18
Aug
2019

Generational progress can no longer be taken for granted

by Danielle Wood and Kate Griffiths


Published by The Age, Sunday 18 August

Baby Boomers are awful, right? The big houses, the franking credits and the gratuitous advice about young people’s breakfast choices. At least so says Twitter, the most Millennial of social media platforms. So are these cross-generational salvos just another manifestation of young adult angst, or are young people justified in feeling aggrieved?

Generation-on-generation progress in living standards has been the happy dividend of Australia’s strong economic performance since the Second World War. On average, children could expect to be substantially healthier, wealthier and better housed than their parents at the same age. This generational progress can no longer be taken for granted.

The wealth of households under 35 has barely moved in 15 years. And poorer young Australians have less today than poorer young Australians did 15 years ago. In contrast, wealth for older households has grown rapidly. A household headed by someone 65-74 now has on average $1.3 million in assets, up from $900,000 for a household of this age group in 2004, helped by the housing boom and growth in superannuation assets.

Housing markets are crucial to the divided fortunes of the younger and older generations. Booming property prices since the turn of the century have made many property owners in Sydney and Melbourne unexpected millionaires. At the height of the boom, the average capital gain for a regular house in Sydney was higher than average annual earnings. In other words, for a lot of workers their houses earned more than they did.

High house prices make it substantially harder for young people to save for a deposit. Home ownership rates on average have dropped significantly for households under 35 over two generations, with the biggest falls among the young and poor. In 1981, 60 per cent of people in the lowest wealth quintile aged 25-34 owned a home. Today the figure is just 20 per cent.

Waiting for your parents to die isn’t exactly a wise investment strategy for want-to-be home owners. The most common age to receive an inheritance is 55-59, so these types of intergenerational transfers are unlikely to help people when they most want to get into the market.

Even those young people who do buy a home are unlikely to be on the same wealth trajectory as their parents. Twenty years of average annual growth of 5 per cent above inflation is unlikely to be repeated. Prices are unlikely to grow as quickly in future because income growth is likely to be slower, and official interest rates can’t fall much further.

More recently, economic pressures on the young have been exacerbated by wage stagnation and rising underemployment. Older households are better cushioned from low wage growth because they are more likely to have other sources of income. If low wage growth and fewer working hours is the ‘new normal’, then we could have a generation emerge from young adulthood with lower incomes than the one before it. While this would be unprecedented in living memory in Australia, it has already happened in the US and UK where wages have stagnated for more than a decade.

And this is all before we even get to the fiscal frog-boil of an ageing population. More people over 65 means higher government spending on health, aged care and pensions. But there will be fewer working-age people for every person over 65 to pay for it. The number of 15-64-year-old Australians for every person aged 65 or older fell from 7.4 in the mid-1970s to 4.4 in 2014-15 and is projected to fall further to 3.2 in 2054-55.

Governments have supercharged these demographic pressures by introducing generous tax concessions for older people. The share of households over 65 paying tax has halved over the past two decades. And average income tax paid has barely changed for people over 65 despite strong growth in their incomes and wealth. Working-age Australians are underwriting the living standards of older Australians to a much greater extent than the Baby Boomers did for their forebears.

Past government decisions have contributed to the problems. The choices governments make today could help restore generation-on-generation progress.

Policies to boost economic growth – such as tax reform, better education and smarter infrastructure spending – benefit all Australians but particularly the young. Freeing-up planning laws would help younger Australians buy a home. And winding back some of the overly generous tax concessions for “comfortably off” older Australians would reduce the budget pressures caused by an ageing population.

None of this will be politically easy. An ageing population means an ageing voter base. But Boomers aren’t awful. They care about future generations. And ultimately their support will be crucial in ensuring the policy changes needed to give young Australians a fair go.