheme’s total impact over the
forward estimates would require assessment of:
•
•
•
•
First (or immediate) round effects;
Second (and possible third) round effects;
Dynamic changes in economic behaviour by individual Australians as a result of changes
in marginal incentives; and
Key economic and financial variables which will affect the impact of the scheme on both
the Commonwealth and individual Australians.
These factors are discussed below.
First round effect - Saving on interest payments
The primary benefit to the Commonwealth would be the cash received from the retirement of
HELP debt, to repay existing Commonwealth debt or offset deficit expenditure which would have
required debt financing. This in turn allows the Commonwealth to achieve savings on interest
repayments which the Commonwealth is making on borrowed money used to finance the HELP
scheme.
The potential fiscal savings from lower interest repayments would be dependent on:
•
•
the take-up rate of the scheme; and
how much HELP debt is repaid under the scheme.
First round effect – administrative savings for the ATO
If introduced and as individuals are able to pay off their existing HELP debt, the ATO will have
fewer HELP accounts in which to administer. As a result, there would be an administrative
savings to the Commonwealth via the ATO, including staff costs, IT and record keeping,
communication and postage costs relating to individual HELP accounts.
First round effect – tax revenue forgone from the returns generated from superannuation
accounts
The introduction of this scheme would result in a new leakage of capital from existing
superannuation accounts to the Commonwealth. The leakage would result in the Commonwealth
incurring a loss of direct tax revenue via lower investment returns (in nominal dollar terms) on
invested capital.
The potential loss of tax revenue would be dependent on the amount of capital leakage from
superannuation accounts.
Second round effect - Implications for tax revenue
Tax modelling would be required to assess the overall impact on both Commonwealth and
State/Territory Government taxation revenue. While, as noted above, the scheme would induce a
12
first round taxation and expenditure effect, the scheme would also induce a second round
taxation effect for those individuals who are able to retire their entire HELP debt.
For these individuals, the retirement of their HELP debt and the increase in their take home
disposable income would result in:
•
Greater economic growth if this disposable income was used for additional consumption.
The greater growth reflected in greater business earnings would be partially captured
through greater corporate tax and income tax receipts;
•
Greater GST receipts for new consumption spending on goods and services that incur the
GST thereby providing additional taxation revenue to State and Territory Governments;
and
•
Additional income tax receipts if the money is saved through the interest bearing
instruments.
Dynamic changes in economic behaviour
If the scheme’s introduction alters the marginal incentives of participating in the workforce then
greater income tax receipts could be generated if the scheme encourages more Australians to
re-enter the workforce or to work more hours.
Key economic and financial variables
Assessment of the total fiscal implications of this scheme will be also dependent on key economic
and financial variables used in assessment. This may include:
•
•
the bond yield payable on Commonwealth Government debt; or
the return forgone on the superannuation capital withdrawn.
The Commonwealth Government is currently experiencing historically and abnormally low rates
of interest of its issued debt. The current yield on 10 year bonds debt issued by the Australian
Government is 2.61% as of 26 January 201512. This bond yield is almost at its lowest since at least
1969.
In calculating the potential payable interest savings by the Commonwealth from reducing the
outstanding capital issued under the HELP scheme over the coming 5 – 10 years, a historical
averaged interest rate needs to be considered.
Longer term Commonwealth Government fiscal considerations
This scheme, if implemented, would carry longer term fiscal implications for the Commonwealth
beyond the forward estimates period whether the scheme was implemented as an open ended
program or for a defined period. We outline some of these implications below.
12
http://www.tradingeconomics.com/australia/government-bond-yield
13
Implications for the age pension
As Individuals who participate in this scheme are able to immediately boost their take home
disposable pay or reduce the time horizon to retire existing HELP debt, the Commonwealth will
have no control on how this additional income may be used, it is legitimate to consider:
•
•
the likely financial state of those individuals who participate in the scheme; and
question whether the scheme creates a greater reliance on the age pension once these
individuals reach the eligible age to receive the pension.
These considerations are dependent on the scheme’s design elements. In the section below,
several policy options and variations are outlined which can provide the Commonwealth with
greater assurance and certainty that the underlying policy intent of superannuation, i.e. reducing
Australian’s reliance on the age pension as the principal means to fund ones retirement is not
compromised through the implementation of this scheme.
