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What should the next generation's Australia look like?

This article extracts sections from the 2021 John Button Oration, and for detailed footnotes, to view the webinar, or to read the full Oration, click here.

 

In this speech about generational obligation, I want to recognise the way traditional owners of our land fostered the invisible bond between their people past, present and future. Through the idea of care for country – nurturing land, water, flora and fauna – and passing on the knowledge of how to maintain the equilibrium via stories and lores, the bonds between generations were self-perpetuating.

The very idea that people at a point in time would draw on resources at the expense of others to come would be very foreign to them indeed. I think there is much we can learn.

John Button was Australia’s longest-serving Industry Minister and by all accounts a man of principle. I suspect he would be both dismayed but galvanised by the state of affairs I want to touch on today.

John Button’s legacy made a big impression on me as a young economist. He led the transformation of Australia’s industry policy, helping ensure Australia was competitive in increasingly global markets. This was forward-looking and brave. Some jobs were lost – as in any transition – but huge number of jobs were also created elsewhere, and the changes helped improve Australian living standards for decades to come.

The management of this transition has important lessons for today.

Economic change comes, regardless of actions by governments. By being on the front foot and actively managing the transition, disruptions to jobs and lives can be minimised and Australia given the best chance to flourish.

Putting one’s head in the sand might be politically easier, but it generally leads to more pain in the long run.

John Button, like the best leaders, was able to see what was on the horizon and take the necessary actions.

Have you ever had a pay rise?

What do generational labels even mean? The Silent Generation, Boomers, Generation X, Millennials, Gen Z – the boundaries are fuzzy, but generational cohorts are often grouped by demographers and sociologists to draw generalisations about those who grew up in similar times with perhaps similar formative life experiences.

In an economic sense, it is also true that generations share experiences that shape their ultimate living standards.

If I had only one question to ask to identify someone’s age by their economic experience it would be this: have you ever had a pay rise? For most of us, it seems a silly question. But for many under-35s, the answer – at least in terms of a pay rise that improved their real living standards – would be no.

The 2008 GFC, like all economic crises, saw employment take a hit. But unlike other crises, we were still seeing the effects in labour markets at the time the coronavirus began to disrupt our lives in 2020.

While weak wages growth has bitten all ages groups, for younger people it has been particularly pronounced. Workers aged 20-34 experienced close to zero growth in real wage rates from 2008 to 2018.

Contributing to poor outcomes is that younger people are ‘falling down the jobs ladder’, in the words of former Bank of England Chief Economist Andy Haldane.

The Australian Productivity Commission has found that people joining the workforce in the past decade have graduated into less-attractive occupations on average, for a given level of education, than previous generations.

And with young university graduates moving into lower-level roles, other young people without the same qualifications are pushed even further down the ladder into jobs more likely to be characterised by part-time and casual work.

This has been accompanied by a big rise in underemployment (workers not getting all the hours they want) particularly among younger age groups.

The overall effect of flatlining wages and rising underemployment? Under-35s in 2018 had, on average, lower incomes than those of the same age a decade earlier.

Australian youth are far from alone in this experience.

Just before the COVID crisis, the Institute of Fiscal Studies in the UK released analysis that showed those born in the 1980s were the first post-war generation not to have higher median incomes in their early 30s than those born a decade earlier.

Similarly in the United States, Millennials are less well off than members of earlier generations were when they were the same age, with both lower earnings and less wealth.

The take-out is clear: when growth is weak and labour markets have excess capacity, younger people bear the brunt through stagnant wages and high underemployment. Without strategies to boost activity, productivity, and wages, generation-on-generation progress on incomes is NOT guaranteed.

Where young people emerge from the more recent COVID shock remains to be seen. Youth unemployment hit 16% at the worst of the crisis, and underemployment touched another 24%. While jobs are bouncing back strongly, it is not yet clear whether we have the right policy settings to have our young people climbing that jobs ladder again.

This must be a priority.

But while the impact on labour market outcomes remains uncertain, what is clear is the COVID shock has widened even further the generational chasms in wealth.

The Great Australian Nightmare

Since World War 2, Australia has been a nation of homeowners. Home ownership rates peaked at more than 71% in 1966. Almost three-quarters of the nation was on the property ladder and living the dream – home ownership was celebrated as an indicator of success, security, and quality of life.

