The myth that young people can’t buy a house because they’re lazy, or waste their money,
is busted. According to a new report by the Grattan Institute, young Australians are simply
not as wealthy as their predecessors were three decades ago.
This graph shows that older households (65 years and older), have almost four times as
much wealth as younger households (34 years and younger) on average. This is compared
to only 2½ times 30 years ago. Relative income and expenditure has also increased.
When it comes to government benefits, older households are getting a lot more than they
used to increasing from about $17,000 30 years ago, to about $28,000 per year now. (Note:
all these figures have been adjusted for inflation). Younger households are unsurprisingly the
ones funding all of this. If you could conclude one things from this graph, it would be that
the tax and transfer system has become increasingly generous to older Australians, which leaves
Millennials and Generation Z to carry the burden threatening the sustainability of the
so-called ‘Generational Bargain’.
What is the Generational Bargain? It basically is an implicit contract between generations
where working-age families pay more in taxes than they receive in benefits. This helps
support older Australians who are no longer in the workforce. The bargain is sustained
by a sense of fairness and generosity between generations, with the goal (for most people)
to leave the world a better place for future generations.
Just a quick aside for those not hip with all the generational lingo. Gen Z (or Centennials
as they are sometimes known) are the youngest generation aged under 24. Millennials are
aged between 24 and 38. Generation X are between 39 and 54. Baby boomers are aged 55 to 73.
And the oldest generation is referred to as the Traditionalists or the Silent Generation.
Looking at this chart, we can see that the wealth gap between young and old is growing.
Most of Australia’s increase in wealth has gone to the older generations. The richest
age-bracket, 65 to 74-year-olds, now has about $1.3 million in wealth, which is up from about
$530,000 in 1994 in real terms. They are significantly richer than they once were. However, if you
look at the younger generations, their gains have been modest at best, with the youngest
generation having seen almost no improvement.
Putting these figures into equivalised terms (that is, taking into account varying household
size and composition), the results are equally gloomy. The net wealth of older Australians
has grown much more than the younger generations.
Most of the wealth growth has occurred in property and superannuation. Booming house
prices has favoured long-term property owners, turning many of the older generation into
unexpected millionaires. They didn’t work hard to become millionaires. They just bought
a cheap house three decades ago and held onto it. Consequently, we have a younger generation
that are finding it increasingly difficult to buy a house — not because they’re lazy
or wasteful of their money — but because society has been set up that way. They just
can’t afford it.
This graph shows that young people are unlikely to enjoy the same windfall gains in asset
prices. People who own property or have a large super account will see greater wealth
increases than those that just work full-time. In other words, it doesn’t matter how hard
the younger generation work, they’re constantly behind the eight ball.
This chart shows that rich young Australians are faring okay, but other young people are
going backwards with the most disadvantaged group being the poorest young Australians
who are losing wealth at a mighty rate. Do you notice that the poorest old people are
doing very well indeed in terms of gains in household wealth.
We can see here that the Baby Boomers won the demographic lottery having a large number
of young people supporting them in their retirement years, but the population in Australia is
ageing. A typical 40-year-old today contributes much more towards the retirement of others
through taxes than did his or her baby-boomer predecessors. Unfortunately, Generation Z
has already lost this lottery with only half as many younger people there to support them
when they eventually retire. They better hope that helper-robots become a real thing.
I could go on and on showing you more graphs to back up my point, but what’s the point?
You get the idea, right? Inequality in Australia is rife and unfortunately we’re letting
richer older Australians dictate where the wealth should go — into their back pockets.
But what can be done about it?
Well, the report made a number of recommendations. The ones that would have the biggest impact
include: Improving the efficiency of taxation; Improve labour force participation and productivity;
and Make strategic investments in infrastructure.
Housing affordability is also a big issue, but unfortunately, it’s a difficult political
challenge. Rich people don’t want house prices to go down.
Age-based tax breaks could also be modified to help the situation, but again, it’s a
political challenge.
Intergenerational transfers is also on the agenda, but good luck getting that passed
in parliament.
So what are your thoughts? Is our generational bargain at breaking point? Do we really want
young Australians to become poor Australians? I don’t think so, so let’s fix this mess.