For the large bulk of individuals who are likely to participate in this scheme, many of these
individuals will have more than 25 to 35 years to prepare for their retirement assuming a
retirement age of 67. During the course of the coming three decades, advances in medical science
and intergenerational pressures on Commonwealth and State and Territory budgets are likely to
result in extensive public debate and public policy reform with respect to Australia’s retirement
system (i.e. superannuation and government assistance payments) that places the Australian
economy and public finances on a sound and sustainable basis.
Given the time horizon involved, it is difficult to anticipate how this scheme and potential future
reform will impact on the provision and overall cost of the age pension to the Commonwealth.
Given the likely benefits available to the Commonwealth and individuals from this scheme,
uncertainty over the impact of the age pension over this time horizon should not prevent the
introduction of this scheme.
Globalisation and the mobility of labour
The process of globalisation which in its current phase has been significantly restructuring the
global economy over the past 25 years continues to have significant implications on the mobility
of capital and labour across the world.
Australians, in increasing numbers, are spending more time working outside of Australia. For
some Australians working outside of Australia is a long held ambition, for others it could be the
requirements imposed by multinational companies to work in international markets or the
emergence of unexpected opportunities during their working life.
Many of these Australians are skilled individuals and have been the recipient of an Australian
tertiary education.
One design weakness of the HELP scheme from a Commonwealth perspective is that individual
Australians are not obligated to repay their HELP loan if they do not reside in Australia and do not
generate taxable income within Australia. If these individuals do not return back to Australia, the
Commonwealth is not able to recoup the outstanding loan capital.
One of the potential benefits that may result from the implementation of this scheme is that the
Commonwealth may be able to recoup outstanding HELP debt from individual Australians now
given that some Australians may, at a later stage, decide to work outside of Australia.
14
Premature Death
The HELP scheme is designed to recoup repayments from individuals who are currently alive and
is earning a taxable income within Australia above a certain taxable income threshold. If an
individual Australian unfortunately experiences premature death, then any outstanding HELP
debt is written off by the Commonwealth. This was reconfirmed, on 29 May 2014, by the Prime
Minister, the Hon. Tony Abbott MHR who ruled out capturing outstanding HELP debt through the
estates of deceased Australians.13
The introduction of this scheme would allow the Government to recoup outstanding HELP debt
from individual Australians who participated in the scheme and who, at a future point in time, are
unfortunate to experience premature death.
This is particularly important given that the Commonwealth Government has only made a
provision of doubtful debts of only $24 million14 against the HELP scheme among other financial
advances (including advances to State and Territory Governments) which is expected to total
$45.1 billion in 2014-15.
13
http://www.smh.com.au/federal-politics/political-news/tony-abbott-scotches-idea-of-collecting-hecsdebt-from-dead-students-20140528-395ch.html
14
See Note 13, Statement 9 of Budget Paper 1, Commonwealth budget 2014-15,
http://www.budget.gov.au/2014-15/content/bp1/download/BP1_BS9.pdf
15
Policy options and variations
There are various design variations and options which the Commonwealth could adopt to the
proposed scheme in order to address any perceived public policy or stakeholder concerns. These
options include:
•
Introducing a specific time limit for which the scheme may run - this budget measure could
be introduced for a limited 6-12 month period which would allow the Commonwealth and
other interested stakeholders to assess both the macro and micro economic impacts on the
scheme.
•
Placing a cap on the number of withdrawals from an individual superannuation account
during a specific period – to provide certainty and stability to individual superannuation
accounts, the Commonwealth could limit the number of potential withdraws to be, say, one
or two withdraws per year.
•
Placing a cap on the amount that may be withdrawn from individual superannuation
accounts – the Commonwealth could cap the amount of financial capital that could be
withdrawn from individual superannuation accounts that could be used to pay existing HELP
debt.
A cap of, for example, $20,000 as the maximum amount an individual could withdraw under
the scheme would provide individual Australians with some benefit and would ensure that
individual Australians did not exhaust all of their retirement savings which would undermine
their ability to fund their retirement.
•
Excluding the existing 5% discount from applying to this scheme – the Commonwealth
could exempt the 5% discount which currently applies to early repayments of HELP debt
from this scheme. This would allow the Commonwealth to minimise any potential tax
revenue forgone from lower superannuation balances.
•
Placing age eligibility criteria on those Australians able to participate in the scheme
Maximum age eligibility
Introducing maximum age eligibility, for example limiting participation in the scheme to
people under 40 years old would provide the Government with assurance that Australians
over 40 years old would have sufficient time to accumulate sufficient superannuation savings
that funds their retirement and limits dependency on the age pension.
