The act of bastardry that’s hurting young generations

Tax boffin Ken Henry calls it intergenerational bastardry.

In the more polite but just as emotionally charged words of tax academic Bob Breunig, the “intergenerational contract has lost its balance”.

Both men, attendees at the economic roundtable love-in that has taken place over the past three days in the federal cabinet room, are venting about how the tax system is absolutely doing over young Australians while rewarding those in their golden years.

Henry’s views about the tax system (and the way the environment has been degraded) are well known. He’s never been shy about arguing that young people are paying more tax, largely to support those who have retired.

Breunig, along with fellow ANU experts Peter Varela and Matthew Smith, produced a paper that was released just before Anthony Albanese, Jim Chalmers and 25 others sat down for the cabinet roundtable.

That paper puts real details around the price being paid by those who happen to have been born this side of 1990.

According to Breunig and team, the average 75-year-old’s post-tax and welfare income (think of the age pension plus interest on savings or maybe their superannuation) 25 years ago was about three-quarters of the then-average Australian income.

Today, thanks to active policies by both sides of politics, a 75-year-old’s average income is equal to that of an average working Australian.

So post-tax income and pension payments have gone up relative to the overall population, but not all parts of the population.

Older Australians have a post-tax income one-third higher than someone aged between 18 and 30. They used to be around the same. The change has been caused by more tax on the younger cohort and less tax (and larger income streams) for the older bunch.

Before the turn of the century, retirees received relatively little in the way of income, relying largely on the age pension to get by. Superannuation was created to ensure older people did not have to rely on government support. It was all aimed at giving retirees dignity in their later years.

But along the way, it’s gone way beyond dignity. In too many cases, it’s become estate planning, tax management or wealth transference.

The average 60-ish retiree drawing tax-free income from their super plus a bit of the age pension is getting the same income as an average working 40-year-old. But the spending pressures on a retiree and someone in their early 40s are very different.

The retiree doesn’t face the “pressures of saving for the future or supporting a growing family”. They have probably paid off their mortgage while they spend far less than someone of working age.

One of those saving pressures is finding a deposit for a home. In 1990, to buy a median-priced house in Sydney required almost seven times the median income. It’s now more than 13 times the median income.

That’s a big factor in the collapse in home ownership among under-35s. That fall in ownership is one of the factors contributing to the drop-off in fertility rates among younger couples.

We’re asking younger Australians to pay huge amounts for their higher education, leaving many in debt for longer (another issue making it more difficult for this group of people to save for a deposit).

Breunig and his team point out that we have a tax and welfare system which rewards people who move their wealth into income-generating low- or no-tax asset classes.

About two-thirds of income is captured by the tax system.

That’s great if you have assets not attracting tax. But for those who don’t, like most people under the age of 40, that translates into paying more tax. And that tax is probably going towards services (the health system, aged care) used by older Australians.

This is why Breunig and his team believe the intergenerational contract is broken.

“The current tax and transfer system, with its growing obligations to the growing cohort of older Australians and shrinking resources from which to meet those obligations, is spiralling down and unsustainable,” they found.

To resolve this problem, you could slash spending. The second-largest expense for the federal budget is the age pension, at $66 billion a year. That’s followed by the NDIS ($51 billion), aged care services ($41 billion), medical benefits ($35 billion) and assistance to the states to run their hospitals ($34 billion).

The largest expense in the budget world is actually the GST at $101 billion, which goes straight out the door, mostly to fund state hospitals. Combined, that’s about 40 per cent of the budget, much of which flows to the old, the sick, the disabled and the young.

Another option is to increase taxes on older Australians. That would be the bunch of politically important voters who have managed to move the tax system in their favour over the past 30 years.

The economic roundtable was all about finding ways to lift our nation’s collective living standards while also fixing the budget bottom line. When it came to tax, the usual ideas such as company tax or the GST dominated discussion.

Breunig’s research, building on the warnings of people such as Ken Henry, suggests that’s just touching the edges.

The economic roundtable considered a number of worthy issues. Whether they deliver is an open question.

But on the battle between the generations, one continues to stomp all over the other.

Shane Wright is a senior economics correspondent and regular columnist.

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