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Tomorrow's taxpayers pay for today's policy mistakes

There are two very significant intergenerational inequities in Australian public policy. They are the age pension and revenue from our natural resources. Both involve government spending today which will be paid for by future generations of taxpayers. Interest rates are higher today as a result of this stimulus.

In the May 2024 Australian budget, the Treasurer, Jim Chalmers, announced a surplus of $9.3 billion and gross debt of $1 trillion. With government spending growing at 4.5% in 2023/24 and 3.6% in 2024/25 (in real terms) gross debt will exceed $1.1 trillion through 2025/2026. As is common, no mention was made of the unfunded liability for age pensions. This is an inappropriate policy.

There are three pillars to the retirement income system being the age pension, compulsory superannuation, and private savings. In current public policy, unfortunately without any clear framework, the three pillars are independent of each other. This is inappropriate, as was made clear in the 2020 Retirement Income Review Report. A proposed change in the superannuation regime with a cap of $3 million and taxing of unrealised capital gains has introduced yet another layer of separation and complexity.

Payment of age pensions is made on an emerging cost basis. Obligations for the age pension arise with residents of Australia turning 67 years. Under an emerging cost basis, the payments will be financed by future generations. This liability represents an intergenerational inequity which should be addressed in the intergenerational report prepared by the Federal government every five years. It was not addressed in the 2023 report.

While the age pension is not a binding legal obligation, it is an integral component of the expectations of the community. Australians, including new immigrants, have an expectation that the age pension is a key part of Australian life in retirement.

Extraordinary growth in Australian immigration has occurred under the current Federal government. It is now approaching 550,000 per annum. Consequences are extensive and include an increase in the prospective age pension obligation. This increase must be factored into an estimate of the liability.

In 2023 the Federal Government released the latest intergenerational report which considered the outlook for Australian finances through to 2063. It foreshadowed a reduced entitlement of Australians for the age pension in part reflecting the growth in superannuation savings. Subsequent superannuation policy changes indicate that this was a heroic assumption. Nevertheless, an ageing population is expected, and limited policy action can change this. It is assumed for the estimation of the unfunded age pension liability that policy levers are largely unchanged.

Estimated unfunded age pension liability for the current population is $2.05 trillion. This indicates that the current declared Federal Government net debt of $1 trillion, growing to at least $1.1 trillion, materially understates the extent of financial obligations. It is a liability which, without any policy change, will be met by future generations of Australian taxpayers. It is a clear case of intergenerational inequity.

Government ‘wealth funds’

Many governments have attempted to address this intergenerational inequity by directing revenue from taxation, royalties or rent for natural resources of the nation into a wealth fund.

In Norway a wealth fund was established “which would ensure the long-term management of revenue from oil and gas reserves so that the wealth benefits both current and future generations”. Wealth funds reflect a policy where revenue is generated from natural resources of the country today for the benefit of the population in the future not just the current population.

Australia is generating significant wealth from commodity resources including gas and iron ore. Through taxes and royalties, it is generating revenue for federal and state governments. In Victoria, where the ALP has an aversion for gas, the prospect of revenue from natural gas resources which are estimated at a minimum of 4,996 trillion cubic metres would contribute a partial solution to the extraordinary debt nightmare of the state. A future Victorian wealth fund might be contemplated.

In the 2010 Henry Taxation Review a statement was made regarding natural resources as follows “The current structure fails to collect a sufficient return for the Australian community”. In other words, revenue from current charges is being applied to pay benefits for the population today without consideration of future generations.

It’s clear that future taxpayers are getting the worse end of the deal when it comes to unfunded age pension liabilities and how natural resource revenues are used. To right these inequities, we must examine a policy that acknowledges and funds the age pension. In addition to this, a Federal and/or state sovereign wealth fund drawing on the Norwegian model to invest natural resource revenue should be considered.

The two issues can be addressed concurrently, as was done with the Future Fund and the commonwealth government employees superannuation liability.

 

Ken Atchison has been involved in financial markets since the early 1970s and is Founder of Atchison Consultants.

 

15 Comments
Keith
July 17, 2024

In the above article and comments there has been no mention of the Future Fund which I thought was commenced to pay for future pensions. Even if insufficient it is still an important asset for future use.

Former Treasury policy maker
July 17, 2024

Keith, only future Commonwealth public service pensions. Not all pensions.

Hampton Mar
July 15, 2024

Don't forget the 72 F35 fighters and the nuclear submarines paid for by this generation to protect the younger generation from the Com**** from the North. Unfortunately the nuclear subs delivered in 10 years time will be as effective as a tinny with 2 torpedo tubes attached to its side. ham

Chris
July 14, 2024

Geoff D, the higher interest rates furphy has been dispelled. Consider the average wage at that time, average cost of a house at that time and you have a particular multiple of income to houses, plus a certain percentage of wages being spent on paying it off.

