The wealth of generations

by John Daley, Danielle Wood

09.12.2014 report

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Older Australians are capturing a growing share of Australia’s wealth, while the wealth of younger Australians has stagnated, a new Grattan Institute report finds.

The housing boom plus rapid increases in government payments on pensions and services for older people risks creating a generation of young Australians with a lower standard of living than that of their parents at a similar age. The generational bargain, under which each generation of working Australians supports retirees while still improving its own standard of living, is under threat.

The report finds that most age groups are richer than they were in 2003. An average 55 to 64-year old household was $173,000 richer in real terms in 2011-12 than was a household of that age in 2003-04. The average 65 to 74-year old household was $215,000 better off over the same period.

However, the average 35 to 44-year old household was only $80,000 richer. Worst affected were 25 to 34-year olds who had less wealth than people of the same age eight years before – even though they saved more than did people of that age in the past.

Governments are also spending much more on pensions and services, particularly health, for older households. In 2010, governments spent $9400 more per household over 65 than they did six years before. Much of the increased spending was funded by budget deficits. Future taxpayers will have to repay the debt.

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.

The generational bargain is at risk because government transfers from younger to older cohorts are now so large that future budgets may not be able to afford them, and incomes may rise more slowly over coming decades. If so, the last two decades in the United States and Britain illustrate the potential outcomes. The wealth and incomes of younger age groups in these countries have fallen well behind those of their parents at a similar age.

Although older generations will ultimately pass on much of their accumulated wealth, this may not help younger generations much. On current trends, inheritances are typically received later in life and primarily benefit those who are already wealthy. Gifts to younger generations are typically small, and also primarily benefit well-off households.

The report proposes tighter targeting of the Age Pension, reducing superannuation tax concessions and a shift to increase taxes on assets in order to redress the balance. These reforms would fall most on those who have benefited most from windfalls and government largesse, and have paid lower taxes while deficits accumulated.

Governments should not delay, or a younger generation may be even worse off, as they miss out on benefits their parents enjoyed. The huge challenge for governments and the nation is to introduce policies that ensure we keep a vital part of the generational bargain: rising living standards for every generation.

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