Category: Income and wealth

The politics of multi-rate marginal HELP repayments

Andrew Norton2 Comments

In a couple of previous posts, I examined reasons for moving to a marginal rate system for repaying HELP debt, as proposed by the Universities Accord final report, and what the rates might be.

Under a marginal rate system HELP debtors would repay a % of all income above a threshold amount, instead of a % of all income once a threshold is reached, as now. An advantage of marginal rate repayment systems is that they can reduce effective marginal tax rates. High EMTRs discourage people from taking on more paid work. In some cases under the current system EMTRs exceed 100%, so disposable income goes down despite nominal income going up.

The Accord final report and the minister, Jason Clare, also suggest reducing annual repayments, at least for lower income HELP debtors. Except for HELP debtors just above an income threshold in the current system (especially the first one, where there are very high EMTRs) this is not an inherent feature of marginal rate systems compared to current arrangements. But it could be a political selling point for a marginal rate system designed to reduce repayments.

To cut annual repayments for lower income HELP debtors without causing a major reduction in HELP repayment revenue the government would need to introduce a multi-rate marginal system. This is implied in the Accord final report discussion. Multi-rate systems progressively increase the marginal rate as income goes up. There are many possible sets of rates, but my previous post looks at 7%-17%-22% and 10%-15%-20% models.

This post goes through some of the political implications of moving to a marginal rate system.

How will the percentage numbers be interpreted?

One initial challenge will be convincing people that a 7% or 10% first marginal rate will usually reduce their repayments compared to the current seemingly lower rates. How can charging 7% increase disposable income compared to 1%?!

Of course the answer is what the percentages are of, but for people half paying attention, who have never thought about marginal versus whole of income rates before, a higher percentage rate reducing their repayments is going to seem counter-intuitive.

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Why does the Universities Accord final report suggest repaying HELP debt on a marginal rate – a % of income above the threshold, rather than all income?

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One quirk of the HELP repayment system is that, on reaching each repayment threshold, the debtor pays a % of their entire income. England and New Zealand followed Australia in creating income contingent student loans. But their repayment systems are based on a % of their income above the threshold – they have marginal rate systems. The Australian income tax system also uses marginal rates.

The Universities Accord final report HELP repayment recommendations include ‘moving to arrangements based on marginal income’.

As explained below, this Accord change would reduce ‘effective marginal tax rates’ – the loss of disposable income on each dollar above the threshold. Under the current system, EMTRs can exceed 100% – so that earning an extra dollar reduces rather than increases a HELP debtor’s annual disposable income. The Accord final report calls this an ‘unfair situation’.

The Accord final report does not specify a marginal rate – an issue I discuss in another post. England and New Zealand have marginal loan repayment rates of 9% and 12% respectively above their repayment thresholds.

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More than a million people are now repaying HELP debt, but the average repayment is down

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The ATO’s annual taxation statistics release shows that in 2019-20 the number of repaying HELP debtors continued its strong growth, up 23 per cent on 2018-19 and exceeding 1 million for the first time. However, compulsory repayments are not growing as strongly, up 8 per cent on 2018-19 to $3.6 billion.

This post offers a few explanations for overall growth and why repayers are increasing more rapidly than repayments.

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The case for redefining low socioeconomic status in higher education

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(This post also appears on the Grattan Institute blog.)

Since the early 1990s, higher education statistics have defined someone as of low socio-economic status if they are from a region classified in the lowest 25 per cent in Australia according to the ABS Index of Education and Occupation.

Universities are rewarded for enrolling students from these areas. A participation fund of about $135 million is distributed between universities according to their share of low SES students. A university’s success in the new performance-funding scheme will depend in part on it enrolling low-SES students.

The low-SES definition has been criticised over the years, usually because it often misclassifies individuals. High-SES people live in low-SES areas, and vice versa. But we need a balance between precision and practicalities. To recruit additional low-SES students, universities need to first identify them. Geographic areas are easier to find than individuals with particular family characteristics.

Although geographic SES measures should be retained, the lowest 25 per cent definition needs reconsidering. As the chart below shows, in 2016 higher education participation rates in the lowest quartile were not clearly distinct from the second quartile. Generally, the weighted average participation/attainment rates at the ABS SA2 geographic level cluster at around 25 per cent for people aged 18-23 across the lowest 50 per cent of areas by the Index of Education and Occupation. An SA2 is roughly the size of a postcode.*

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Is government spending on tertiary education getting more progressive?