Ownership rates declined very gradually in following decades but then sharply since the early 1990s, when house prices and incomes started to diverge. At the 2016 Census, home ownership rates were at their lowest level since 1954.

But what has been particularly striking is the drop among young people.

In 1981, when the Boomer generation was settling down and having families, 67% of 30-year-olds owned their own home. In 2016, the equivalent figure was 45%.

But even this hides an even more concerning disparity in the huge fall among poorer young people. In 1981, 60% of the poorest 25–34-year-olds owned a home. Today the figure is just 20%.

In contrast, for the richest 20% of young people, ownership rates have fallen only modestly in 40 years – demolishing the suggestion that plummeting homeownership rates reflect different preferences or the breakfast choices of today’s young people.

Young people want to own their home as much as ever, but the fact remains that it is now only the richest ones, or the ones with the richest parents, who can afford to.

Along with the challenges of renting in a country that has some of the least-friendly rental laws in the world, the locking of young people out of the housing market has undercut their capacity to accumulate wealth, especially compared to older generations that have reaped the windfall gains in wealth that have come from the spectacular rises in house prices, and those of other assets, over the past 25 years.

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. 

These growing wealth gaps are not because young people don’t work hard. More young people today combine work with post-school study to get by, and if they are lucky enough to get a full-time job on graduation, they can expect to be working about 38-39 hours a week, the same as their parents were in the 1980s.

Nor can we blame too many avocado brunches. Young people spend less on ‘discretionary’ items such as recreation, alcohol and tobacco, clothes and personal care, household services and furnishings in real terms today than people of the same age three decades ago.

To the extent that they are spending more it’s on essentials – housing, power, food, medical care, and transport – with rises in housing costs being the biggest contributor.

Let me be clear about what younger people (and indeed some older people) are up against.

Think about your job for the past year, if you were one of the lucky ones who had one, and everything you put into it. The hours, the physical, mental, and emotional energy. For those life-dominating efforts, the average Australian worker earned about $68,000, or just over $90,000 for the average full-time worker.

Now think about your house, if you own one. Your shelter, the place you return home to. I’m sure you spent some time on maintenance and upkeep. But unless you are featuring in the next season of Grand Designs, I’m guessing it consumed substantially less of your time and energy than your job did.

Guess what your house made you last year – about $140,000 for the average house in Victoria, and more than $200,000 for the average house in New South Wales.

How can it be that a relatively low-risk, low-effort investment can often provide greater returns than a year of hard work? And for those saving for a deposit? They are almost invariably further away than they were a year ago.

An intergenerational swindle

‘Demography is destiny’ or so French sociologist Auguste Comte told us.

Every five years the Australian Government releases an Intergenerational Report, reminding us of one facet of this destiny: that, without action, an ageing population and other changes will leave public finances looking ugly.

The fallout from COVID means the 2021 report was a sea of red. Budget deficits for 40 years, with net debt still at 34.4% of GDP in 2061, and the interest cost of serving that debt growing to 1.7% of GDP.

But even these numbers are based on rosy assumptions about productivity and discounting the future costs of climate change.

The underlying structural challenge comes from the different size of generations and the implicit generational bargain we have weaved into our tax and welfare system.

Working-age Australians, as a group, are net contributors to the budget – they pay more in taxes than they receive in either welfare benefits or spending. These contributions support older Australians who take a lot more out in spending and pension payments than they contribute in taxes.

Today’s working-age Australians of course anticipate that the generation after them will support them in the same way as they age.

So far so fair.

But what will make it more challenging for today’s young people to uphold their end of the bargain is that the destiny of demography is working against them.

The number of working-age Australians for every person aged 65 and older fell from 7.4 in the mid-1970s to 4.4 in 2015, and is projected to fall to just 3.2 in 2055.

This could be seen as just bad luck for today’s young people. There are swings and roundabouts that all generations have had to grapple with.

But what I think is less easy to accept is a series of policy decisions that have substantially increased the size of the intergenerational transfers, supercharging these future demographic pressures.

First, health spending is climbing. Commonwealth health spending has been climbing by 3% a year over and above inflation for the past decade. State health spending has grown at 3.7% a year in real terms.