This option would address any perceived concerns that the scheme undermines the original
policy intent of the universal compulsory superannuation system that being to assist
Australians save for their own retirement.
Minimum age requirements
Minimum age requirements could be introduced, say only allowing Australians 30 years or
over to participate in the scheme in order to avoid introducing a disincentive in the system
for Australians to pay for their tertiary education expenses upfront that are covered by the
HELP scheme.
16
Minimum age requirements could also be introduced to ensure that current students or
recent graduates are not unduly influenced in their educational attainment decisions by the
scheme.
•
Placing a cap on the amount of capital leakage which may be drawn from the
superannuation industry during a specific period – to alleviate any concerns regarding the
potential for excessive leakage coming from the superannuation system, the Commonwealth
Government could place a total cap on how much financial capital can be drawn down from
the superannuation system during a specific period or for the scheme overall.
For example, the Commonwealth may limit the capital leakage to $4 billion per annum or on
an overall basis. This cap could be enforced through requiring individual Australians to run
through an application process with the ATO on a first come or first served basis or with a
preference for families who are currently raising dependent children.
•
Increasing the superannuation preservation age for those Australians who participate in
the scheme – the Commonwealth could require Australians who participate in the scheme to
accept a higher superannuation preservation age as a condition of their participation.
This would provide additional assurance to the Commonwealth that participants will have
sufficient time and ability in which to accumulate sufficient capital that funds their
retirement and therefore reduces their reliance on Commonwealth assistance payments
such as the age pension.
This option could also offset any lost taxation revenue that the Commonwealth may
experience through the early withdrawal of superannuation capital over an individual’s life
time.
Modelling analysis would be required to assess what the new preservation age should be for
those who participate in the scheme.
The Commonwealth would be required to assess, via a Regulation Impact Statement, the
potential administrative burden that the superannuation industry may experience in having
to administer different preservation ages for different superannuation account holders.
•
Imposing a special tax or charge on the superannuation capital withdrawn – the
Commonwealth could impose a special tax or charge on the capital withdrawn under this
scheme to ensure that those who do not participate in the scheme are not unfairly treated
as they will not have access to their superannuation capital until they meet the preservation
age criteria.
Currently, individuals who access their superannuation capital under the age of 55 as a lump
sum are taxed at 22% on the taxable component (this includes a Medicare component
levy)15. The Commonwealth would have to consider whether this taxation rate (or an
alternative tax or charge) would act as a prohibitive disincentive to participating in the
scheme.
Moreover, the rate of tax or charge imposed would have to acknowledge that this scheme
creates a public benefit through the retirement of HELP debt and therefore an improvement
15
https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/tax-and-super
17
in the Commonwealth’s balance sheet whereas other forms of capital withdraw generate
solely private benefits for the individuals involved.
•
Require participants to make additional superannuation contributions at a future point in
time – the Commonwealth could require individual Australians who participate in the
scheme to make additional contributions to their superannuation fund at a future point in
time.
This option would provide additional assurance to the Commonwealth that participants will
have sufficient capital that funds their retirement and therefore reduces their reliance on
Commonwealth assistance payments such as the age pension. This option could also
alleviate any concerns that this scheme may undermine the ability of the superannuation
industry to provide a deep pool of national savings.
This option would also recognise that individual Australians are generally capital constrained
during the family formation and child rearing stages of their lives and generally will have
greater capacity to contribute further to their superannuation fund at latter points in their
life.
An analysis of the various contribution options, including the size and timing of additional
contributions, would be required to determine the most optimal outcome for both the
individual and the Commonwealth.
Assessment and selection of available policy options and variations
The above list of policy options and variations should not be considered as an exhaustive list as
other policy options and variations to the scheme may potentially be identified by interested
stakeholders.
In assessing and selecting the various scheme design options available to policy makers, a robust
cost-benefit analysis (coupled with detailed economic and financial modelling and economic
welfare analysis) of the various possible options is required to determine the most optimal design
of the scheme that best promotes the benefits to individuals Australians and the Commonwealth
at the same time as addressing any perceived public policy or stakeholder concerns.