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One long-made argument against tertiary education subsidies is that they are regressive. University students tend to come from more privileged backgrounds, and therefore high-income households receive a disproportionate share of government spending on higher education.

Based on gross household income, ABS data on the distribution of government benefits released today confirms that this is still true, as the chart below shows, although the ratio between the highest and lowest income quintiles is lower now than in the past.

Slide2

On an equivalised income basis, which takes into account household size, the distribution of spending is more even. This reflects the fact that although students tend to come from relatively affluent households, these also tend to be relatively large households containing a couple and their children. Making it disposable income makes it more even still, given progressive taxation. Read More »

Was higher education ever likely to reduce inequality?

Andrew Norton8 Comments

Next week I am a panelist in a discussion on whether Australia has an equitable tertiary education system. The promotional blurb says:

Australians believe we live in a fair and egalitarian country. We believe in a fair go: in equality of opportunity. We also believe that accessible education and training is a fundamental right and it facilitates prosperity, social mobility and a richer and more engaged economy.

Are these beliefs about who we are based in fact? While access to higher education has increased dramatically over the past 30 years, income and wealth inequality is also on the rise. This seeming contradiction challenges our most fundamental beliefs about intergenerational mobility. Is the education system a cure or a curse? …

When I accepted the invitation to be on the panel I told the organisers that I did not know the answers to their questions, but I could offer some observations. I am going to try a few of them out on this blog.

Starting theoretically, I think social mobility and income inequality are distinct issues. It was always more plausible that education would promote mobility in personal status than that it would reduce snapshot-in-time income inequality figures. Indeed, there are reasons for thinking that higher education is more likely to increase than decrease income inequality.

Higher education can increase individual income inequality by facilitating a more unequal labour market. Higher education provides the training to support an increasing number of highly-skilled and highly-paid professionals. In a 2017 paper, Jeff Borland and Michael Coelli have some interesting charts showing growth in demand for the kinds of cognitive skills that a university education aspires to teach. Consistent with this, numerous papers have shown substantial financial ‘returns’ to higher education. This Deloitte report from last year summarises some of the local literature and adds its own estimates. Read More »

Are English university students right to be upset about high fees?

Andrew Norton1 Comment

Since the British Labour Party did unexpectedly well in last month’s UK elections, on the back of strong support from young people in particular, university fees have turned into a big issue there. The Australian‘s High Wired column hints that this ‘international narrative’ might arrive on our shores.

Both free and high-fee higher education systems can perform reasonably well on measures such as levels of educational attainment. The chart below has lagged fee data to capture the time 25-34 year olds went to university, but the broad patterns are evident. People living in high fee countries tend to have relatively high rates of holding university qualifications. Low attainment countries have low or zero fees, but there is also a cluster of low or zero fee countries with high attainment.

There are many country-level complexities in this analysis (for example, German low attainment may not be a problem given the structure of their economy and strong vocational system). But generally the cost of high attainment has to be met with high taxes or high fees. Read More »

Should we use the OECD’s analysis of the private financial benefits of tertiary education?

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I’m quoted this morning in The Australian‘s report on graduate earnings across the OECD, which is in the latest issue of Education at a Glance.

The reported numbers seemed low compared to work Grattan and others have done for higher education, and I have had a bit more time since to work out why.

An issue I noted in the Oz is that the analysis included people with diplomas. In 2012, diploma holders were 28 per cent of everyone with a diploma or higher qualification. Their lower average earnings will bring down the overall average.

Another issue is that the OECD’s data source may be understating graduate income. They used a source I had never heard of for analysing educational returns, the ABS Disablity, Ageing and Carers survey. It was a general population survey so the issue is not that it is a sample of graduates with a disability. However, looking at the way the unit record data is made available to researchers it seems income is only available in ranges, the top one of which is $1,730 a week or more. We hit this problem in the 2011 census as well, with their top range of $2,000 a week or more. 11 per per cent of diploma holders, 21 per cent of bachelor degree holders, and 33 per cent of postgraduate degree holders reported incomes of $2,000 a week or more. As some of these would have incomes well over $2,000 a week, the average is artificially held down by the income category cap.

The OECD numbers are net present value, which means that income expected to be received in the future is counted as of less value than income received now. There is plausible time value of money theory for discounting the future – for example, an 18 year old prospective student would probably rather receive $1,000 now than $1,100 when they finish their 3 year degree, even though there is a favourable implied interest rate on offer.