The increase has been particularly stark for those in their 70s and 80s – with average health spend per person increasing by more than $4,000 in just 12 years.

Second, age care spending is also growing strongly.

Australian Government spending on aged care has increased by more than 40% in real terms since 2012-13. While the number of people living in residential aged care facilities has remained relatively stable in recent years, the number of people on a Home Care Package has increased markedly, growing from about 60,000 in 2015 to about 170,000 by the end of last year.

Changes in the recent Budget are expected to add about $4.5 billion per year in extra spending. Most Australians support increased health and aged care spending. And the result – providing older people with longer, healthier, and more fulfilled lives – is something we should be proud of as a nation.

But at the same time as we have decided as a country to pay more to support better outcomes for older Australians, we have made a series of tax policy decisions – tax-free superannuation income in retirement, refundable franking credits, and special tax offsets for seniors – which mean we now ask older Australians to make a much smaller contribution to the delivery of services than we once did.

Incomes for households over 65 have more than doubled over the past 25 years – substantially faster growth than for households under 55.

But households over 65 pay virtually no more income tax than people of the same age 25 years ago. Indeed, the share of older households paying any tax has fallen from 27% in the mid-1990s to 17% today.

And that has contributed to a tax system where someone’s date of birth is almost as important as their income in determining their tax contribution.

An older household with income of $100,000 pays about the same tax as a working-age household on $50,000. There is simply no policy justification for this degree of age segregation in the system.

One argument that is sometimes advanced to defend the generosity of age-based tax breaks is that older Australians have ‘paid their taxes’. But the idea of the tax system as an individual’s piggy bank is silly if you believe in a progressive tax and welfare system and the provision of public goods such as roads and defence.

Nor does it does not hold water in a generational sense. Younger households today are underwriting the living standards of older households to a much greater extent than in the past.

People born in the late-1940s, at the beginning of the baby boom generation, reached their peak contribution to the tax system in their early 40s – and at that point they were contributing an average of $3,200 a year in today’s dollars to support older generations in retirement. An average 40-year-old today, born at the tail-end of Generation X, is paying $7,300 a year.

That is more than they are contributing to their own retirement through compulsory superannuation.

Under current policy settings, the child of today’s 40-year-old will need to pay an inflation-adjusted $11,400 by the time he or she reaches 40 just to sustain the current levels of benefits in retirement.

That’s what the Intergenerational Report reminds us of: that without policy changes, budget deficits are set to grow ever bigger over time, and net debt will increase as a share of the economy in decades to come.

The unwanted fiscal inheritance will fall on the generation of Australians who have seen their incomes and wealth stagnate – the same generation who missed the property boom and entered the workforce during a period of flatlining real wages.

What does better look like?

What would make a better Australia for the next generation is not a simple question.

We should listen to the voice of young people and what they think is needed.

A coalition of youth-organised groups including Think Forward, the Foundation for Young Australians, Youth Action, Youth Development Australia, and the Youth Affairs Councils from several states have called for a parliamentary inquiry to start the conversation on intergenerational fairness.

They take their inspiration from the 2018 House of Lords inquiry in the UK. The report from this inquiry, Tackling Intergenerational Unfairness, published in 2019, observes that intergenerational fairness had become an ‘increasingly pressing concern for both policy makers and the public’.

They found that:

The relationship between older and younger generations is still defined by mutual support and affection. However, the action and inaction of successive governments risks undermining the foundation of this relationship. Many in younger generations are struggling to find secure, well-paid jobs and secure, affordable housing, while many in older generations risk not receiving the support they need because government after government has failed to plan for a long-term generational timescale.

It all sounds very familiar.