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Voluntary use of financial capital from superannuation accounts to
retire HELP loan debt
Questions and Answers
1. Why should the Government only limit this scheme to HELP debt?
Unlike other forms of debt, the repayment (partial or whole) of an existing HELP loan is
unlikely to result in new HELP debt being taken up by individual Australians representing a
permanent structural benefit to the balance sheet of the Commonwealth Government.
Among the various forms of debt finance available to individual Australians, HELP debt is one
of the least reoccurring forms of debt taken up by individual Australians.
For those Australians who are able to retire their existing HELP debt, the additional income
that individuals would enjoy from retiring HELP debt would:
•
•
•
go to meeting existing cost of living pressures;
be saved either to fund future consumption or be used to generate wealth through
asset accumulation; or
be used to retire existing household debt whether credit card debt, personal loans,
car financing loans or mortgage debt.
For those Australians who do incur new HELP debt after participating in the scheme, while
they may be incurring new amounts of debt, the additional study will allow them to
formulate higher levels of human capital and therefore boost the overall skill level in the
Australian labour market contributing to higher rates of labour productivity.
From an economic perspective, additional accumulation of HELP debt should not be
considered as expenditure on current consumption (i.e. expenditure that only has an
economic life of less than a year), but rather, it should be considered as an investment in
human capital (i.e. an asset) that continues to yield benefits over the life of the individual
concerned.
2. Will this scheme undermine the original policy intent of compulsory universal superannuation
and impair the ability of individual Australians to plan for their retirement?
The original policy intent of the compulsory universal superannuation system was to create a
public benefit for Australia by encouraging Australians to adequately prepare for their
retirement and thus reduce their dependency on the age pension for their post retirement
income. The implementation of this budget measure will generate significant public benefit
through the reduction of Commonwealth debt under the HELP scheme and the associated
saving of interest payable.
Individual Australians who are able to increase their take home disposable income through
participating in this scheme will be able to improve their household wealth through:
•
Using this additional income to meet existing cost of living pressure, thereby
reducing the need to take on new forms of debt to fund essential consumption items
such as housing, food, energy, transport or childcare costs;
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•
Saving the additional income through an interest bearing account for the purposes of
purchasing a major asset such as housing at a future point in time;
•
Reduce existing household debt whether the debt be credit card debt, personal
loans, car financing or mortgage debt.
While these impacts are short term in nature, the benefit of these impacts will provide
individual households with a stronger platform to successfully secure their financial future.
This is supported by HSBC’s, Future of Retirement report which found that more than 45% of
Australian survey respondents indicated that they are struggling to adequately prepare for
their retirement due to existing financial commitments and current forms of household debt,
including mortgage debt.
3. Is this scheme consistent with the Coalition’s 2013 election superannuation policy?
The Coalition’s overriding commitment in its 2013 election policy on superannuation16 was
that in order to:
“help Australians have confidence again in superannuation we pledge not to make any
unexpected detrimental changes to superannuation.”
The proposed budget measure as an opt-in scheme does not detrimentally impact the
superannuation of individual Australians. The proposed initiative provides eligible individuals
with a greater choice about how to use their superannuation that best maximises their
economic welfare both now and into the future.
Moreover, the proposed scheme does not conflict with the other policy initiatives outlined in
the Coalition’s superannuation policy.
4. Won’t this scheme encourage other Australians to call on the Government to provide access
to their superannuation funds to meet existing cost-of-living pressures?
While individual Australians may request access to their superannuation funds for other
purposes, the proposed budget measure is specific and unique. Its designs elements should
be preserved as outlined in this submission given that:
•
Retiring HELP debt assists the Commonwealth Government with its immediate
objective of budget repair and debt reduction. The reduction of Commonwealth debt
and the associated saving of payable interest generates a public benefit that is
enjoyed by all Australians. Providing access to superannuation funds to meet other
forms of household debt does not assist the government meet its fiscal policy
objectives; and
•
Incurring HELP debt is unique as it relates to undertaking tertiary approved study.
This debt, in most cases, will not be recurring unless further study is undertaken,
which for many households may not necessarily be the case and therefore
represents, for many, a permanent structural improvement in their household
balance sheet.
16
http://lpawebstatic.s3.amazonaws.com/Coalition%202013%20Election%20Policy%20%E2%80%93%20Superannuation%2
0%E2%80%93%20final.pdf
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Providing additional access to superannuation funds to meet existing cost of living pressures
outside of the HELP scheme may undermine the original policy intent of superannuation as
this may invite individual Australians to assume new debt at a future point in time and
therefore the Commonwealth would not have adequate assurance that individual
Australians have prepared for their retirement.
