Inequality between generations in Australia is at a 20-year high, according to a new report by the Actuaries Institute.
The Institute contends this is because government spending favours the old and because asset prices have risen faster than incomes.
The Institute states that current young people have better education, health and social outcomes than previous generations of young people, but worse economic, environmental and housing incomes. Policy options suggested by the Institute include boosting childcare subsidies and including a retiree’s home in the Aged Pension asset test:
Now more than ever, it is important to understand how intergenerational equity is changing over time. The Australian Actuaries Intergenerational Equity Index (AAIEI) contributes to this discussion by tracking and assessing 24 indicators across six broad domains that relate to wealth and wellbeing (Economic and Fiscal, Housing, Health and disability, Social, Education and Environment). For three age groups we track the absolute change as well as the relative change between age bands over time, as shown in Figure 1.
The absolute lines (left) indicate whether wealth and wellbeing are improving for particular age bands across the range of domains. The level of the lines for different age bands also indicates that measures are generally better for older versus younger people. For the last calculated year, the index is 68 for the 25-34 age band, 99 for the 45–54 age band and 115 for the 65-74 age band. This compares to an average standard deviation of approximately six within each age band over the time period and, therefore, the gaps are substantial. This ordering seems natural. For example, in the economic and housing domains older Australians have had more time to accumulate wealth and housing, which is reflected in the differences. The most notable trend in the absolute index values is the marked increase in the index for the 65-74 age band from 2012 onwards, while over the same period there was a pronounced drop in the index for the 25-34 and 45-54 age bands.
The relative change in the index across ages (right panel) is more important for understanding changing intergenerational equity and the results are striking. Specifically the ‘gap’ in the index between the 25-34 and 65-74 age bands has increased from -10 around 2006 to -46 in 2018. This suggests that younger people have been relatively disadvantaged across a range of measures in the past few years. This period coincides with Baby Boomers entering the 65-74 age band and Millennials entering the 25-34 age band, suggesting a growing tension between these cohorts. Notably, the gap between the 25-34 and 45-54 age bands has remained relatively steady, and the absolute index for the 65-74 age band has similarly pulled away from the middle age band. We regard this as a material and adverse shift for younger and middle-age Australians as well as an indication of worsening intergenerational equity.
Any index that attempts to boil complex social issues down into a single number is inherently limited. To better understand the index, this report unpacks the trends in the underlying domains and indicators that drive the numbers. Figure 2 shows domain-level differences between the two bands. While younger Australians have significantly higher scores for health and education related measures, we can see large deficits for the economic, housing, social and environment domains. When focusing on change – particularly over the past five years – it is the movement of the economic, housing and environmental components of the index that causes the observed slide in relative score for 25-34 versus 65-74 age bands.
The findings gel with concerns prominent for young people. Recently wage growth has been weak, often negative in real terms, and low unemployment (prior to the pandemic) masked underutilisation that was particularly prominent for younger workers. Government spending has skewed towards older generations with increased health, pension and aged care spending, while unemployment benefits remained low (again, prior to the pandemic). And increases in government debt since the Global Financial Crisis (GFC) represent a potential burden on future taxpayers.
For housing, the home ownership rate for the 25-34-year-old age group has fallen from 51 to 37 per cent over the past two decades, but has remained more stable in older age bands. While personal choice plays a role, few would dispute that young people’s ability to buy into the housing market has fallen. At the same time, rapid rises in house prices compound the wealth of those who own housing already, typically older Australians. Housing affordability contributes to social issues too – homelessness is rising, and gaining access to social housing is more difficult.
The environment that young people are experiencing nowadays is different to that experienced by older generations when they were young. Climate change, measured through both CO2 levels and temperature, is a quintessential intergenerational issue. In Australia, climate change is also associated with a drying of the Murray-Darling Basin, one of our key agricultural regions that has recently experienced prolonged drought. Other environmental measures such as biodiversity are also declining.
Not all trends are negative, of course. Education, as measured by attainment, has steadily improved. Life expectancy and disability rates have also markedly improved, although mental health remains a challenge for many. In the social domain, reductions in the gender pay gap and falling crime rates are also encouraging and tend to benefit younger people more. However, these improvements are not sufficient to drive the relative difference between young and old into positive territory.
The finding that the wealth and wellbeing of older Australians has improved on average relative to that of younger and middle-aged Australians does not diminish the challenges faced by some older Australians. For example, poverty rates are highest for those aged 65 and above who rent; and obesity rates are growing, with higher rates in older Australians.
What are the implications of rising intergenerational inequity? Most of the issues highlighted in this paper are well-known and detailed thinking on potential policy solutions is ongoing. Our report points to many of these potential solutions, which range from better retirement income policy, to phasing out land tax, increased preventative health spending and greater activity to mitigate and adapt to climate change. We believe there is significant opportunity for policy to drive improvements in intergenerational equity; and that consistently measuring intergenerational equity will aid long-term policy decision-making. We need not live in a country where most people believe their children will be worse off – such a system is not sustainable.
Australia had an opportunity to tackle some of these inequities at last year’s Federal Election, via property tax and franking credit reform, but voted against change.