I wholeheartedly support young people’s calls for an Australian parliamentary inquiry, and if I could treat this as a pre-emptive submission I would highlight the following priorities:

  • First, getting our macroeconomic policy settings right, with a focus on creating jobs and lifting wages growth. That means not being trigger happy on interest rates at the first sign of inflation, and not pushing for budget consolidation until unemployment is durably low and wages are rising.
  • Second, revisiting the long list of productivity-enhancing reforms advanced by Grattan Institute, federal and state productivity commissions and others to boost long-term living standards.
  • Third, not increasing the Superannuation Guarantee – compulsorily taking more money off young people now when they need it, given that they are already being forced to save for a higher living standard in retirement than they enjoy today.
  • Fourth, serious steps on housing affordability including boost housing supply by changing planning rules to allow more homes in the inner and middle rings of our capital cities, reducing tax breaks for investment in housing including reducing the capital gains tax discount to 25% and winding back negative gearing, and exploring more innovative proposals such as shared-equity schemes.
  • Fifth, improving outcomes for people who don’t own their homes, by changing rental laws to give tenants more rights, increasing the supply of social housing, and boosting rent assistance for those on income support.
  • Sixth, increasing support for accessible and affordable early learning and care – giving the next generation the opportunity for enriching early childhood development while supporting their parents to participate in the paid workforce without facing prohibitive out-of-pocket care costs.
  • Seventh, winding back aged-based tax breaks by taxing superannuation earnings in retirement at 15%, and removing the seniors’ and pensioners’ tax offset, and the special Medicare levy rate for over-65s.
    This would re-establish the principle that existed pre-Howard, that income tax contributions should be based on income rather than age. And crucially it would represent a de-escalation of policy decisions that cumulatively ask working-age Australians to underwrite much larger transfers to older Australians than any previous generation has supported.
  • Finally, seriously grapple with taxes on intergenerational transfers, at least for very large ones. If the money collected were used to fund income tax cuts, most people under 50 would be ahead financially. At a minimum, we should not be subsiding inheritances via some of the existing rules that allow the accumulated value of super tax breaks to be inherited by the next generation as well as the exclusion of virtually all the home from the age pension asset test.

And whether or not it is in scope for such inquiry, Australia must align with other developed countries to set more ambitious targets for emissions reduction by 2030 – including a proper set of policies to help us get there. If governments are looking for inspiration, the recent Grattan Institute Towards Net Zero series is filled with evidence-based suggestions of relatively low-cost things we could do right now that would help put Australia on the right trajectory.

The alternative is we continue to be part of the problem rather than the solution to this generational, indeed existential, global challenge.

Calling time on generation warfare

I understand my comments today are strong, and my policy suggestions might feel confronting.

I may be accused of trying to whip-up generational conflict. But, let me be clear, that is the exact opposite of what I hope to achieve.

I believe that most Australians care deeply for other generations and want to restore that hopeful bargain.

For all the Gen Z ‘OK Boomer’ eye-rolling, young Australians gave up their social lives and in some cases their jobs to protect the welfare of the older and more vulnerable Australians during COVID. Polling throughout the pandemic suggested young Australians were more strongly in favour of lockdowns than any other age cohort.

And for all the pious Boomer lectures about brunch choices, much of the concern I hear about house prices and their impacts actually come from the older generations, many of whom say they would be happy to see the prices of their own assets reduced to ease the pressure on future generations.

Similarly, look around any climate-change lecture or protest, and you will find grey haired attendees as common as tattooed ones in the crowd. Care about the future is alive and well.

A proper debate about the impacts of policy settings on the outcomes for different generations can only occur when we reject once and for all ‘generational exceptionalism’: the damaging belief that differences in life outcomes between generations are driven by differences in work ethic, talent, or attitude, rather than luck and policy choices.

American political philosopher Michael Sandel notes how such belief systems corrode civic sensibilities:

For the more we think of ourselves as self-made and self-sufficient, the harder it is to learn gratitude and humility…

And without these sentiments, it is hard to care for the common good.

While every generation has its own unique challenges and opportunities, the only rational place to start is the idea that people born at different points in time are no less deserving than others.

So let’s drop the petty generational warfare, and work together to ensure that the Australia we leave to our children is better than the one we inherited. With the right policy settings, I believe we can restore the hopeful bargain.

 

Danielle Wood is the CEO of Grattan Institute, where she heads a team of leading policy thinkers, researching and advocating policy to improve the lives of Australians.

For detailed footnotes, to view the webinar, or to read the full oration, click here.