Moreover, releasing superannuation for the purposes of asset accumulation such as housing
may lead to inflating house prices as individuals would be able to leverage greater amounts
of mortgage debt using their superannuation capital than otherwise would be the case.
5. Will Australians be better off over the long term if they participate in this scheme?
Ultimately individual Australians will have to decide whether accelerating the retirement of
their HELP debt is in their financial interests relative to the potential investment returns that
they may enjoy via their superannuation account. However, in answering this question the
following should be considered:
•
Australians who access the HELP scheme enjoy a zero default risk17 under this
scheme and are not charged the real rate of interest. Individual Australians who
retire their HELP debt and use their increased take home disposable income to retire
or avoid other forms of household debt will be better off as these other forms of
debt does carry a default risk and are lent out at real rates of interest.
•
Depending on one’s individual circumstances, some Australians place greater
importance on maximising their personal cash flow during the family formulation
and childrearing stage of their life rather than on returns generated in their
superannuation account.
6. How much capital leakage could the superannuation industry experience from this scheme?
As a voluntary scheme it is difficult to estimate the potential leakage that would occur under
the scheme on an annual basis if caps or eligibility criteria are not placed on individual
Australians participating in the scheme.
If introduced on 1 July 2015, the amount of capital that is used to retire HELP will be less
than the total estimated outstanding HELP debt of $29.9 billion given that:
•
Not all individuals are required to repay their HELP debt if they don’t earn above the
specified threshold or if they work outside of Australia;
•
Not all Australians who are required to repay their HELP debt will take advantage of
the proposed repayment scheme outlined in this submission for either financial or
non-financial reasons; and
•
Not all Australians have sufficient capital in their superannuation accounts to repay
their existing HELP debt.
17
Individuals who have a HELP debt have a legal obligation to repay their debt via the PAYG system if they
meet a certain income threshold. Beyond this obligation, there are no consequences for individual
Australians who do not fully repay the Commonwealth the money received under the HELP loan system.
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7. What is the total impact of this scheme on the Australian economy and the Commonwealth
budget?
The scheme’s total impact on the Australian economy and the Commonwealth budget will
need to be assessed in terms of:
•
•
•
•
First (or immediate) round effects – i.e. the scheme’s take up rate, how much
debt in total is paid back;
Second (and possible third) round effects;
Dynamic changes in economic behaviour by individual Australians as a result of
changes in marginal incentives;
Key economic and financial variables which will affect the impact of the scheme
on both the Commonwealth and individual Australians.
This may include the bond yield payable on Commonwealth Government debt or the rates of
return forgone on the superannuation capital withdrawn which would affect the total
realisable Government savings from the scheme.
The Commonwealth Government is currently experiencing historically and abnormally low
rates of interest of its issued debt. The current yield on 10 year bonds debt issued by the
Australian Government is 2.67% as of 18 January 2015 18. This bond yield is at its lowest since
at least 1969.
In calculating the potential payable interest savings by the Commonwealth from reducing the
outstanding capital issued under the HELP debt scheme over the coming 5 – 10 years, a
historical averaged interest rate needs to be considered.
8. Will this scheme impact on the pricing and marketing activities of universities and other
tertiary institutions covered by the HELP scheme?
The intent of this budget measure is to assist the Commonwealth Government with its goal
of budget repair and debt reduction as well as assisting individual Australians who are able
and willing to do so, reduce their outstanding debt obligations with the Commonwealth that
allows them to increase their take home disposable income.
Adjustments to the pricing and marketing activities of universities that results in higher
course or degree costs as a result of this budget measure would be an unintended
consequence.
To ensure that this is unintended consequence is not realised, the Government could
introduce this budget measure for limited amount of time (e.g. 12 months) with a formal
review following the end of the scheme’s operational period, ensuring that this measure
does not become a permanent fixture in the Commonwealth policy landscape.
The Government could also introduce a minimum age eligibility criteria (e.g. only people
above the age of 30 can access the scheme) to ensure that existing students and recent
graduates (who usually complete their study in their early to mid-20s) are not unintentional
influenced in their educational attainment decisions.
18
http://www.tradingeconomics.com/australia/government-bond-yield
22
9. Is this scheme unfair and discriminatory against those Australians who do not have a HELP
debt?
