The Federal Election heard the concerns of many younger people that they’re being disadvantaged by Government policies that favour older people over them. A new report suggests they might be right.
Academics from the ANU’s Crawford School of Public Policy have released a paper measuring the way that the tax and transfer system redistributes income between Australians of different ages and how that’s changed in the past three decades.
The paper, ‘Measuring the changing size of intergenerational transfers in the Australian tax and transfer system’, has found that the system has been more generous to older Australians than younger ones.
It says government spending on older people, including the age pension, aged care and health care, has increased significantly in real, per-person terms over time. By contrast, net spending on younger households has remained relatively constant.
And the figures aren’t distorted by an ageing population as they’re measured on a per capita basis.
The paper says the increase in transfers to older Australians has happened in a period where older people have also earned significantly more private income, primarily from higher capital income from real estate and superannuation.
It says these two trends have had a significant impact on the nature of our tax and transfer system and income distribution by age. For instance, from 1993/94 to 2002/03, Australians aged over 60 had private income equal to 41% of the income of Australians aged 18 to 60 and average final income (after taxes and transfers) equal to 61% of the income of Australians aged 18 to 60. Yet, in the final ten years of the study, the pre-tax income of Australians aged over 60 was 65% of the population aged 18 to 60, and post-tax income was equal to 95% of their income.
It goes on to suggest that the trend is even more notable when Australians over the age of 60 are compared to those aged 18 to 30. In the past decade, the older cohort has earned an income around 11% higher ($72,000 compared to $64,000 in 2022 dollars). However, the tax and transfer system means that the older group has an average after-tax income 60% higher than the younger group.
What’s behind the trends?
The chart above shows the six main levels of taxes and it’s primarily been personal income tax which has been a key contributor to the growing divide between old and young. The growth in personal income tax has been driven by an increase in real incomes along with the average tax rate on income remaining relatively stable during the period. Numbers for the other taxes haven’t changed as much.
The next chart shows the change in aggregate taxes for different age groups. It reveals that total taxes paid have increased meaningfully for those in the highest earning years. Meanwhile, taxes have also increased for older people but remain low in absolute terms. And taxes paid haven’t risen for the young reflecting the low growth rate in earnings for this group.
The other change has been in Government spending on different age groups.
The paper breaks down Government expenses into three categories:
- Pensions and other cash benefits
- Social transfers in kind, such as health and education, where the spending has a clear recipient.
- All other government spending such as infrastructure costs or defence is assumed to be spread equally across all people above the age of 15.
The chart suggests that older people have benefited disproportionately across cash benefits and social transfers when measured on a real, per-person basis.
The next chart aggregates all Government spending across age groups.
Adding it up
So what does this all add up too? The paper says that by combined the net impact of taxes less transfers, you can gauge the impact of the tax and transfer system on different ages over time. And here’s the result:
This shows that the system has transferred money from people of working age to those of older ages in every period. But the net transfer to older Australians has increased most in real terms in recent years. And transfers to younger cohorts have not increased to the same degree.
Key findings
From the data, the paper reaches several conclusions:
- The tax and transfer system has not adjusted to the changing age profile of income in Australia. It increasingly favour older Australians at the expense of the young. Unless we want to explicitly favour older Australians, policies should be considered that reduce payments to older people and shift the tax burden away from the young towards the old. Policy rules around means testing could be an important part of such a shift.
- The personal income tax system captures only around two-thirds of household income, leaving income generated from owner-occupied housing and superannuation lightly taxed. This has important implications for efficiency and equity.
- Growth in land prices has created large transfers of wealth between generations. This price growth is driven to some extent by government policies, such as restrictive zoning and planning practices. Removing these barriers makes sense.
- To achieve a fiscally sustainable budget over the coming decades, Australia must choose between increasing taxes and reducing government expenses. The consequences of this adjustment should be borne, at least in part, by older Australians. Achieving budget sustainability solely by increasing taxes on Australians of working age (mostly by growing personal income tax revenue through bracket creep) will worsen generational inequities.
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On the topic of Government expenses, Peter Swan and Dimitri Burshtein say Labor should make spending cuts a top priority. Reining in spending wouldn't just address our budget concerns but they say it would also clear the way for the meaningful tax reforms that are needed to boost Australia's ailing productivity.
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