 

13 Comments
SMSF Trustee
November 30, 2021

How can it be that your house made more than a year of hard work?
Perhaps it's because for many years the housing stock kept on expanding by moving out into suburb after suburb, taking up more land. That perceived excess supply of available land on which to build meant that land values were relatively low for decades. But now that we've reached a point where there isn't as much land available (it's too far from the city, the transport links haven't kept up with the urban sprawl, too far from the beach or for whatever reason), the value of land is rising to a new equilibrium level.
Why is it presumed that the value of land a decade or two ago was 'right' and now it's 'wrong'?

The other reason why your house could go up in value more than a year of hard work is that it's an asset into the price of which is already embedded many years of hard work. So why is it a shock that its price appreciation, still only 10% or so, should amount to the same as a year of labour? It's the same hopefully with many people's super - if you have had $500k in super and its been in shares, then it's gone up by more than a year's salary too and is probably $650k in value now.

I reckon John Button would have understood this!

Steve
November 28, 2021

From one who argues for a "progressive" tax system the proposal to tax earnings of a super fund at 15% when in pension phase is odd? No tax free threshold as per everyone else? The average tax on $50,000 of earnings is just over 15% (15.4%). So a couple could earn around $100,000 split evenly and just hit a 15% tax rate. Any earnings below $100,000 would mean the proposed flat 15% rate would be higher than "normal" income. Just how many SMSF's exceed $100,000 in earnings? (Can someone from Firstlinks provide an answer on that?). Sounds like the top end of town argument all over again. You can't have it both ways - the amount that can be in pension phase is already capped; if a significant number of people over 65 aren't paying tax maybe they aren't all gazillionaires? But not as easy to target "ordinary" people.
And just a simple one - perhaps there are less people over 65 paying tax now than the 1990's because of the large increase in the tax free threshold by Labor in 2011? And one of the reasons was to reduce the number of people needing to file tax returns. Now that is cast as some intergenerational rip-off?

Pete
November 28, 2021

The young may be having a difficult time right now but their fortunes are about to change. With the aging demographic and thousands retiring each month, there will soon be more jobs than people. When that happens, wages for workers will sky rocket and the older generation will have a lower standard of living. This may mean not being able to maintain their home. car and having to sacrifice other other aspects of their life simply because they can not afford it. I think the discussion right now should be about growing the economy to satisfy everybody's needs rather than the intergenerational warfare that some seem to advocate. As for me I'm sick of reading about it.

James
November 26, 2021

Good grief! Our country’s problems are immense and complicated and almost impossible to fix because of dreadful divisive, adversarial politics. But decreasing the standard of living of the elderly self funded retirees, whilst ignoring “bigger fish” is not the way.

Andrew Smith
November 25, 2021

PS This point is not supported, and don't throw the baby out with the bath water:

'Third, not increasing the Superannuation Guarantee – compulsorily taking more money off young people now when they need it, given that they are already being forced to save for a higher living standard in retirement than they enjoy today'

Does not reflect any clear logic nor actual dynamics of demography, tax and budgets; super and SCG are there to enable working age Australians to have a comfortable retirement while taking pressure off budgets for pension payments, backgrounded by increasing dependency ratios; of course the system will need ongoing tweaks.

Andrew Smith
November 25, 2021

My concern is that while we are not well informed on demographics in Australia vs. deferring more to ZPG Zero Population Growth junk science and promoting in media the UNPD's nebulous NOM net overseas migration formula (unknown to 99% of media, was inflated/expanded in 2006 by UNPD).

The latter to the point of obsession, while ignoring the superior analysis of the OECD i.e. focus upon long term permanent population cohorts and dynamics, thus knocking out temporary churnover of the NOM, and showing that Australia's working age (decline) is same as Europe but like Canada, NZ, US and UK ameliorated by long term modest permanent migration.

However, there have been a natural increase in four generations of families due to ageing/longevity, peak baby boomer in transition to retirement (after peak earnings/occupation) and worst, is how older generations have been quietly catered to by the LNP, mostly, while younger generations have not, and maybe carrying the can in future e.g. lower service delivery and higher taxes?

Baby boomers and older have guaranteed minimum income (with loose means & assets testing) and healthcare, after free university etc., versus younger who have university etc. fees/HECS, stagnant wage/salary income, stagnant JobSeeker (and onerous conditions) etc.