The proposed budget measure is a specialised scheme focused on assisting a sub-set of the
Australian community who have an outstanding HELP debt with the Commonwealth
Government.
Australians who do not have HELP debt (particularly those who are not the beneficiary of an
Australian territory education) will not have access to their superannuation capital earlier
than the currently stated Commonwealth policy and legal parameters.
Those Australians who are ineligible to participate in the scheme are still able to benefit from
the scheme in the following ways:
•
The reduction of Commonwealth debt via the early repayment of HELP debt will
produce a public benefit greater that all Australians will enjoy; and
•
Those who do not access the scheme will enjoy having more superannuation
capital (and therefore potentially greater investment returns in dollar terms)
relative to those who did participate in the scheme.
Moreover, the Commonwealth may address any perceived unfairness between those who
participate in the scheme relative to those who don’t by:
•
imposing a special tax or charge for the privilege of accessing their
superannuation capital earlier than otherwise; or
•
raising the superannuation preservation age for those participating in the
scheme requiring these individuals to work and save for a longer period of time
before accessing their superannuation capital for retirement purposes; or
•
Reducing other forms of Commonwealth assistance for middle to higher income
earning Australians given that many of beneficially of this scheme will be from
this socio-economic group.
10. Is this scheme a violation of the Sole Purpose Test?
Superannuation funds that enjoy the concessional tax arrangements offered by the
Commonwealth must comply with the ‘Sole Purpose Test’ as outlined in section 62 of the
Superannuation (Industry Supervision) Act 1993 (Cth).
Under this section, the Act defines that each trustee of a regulated superannuation fund
must ensure that the fund is maintained solely for one of the defined ‘core purposes’ (see
subsection 62(1)) or one of the defined ‘ancillary purposes’ (see subsection 62(2)).
The core purpose of a regulated superannuation fund requires the fund to provide benefits
for an individual who have retired from the workforce consistent with the defined aged
preservation age. The defined ancillary purposes allow the early release of benefits to an
individual in a select number of defined cases including:
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•
•
•
•
•
severe financial hardship;
total and permanent disability;
temporary incapacity;
terminal illness; or
permanent departure from Australia19.
The implementation of this scheme would not alter any of the ‘core purposes’ of a regulated
superannuation fund. Rather the implementation of this scheme could be achieved through
a legislative amendment to paragraph 62(1)(b) by allowing the retiring of HELP debt as an
ancillary purpose of a regulated superannuation fund.
11. Has the early release of superannuation benefits previously been considered by Government
and/or Parliament?
The early release of superannuation benefits was considered by the Senate Select
Committee on Superannuation and Financial Services via a specific inquiry. The committee
delivered a report in January 2002 entitled, Early Access to Superannuation Benefits. During
this inquiry the committee did not consider the use of superannuation for the retirement of
existing HELP debt.
The policy context has changed substantially over the 13 years since when this inquiry was
last conducted, including:
•
The significant growth in the overall value of assets under the management of the
superannuation industry;
•
The significant deterioration of the Commonwealth budget and balance sheet
(including the sustainability of the HELP scheme) and the urgency to find new
policy measures that can assist in the task of budget repair and debt reduction;
•
Increasing cost of living pressures being experienced by Australians, particularly
families which is inhibiting Australians to adequately prepare for their retirement
outside of the superannuation system (see references above to HSBC report); and
•
The significant increase in household debt in both nominal and relative to
disposable income terms.
These changing policy circumstances provide sufficient justification for the Commonwealth
to consider the proposed budget measure in the 2015-16 budget cycle.
12. Are there any international precedents for the use of capital from superannuation funds
similar to the scheme advocated in this submission?
There are many developed economies that have implemented their own superannuation
system that helps build a pool of national savings as well as help their citizens to provide an
adequate level of income sufficient for post-working retirement. Many of these countries
have vastly different design features to their superannuation system relative to the
Australian system.
19
http://www.apra.gov.au/super/pages/early-release-of-superannuation-benefits.aspx
24
Some of these countries allow the withdrawal of capital superannuation funds that assist
individuals with major purchases that occur throughout an individual’s life. For example, in
countries such as New Zealand or Switzerland, individuals are able draw down on their
superannuation in order to assist in the purchase of their first owner-occupier home.
Alternatively, in Singapore, individuals have multiple superannuation accounts that allow the
drawdown of capital for various purposes including educational, medical and housing
expenses.
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