Income contingent loans for paid parental leave

• Bruce Chapman, Tim Higgins
• Centre for Economics Policy Research

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12 February 2009In early 2008 the federal government instructed the Productivity Commission (PC) to enquire into the social and economic policy issue of paid parental leave (PPL). In their
draft report, the PC (2008) has called for a taxpayer funded scheme of 18 weeks duration, despite Australian governments having so far resisted the introduction of a
broad grants-based system. A case for government subsidy of PPL can be made on the basis that the social benefits exceed the advantages accruing directly to families.
However, as there are also indisputable private benefits accruing to the parents taking leave, there is a case for private contributions. We identify a market failure in that commercial banks will not provide funds in the absence of collateral due to repayment uncertainty during parental leave, a situation quite similar to the market failure inherent with respect to the financing of tuition for higher education (Gans, 2008). To address this financing impasse, we consider how an income contingent loan (ICL) could be used as an optional supplement to a taxpayer funded PPL scheme. Moral hazard and adverse selection are critical policy issues and these are addressed in the scheme design by: restricting loan duration and size; restricting eligibility to parents with workforce attachment; reducing minimum repayment thresholds to below those of HECS; imposing a loan surcharge, and; making the debt an obligation of both parents. We explain and present simulations of debt, repayment and subsidies for different households. The results show that an optional top-up ICL would not require major contributions from taxpayers, yet would introduce flexibility and choice, and provide consumption-smoothing and lifetime income distribution advantages over possible alternatives.