Re: Commonwealth Pre-Budget Submission Voluntary use of superannuation to retire Higher Education Loan Programme debt

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1 John Adams Budget Policy Division Department of the Treasury Langton Crescent PARKES ACT February 2015 Dear Treasury, Re: 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 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

2 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 jadams1801@gmail.com. Yours faithfully, John Adams

3 Pre-Budget Submission to the 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 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

4 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

5 `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 fiscal budget. Proposed budget measure This submission advocates that the Commonwealth Government as part of its 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 Current state of HELP According to the Commonwealth Budget Paper No. 1 (Statement 9, note 13 1 ), the existing HELP scheme is expected to reach $AUD 29.9 billion during and will balloon out to over $AUD 51.4 billion in (or a 71.9% increase). HELP is recognised as an asset (advances paid) on the Commonwealth Government s balance sheet

6 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 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 Note that in its 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. 6

7 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

8 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 schedule 6, 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 ) and a repayment rate of 4% rising to 8% as taxable income increases to $99,070. 8

9 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 nonessential items. 7 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 increase 8. 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

10 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 AO 9. 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 Media 10 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 : 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

11 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

12 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

13 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 This bond yield is almost at its lowest since at least 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

14 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

15 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 million 14 against the HELP scheme among other financial advances (including advances to State and Territory Governments) which is expected to total $45.1 billion in See Note 13, Statement 9 of Budget Paper 1, Commonwealth budget , 15

16 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

17 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

18 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. 18

19 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; 19

20 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 superannuation 16 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 %E2%80%93%20final.pdf 20

21 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 risk 17 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. 21