But in our Graduate Winners report that was not the way we presented the data, which we left undiscounted in the key sections. This was partly because the undiscounted number is easier to understand, and partly because despite the plausibility of time value of money theory in various contexts I was not sure it was so persuasive in this one. In my view, one reason people pursue higher education is so that they will have a good job and a high income in 30 years time. How much theoretical sense does it make to heavily discount the value of achieving a major objective?

Some interesting data on male hourly earnings by years of experience from the latest HILDA report highlights this issue. For the first five or so years, male graduates don’t earn much more per hour than men with vocational education. But after that time a wide earnings gap develops – in the later years that are most discounted by the OECD methodology.

male hourly earnings

The discounting also affects another issue, which is that they assume students don’t work while studying, and the consequent assumed forgone earnings appear with a low discount and are deducted from gross earnings. But in Australia most students work while studying, so the forgone earnings cost is exaggerated, while future income benefits are under-valued.

There is no perfect method of doing educational returns analysis, and every data source in Australia has limitations. But overall I think the OECD numbers are less useful than existing Australian research on the financial benefits of education.

Does graduating into a recession affect long-term job quality?

Andrew Norton6 Comments

Graduating into a recession may not affect overall employment levels, but could it affect job quality? The theory here is similar to the employment scarring effect. By graduating into a recession, a proportion of graduates don’t acquire jobs that allow them to maintain or develop their skills. This harms their CV, and employers will continue to overlook them as they age, stalling their careers.

In this analysis, I will take professional and managerial employment as a proxy for a quality job. I realise that this is imperfect. Broad job categories can under- or over-state the skills actually required in particular jobs. Job categories are also known not to always match with subjective perceptions of skills use or job satisfaction. But this is the best I can do with readily available data from the census.

As can be seen from the slide below, with dots in the line for the group of most interest, it is hard to see evidence of a scarring effect. It looks like the early 1990s recession cohort are continuing their career climb – not shown, but there is a shift from jobs classified as ‘professional’ to those classified as ‘managerial’, as people move into more senior jobs.

prof and manager 2011

Another test of graduate outcomes is income. Unfortunately the census uses a category of $2,000 a week or more for all higher income earners. But taking this cut-off again we see little evidence (dotted part of the line) that our assumed recession graduates are significantly off-course in their careers. However, by dividing the group into undergraduate degree only and postgraduate we can see one reason why postgraduate study has boomed in recent years.

income 2011

Of course, we can’t rule out that there is some salary penalty hidden in the broad $2,000 a week or more category. But it is hard to argue based on this evidence that there is a significant cohort from the early 1990s who are still doing it tough in 2011.

None of the data sources I have been able to use in analysing this issue are fully adequate. But overall the results I have incline me against the scarring hypothesis. Based on this 1990s recession evidence, employers typically don’t write prospective employees off just because their careers get off to a slow start.

Scholarship scepticism confirmed

Andrew Norton2 Comments

Eighteen months ago I was much less full of praise than others for Graham Tuckwell’s $50 million scholarship donation to the ANU. I said:

Like many scholarship schemes, the Tuckwell scholarship will go to people who already have plenty of potential that is unlikely to go to waste. They will go to university anyway, find mentors anyway (one of the claimed benefits of the scheme), and make something of their lives. They are not the people who need help.

Instead, these scholarships are used for essentially wasteful positional competition between universities. The ANU will use the Tuckwell’s scholarships and the associated publicity to try to take top students away from Sydney, Melbourne and other universities that buy talented students .

The announcement today of the 2015 scholarship winners highlights my point. The schools represented from my home state of Victoria (below) hardly suggest that the scholarships are opening up opportunities for the under-privileged. Instead, they are the ANU poaching students from the University of Melbourne.

Melbourne Grammar School, Westbourne Grammar School, Geelong Grammar School, Melbourne High School, Geelong Grammar School, Ballarat Grammar School St Kevin’s College, Presbyterian Ladies’ College

As I said last year, there are much worse ways a rich man could spend his money. But there are also much better ways.

Update: A reader who likes empirical data has sent me the socioeconomic background data of the successful schools. Three of the students are from schools that have more than 25% of their students from low SES backgrounds. But that isn’t enough to change the overall picture of massive over-representation of the top quartile.

SES schools