How Australia ate its children

By Leith van Onselen

The Grattan Institute has released a brilliant new report, entitled the Wealth of Generations, which neatly captures the growing wealth divide between younger and older Australians, whereby for perhaps the first time in history, ” today’s generation of young Australians may have lower standards of living than their parents at a similar age”.

Below are the key points from the Grattan report:

Over the last decade, older households captured most of the growth in Australia’s wealth. Despite the global financial crisis, households aged between 65 and 74 today are $200,000 wealthier than households of that age 8 years ago. Meanwhile, the wealth of households aged 25 to 34 has gone backwards…

In part, the wealth of generations has diverged because of the boom in housing prices. Older households made big capital gains. With lower and falling rates of home ownership, younger households shared less of this windfall.

Incomes also grew fastest for older Australians allowing them to add more to their wealth through savings. In 2004, households aged 55-64 were net spenders: by 2010, with annual incomes $4,600 higher, their net annual savings were $2,700. Although households aged 25 to 34 controlled their spending, their annual incomes only increased by $3,100, and annual savings by $1,500.

Governments are also spending much more on pensions and services, particularly health, for older households. In 2010, governments spent $10,000 more per household over 65 than they did less than a decade earlier. Much of the increased spending was funded by budget deficits. Future taxpayers will have to repay the debt, dragging further on the prosperity of younger generations.

In the past, each generation took out more from the budget over its lifetime than it put in. This “generational bargain” was sustainable when incomes rose quickly – the norm for 70 years. However, government transfers from younger to older cohorts are now so large that future budgets may not be able to afford them as the population ages. Consequently, the generational bargain is at risk…

Governments can choose to prevent the next generation being worse off than its parents. Targeting the Age Pension, reducing superannuation tax concessions and shifting towards asset taxes could reduce the transfers between today’s younger taxpayers and older retirees. These reforms would fall most on those who have benefited most from windfalls, government largesse, and paying lower taxes while deficits accumulated. And we shouldn’t delay: later implementation may leave a younger generation even worse off, as they miss out on benefits their parents enjoyed.

The report includes a bunch of charts showing just how badly younger generations have fared against their parents and grandparents. Consider the following:

An the main cause of the wealth divide? You guessed it, escalating house values:

Which has crushed home ownership rates amongst the younger cohorts:

Older households have also benefited from strong income growth, which has outpaced their rising consumption spending, whereas the younger generation’s have enjoyed far less growth in both incomes and consumption:

The older generations have also enjoyed a massive increase in fiscal transfers (e.g. the Aged Pension), paid for by the younger generations:

Overall, it’s a damning report that highlights, once again, the egregiousness of the Abbott Government’s attempted tighter restrictions on under-30s accessing unemployment benefits and higher university fees – which would badly impact younger Australians – all the while failing to unwind the plethora of tax concessions on superannuation and property (e.g. CGT and negative gearing) – which overwhelmingly benefit older, wealthier Australians. not to mention its open blockade of global action on climate change.

It also highlights why Australia needs fundamental tax reform that broadens the base and shifts the tax burden away from labour and onto more efficient and equitable sources (e.g. land, resources and consumption), raising productivity in the process.

It is blatantly unfair to expect workers – whose share of the population will fall as the population ages and the proportion of retirees rises – to keep shouldering more and more of the tax burden, at the same time as tax concessions on superannuation and housing, as well as access to the Aged Pension, go untouched.

Which Australian leader will be the first to realise that s/he can capture the entire future generation of voters?

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