For some time former Liberal adviser John Adams and Senator Chris Back have been promoting the idea of using superannuation to pay off HELP debt. Adams put his case on Catallaxy last year, and Senator Back is in the AFR again today on the subject. At The Conversation, Geoff Sharrock has a different take on the same idea, proposing that annual superannuation payments by employers be diverted into meeting that year’s HELP repayments.
You would have to be a bit desperate use superannuation, on which you can reasonably hope to earn a 5-10% a year rate of return on average, to pay off a debt with 2-3% interest. But the proposals are about cash flow, not long-term financial advantage. Any HELP debtor who earns the repayment threshold has to repay more than $2,000 a year, and someone on $100,000 a year will have to repay at least $8,000. While people on these incomes are not poor by general community standards, they could reasonably regard their current needs as more important than additional wealth or consumption in the future.
There is good evidence that people manipulate their income to stay below the HELP repayment threshold (see for example figure 22 on page 40 of our recent report), even though many of them probably will repay eventually. So there would probably be some demand for trading in super for repaying HELP. The Sharrock plan is likely to have more voter appeal than the Adams plan, which will only have the desired effect for debtors who have enough accumulated superannuation to clear their entire debt (as HELP repayments are only based on current income, not outstanding balance*). Most new bachelor-degree graduates will have too little in their super accounts to clear the $20,000 to $40,000 they will typically owe after completing an undergraduate degree, but as Sharrock shows the 9.5% of income annual compulsory superannuation investment is always higher than the compulsory HELP repayment.
But should the government allow superannuation to be used in this way? The two big issues are whether superannuation should be diverted from its core retirement savings purposes, and whether it will save the government money as well as being more convenient for debtors.
Adams is aware of the criticisms, particularly around the long-term impact on retirement income. He says people could be required to make up the contributions later. As with HELP repayment on family income, this would be complex to administer and enforce. It needs a counter-factual amount that would have been saved, and a plan for how it is going to be reached. Sharrock just observes that in his plan most graduates would still have decades of work ahead of them. In part, how big an issue this is will also depend on the level of HELP debt.
Perhaps the bigger danger to retirement savings is the precedent using superannuation for HELP would set. While people who have not been to university don’t have HELP repayments, they do on average have lower incomes, so it is hard to say that HELP debtors have any unique cash flow issues (apart, perhaps, from those created by lifestyle expectations). Adams provides an intellectual differentiation between using HELP for other purposes, such as buying a house, and using it to repay HELP. But inevitably the details would be lost as other people tried to free their superannuation savings for more urgent uses.
The other big question is the effect on the government’s finances. There is value to the government in earlier repayment of HELP debt through lower interest subsidies, and possibly in reduced doubtful debt (although people who think they might not repay in full will be less likely to use their super for early repayment). But the government will lose the taxation it would receive on superannuation funding earnings. Super for HELP also seems open to rorting, by salary sacrificing into superannuation and then using the money to repay HELP debt. It would be a back door way of restoring the bonus for repaying ‘early’ that will otherwise be abolished next year. Many years in the future, there may also be additional issues with people whose super savings are too low for retirement who end up having to rely on government payments.
While I do want HELP debt to be repaid more quickly, on balance I don’t think diverting money from superannuation is the way to do it.
*Unless HELP repayment is completed during the year.