Now, compare this (with inflation factored in for both wages and house prices) and you'll see that the "18% interest rates" are comparable to 7% interest rates today on the same, average house, with the same, average wage, because the former have raced ahead of inflation and wage growth. It is simply "more expensive" to get a comparable house, and it is further out from the CBD.

Ergo, housing is more expensive today and isn't as near to the city, because in the older days, most houses were, by definition, nearer by virtue of the fact that further out had not yet even been developed.

But the boomers will continue to muddy the waters with the 18% furphy.

Dudley
July 15, 2024

"higher interest rates furphy has been dispelled" ... "18% furphy":

Not only interest rate but interest rate multiplied by initial mortgage principal, presuming same mortgage term.

'Mortgage affordability worst since 1990 for house buyers' [ by a whisker ]
https://www.smh.com.au/property/news/mortgage-affordability-worst-since-1990-for-house-buyers-20230503-p5d58h.html

Save money, avoid mortgages, pay cash.

Pete K
July 12, 2024

So there's not much sympathy for the next generations? Yours and my children and grandchildren. Maybe then you won't be caught out in the future when they elect governments representing their interests, not ours, and reduce taxes and cut pensions. Especially given the levels of debt they'll be carrying on their HECS and homes. Just saying.....

Dan
July 12, 2024

Geoff D - the argument "interest rate since my day were high" argument doesn't fly. Plenty of commentary written over last fee years debunks this. Depending on city, etc, mortgagebis roughly 11 times household income. In the 80's, that was 4 times

Aussie HIFIRE
July 11, 2024

Step one in solving this problem should be dramatically decreasing the amount of money age pensioners can have under the assets test and still getting a part of full age pension. Halving it would be a decent start so that instead of paying couple with their own home and $470k in other assets a pension of $44k a year they instead got a lot less and used some of their own money. Our current system of paying a part pension to a couple with their own paid off home and a million dollars in other assets is even more ridiculous.

Cam
July 14, 2024

Agree. Including the family home in the assets test, and changing the asset test thresholds would make a big difference.
I know retirees aware that if they downsize They lose part or all of their pension. That also has a cost as they struggle to maintain their home as they age. It’s also keeping nice family homes not available for younger families.
It would also partially address the inequity where some people have gained massively more wealth in their home based on where their home is and development in their area.

john
July 11, 2024

I thought Australia was doing better than most countries by having the asset test and no universal aged pension

Cam
July 11, 2024

It sounds like its an intergenerational issue for someone to retire today and have their pension paid by future taxpayers. Presumably it was inequitable for this same person when they were working to pay the age pension of people from previous generations. How will that inequity be solved?
We had net assets in 2007, so the current Federal Government debt has been built up over a short timeframe, driven by GFC and Covid spending. This spending was done to save jobs and help workers of the day. It would seem equitable for this debt to be repaid by the generations that benefitted.
I'll guess there is a decent crossover between the people calling for us to stop using gas, and the people complaining about the loss of revenue that results. Not saying we shouldn't be looking after the environment, but there's some obvious costs to it all. Maybe if us and other countries use nuclear energy we can replace the revenue from coal and gas that way.

JohnS
July 11, 2024

I agree completely with your comment "Presumably it was inequitable for this same person when they were working to pay the age pension of people from previous generations"

The "baby boomers" taxation paid for the pensions of the previous generation AND the Baby Boomers were required to pay for their own "pension" in the form of superannuation. It would seem equitable for the next generation to make SOME contribution to the pensions of the baby boomers.

And, as a bonus to the younger generation, you get all the infrastructure that the baby boomers paid for. Just look at the roads, schools, hospitals, navy ships, etc that you have "inherited". Do you expect to get them all given to you? It seems equitable to me (as a baby boomer) to ask you to contribute to my pension. I did it for my forebears, and you are getting the infrastructure that I paid for

Geoff D
July 11, 2024

I agree 100% with the comments of JohnS. That's life! Plus my generation had much higher interest rates to contend with - more than double today's rates!

Chris
July 14, 2024

"It would seem equitable for the next generation to make SOME contribution to the pensions of the baby boomers.".

They already do, it's called "tax". That thing that boomers bleat that "I paid all my life" is also being paid by Gen-X, Y and everyone else after them.

And infrastructure doesn't last forever, it needs maintenance, replacing and technological updates. Again, through tax. Get off your high horse and stop thinking your generation was "more special".

George B
July 15, 2024

Chris you seem to have missed the point that Cam and others are making, namely that no generation is "more special" or privileged when it comes to paying taxes that fund the goods services that are expected of governments such as pensions and aged care (typically for the preceding generation(s)), public infrastructure and all the other things that are funded by taxes.

 

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