An Income contingent Loan for Extending Paid Parental Leave

On Mother’s Day, May 10, 2009, the federal government announced an 18 week paid maternity leave scheme to be funded by taxpayers would be introduced in January 2011. This followed a one year review process beginning with the Productivity Commission (PC) being asked to enquire into the social and economic policy issue of paid parental leave (PPL). A case for government subsidy of PPL can be made on the basis that the social benefits exceed the advantages accruing directly to families. In this paper it is argued that there is scope to extend the 18 week grants based leave policy with significant contributions coming from the households assisted, which is an implicit recognition that there are important private benefits from accessing relatively long periods of parental leave. It is explained that commercial banks will not provide funds in the presence of loan repayment uncertainty, a situation quite similar to the market failure inherent with respect to the financing of tuition for higher education. However, an income contingent loan (ICL), similar to HECS, could be used as an optional supplement to the recently announced taxpayer funded scheme, and this idea has cautious but clear support in the PC’s final report. 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 present simulations of debt, repayment and subsidies for different households. The results show that an optional top-up ICL would not require contributions from taxpayers, yet would introduce flexibility and choice, and provide consumption-smoothing and fair lifetime income distribution outcomes.