However, young just need to be patient as demographic change and asset i.e. house prices will subside (real terms) while post baby boomer cohort is followed by lower fertility, hence, should flatten out population demographics and similar for electoral rolls; latter becoming dominated by older generations potentially leading to (even authoritarian) gerontocracies supporting strong and charismatic leaders e.g. parts of Europe, indulging 'pensioner populism'.

Trevor
November 25, 2021

Almost everyone is being "pushed into higher education", it is no longer optional , and the more complex technical-jobs of the future will require an ever more-educated work force, so what is new there then ? Jobs are now, and always were, limited ; so the 'better equipped you are for work' the more likely you are to get the job ! "For all the Gen Z ‘OK Boomer’ eye-rolling, young Australians gave up their social lives and in some cases their jobs to protect the welfare of the older and more vulnerable Australians during COVID. Polling throughout the pandemic suggested young Australians were more strongly in favour of lockdowns than any other age cohort.". It wasn't done for altruistic or sympathetic and generous reasons! "More young people today combine work with post-school study to get by, and if they are lucky enough to get a full-time job on graduation, they can expect to be working about 38-39 hours a week, the same as their parents were in the 1980s". No! "We" worked a minimum of 50 hours a week because "we" wanted the things "we" now have....and "overtime" and extra hours was the means to achieve it!


 

Geoff
November 25, 2021

Ah... banging on about franking credits designed to position them as evil in the minds of the vast majority of people who don't actually understand what they are.

Craig
November 28, 2021

Spot on Geoff.
If there is a need to increase tax on super incomes all that is needed is an adjustment of the Turnbull tax on super incomes - ie use the existing tax system, don't try to reinvent double tax on company earnings that held back private investment back for decades.

Rob
November 25, 2021

Sorry, this is a "grab bag" of everything that is perceived to be wrong in this country without acknowledging all those things that are right. Starts with John Button - a decent man who tried to rationalize Australian Manufacturing, starting with the Car Industry - did not end well! Scale and cost matter... Of course there is a demographic shift and of course there are additional health costs as people live longer and looking after your ageing relatives, is "contracted out" with both parents now working. It is certainly true that housing, as a multiple of income, is more expensive however interest rates are less than half of the 1970's and about 20% of the 1990's so please do not bleat too much! The danger in any oration is that it can be instantly out of date. "No wage increases" - well actually NO - wages are in fact moving up quite rapidly across the board. This is no macro setting, it is straight, simple, supply and demand which is starting to look a whole lot like the 1970's when unemployment was sub 3%. Anyone who wants to work in this country can, anyone who is any good can get an increase and anyone who wants to put in the hours can buy that mythical house. [By the way, every indication that booming property market has at best plateaued and maybe rolled over] So let's attack wealth broadly shall we and start with Super? No country that I am aware of taxes retirement savings three times - on contribution, on accumulation and in retirement. I do not care "which two" you tax, but I do care if the rules are changed midstream when I have made plans on one basis only to see the goal posts moved. Go after franking credits [again] shall we? Franking credits are genuinely refundable to anybody depending on their taxable income - retirees just happen to be a bigger target... I could go on and on. This oration is that, at it's core, it is fundamentally about "wealth redistribution" whereas the challenge and the opportunity, is actually "wealth creation". That is not to say we cannot do better, we can, but it starts with positive people not policy settings!

Franco
November 25, 2021

Sorry Rob, obviously you're "OK Jack" and so am I. Having used all the things provided of late, especially 50%Cap Gain and tax free super. That doesnt mean I dont realise its unfair. Quoting Warren Buffet -- most of us won the "lottery of birth"--luck of selecting the correct parents in a wealthy country. Also he says his secretary pays a higher tax rate than him--he sees the lack parity. I have given the same example to friends and acquaintances. A family of 4 earning over $100,000 and paying tax and the "lucky" retired couple next door with the same income from super not paying tax. All the best with your beliefs--positive people ---you made me laugh.

Trevor G
November 25, 2021

Not sure why the author feels the need to bring the aborigines and climate change into it? The reference to "refundable franking credits" indicates that the author may not have a good grasp of Australia's dividend imputation system? (reminiscent of the Labor Party at the last election)

Willy
November 25, 2021

Curiously enough, having those of working age shift their unit of account for savings to sats (rather than debasing fiat) will fix this.
Fix the money, fix the world. Gradually....... Then Suddenly.

 

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