Inequality: growing debt traps await for young people and low-income earners

This is part three of a series. Read parts one and two here.

While low wages growth and diminishing housing affordability threaten to worsen inequality in Australia in the wake of the pandemic, other policy decisions by the government will also act to entrench disadvantage.

The government’s early superannuation access scheme, which closed at the end of December, saw nearly 5 million applications to withdraw a total of $36.4 billion from superannuation accounts, with average payments of $7600. For hundreds of thousands of younger Australians and unemployed people, this meant emptying their entire super account — meaning they have to effectively restart building retirement savings. Female workers, who traditionally have lower super balances, will incur the greatest impact — even if they withdrew less than male workers.

It also means younger and lower-income workers who withdrew super missed out on a remarkably positive year for super returns, with median funds managing on average 3.7% growth in a year that was expected to see financial and economic carnage. Those returns instead went to workers with enough resources to not have to draw on their super.

Younger Australians yet to enter the workforce not merely have a difficult housing market and years of low wages growth ahead of them but will carry with them the burden of student debt. In 2019-20, the total of HECS-HELP debt owed by graduates was $66.4 billion, having nearly tripled in size since 2011.

The average student debt has now risen to over $23,000, though around 9% of debtors owe more than $50,000. The time taken to repay it increased to 9.3 years in 2020. The government’s fee changes last year, aimed at deterring students from studying critical thinking subjects, will likely increase the length of time taken to pay off debts as a result of students continuing to undertake subjects targeted by the government.

Most graduates will spend their 20s paying off tens of thousands in student debts before they can think of saving for a home deposit, and in the future may still be paying off education bills in their 30s.

The “bank of mum and dad” also plays a role here, with 6% of families paying or subsidising their children’s student debt, according to one survey. As with access to the housing market, young people from higher-income families benefit from inter-generational transfer of resources that lower-income families can’t provide.

Younger people also face a different credit environment courtesy of the rapidly escalating debt derived from buy-now-pay-later schemes peddled by the likes of Afterpay and Zip and Klarna. These are often seen by critics as a form of predatory lending, and are predominantly aimed at young women. There has been a large surge in personal debt among young people in the UK (even before a lockdown-fuelled surge during the pandemic), where the government is about to draft urgent legislation to impose controls.

Australia, however, has decided not to regulate buy-now-pay-later services after lobbying from the issuing companies and their friends in politics and the media.

Reserve Bank figures suggest buy now pay later is replacing more expensive credit card debt, but until it is seen how this debt performs over time — especially when people cannot repay — the impact on consumers and particularly younger people already carrying substantial student debt will be unclear.

To an extent this mimics previous generations: Boomers and their parents were often caught out by lay-by and hire purchase contracts and their onerous terms until Bankcard appeared in 1974-75 to regularise consumer credit.

Add this debt to HECS, other forms of credit, low wages and low wage growth and the inequality pressures will be felt for a generation to come. This is less problematic while interest rates are at minimum levels but at some stage interest rates will start rising for consumers and mortgage holders, putting more pressure on debt holders.

The government’s planned reduction of the progressivity of the income tax systems will further assist high-income earners, with tax cuts of up to $11,500 for high earners from 2024, while workers on average wages will get little beyond the low- and middle-income tax offset, should the government succumb to pressure and continue it.

And seniors will continue to be able to take advantage of the franking credits rort, with Labor abandoning plans to curb a scam that costs taxpayers $5 billion and flows to wealthy retirees living off dividends.

The post-pandemic economy of Australia will be a divided one — between asset owners and high-income earners on the one side (backed by taxpayer support and government policies) and the asset-less (the young and low-income earners) on the other, for whom the transition to financial security will be further away than ever.

Whether the latter choose to remain invested in an economic and political system that delivers them such poor outcomes remains to be seen.