Younger people are stuck in a tax system that some economists warn is stacked against them, as election promises that give advantages to wealthy, retired baby boomers over wage earners mount.
“We’ve had a tax and transfer system that’s radically benefitted current older Australians throughout their lifetimes,” Steven Hamilton of George Washington University says.
“We’re seeing further giveaways to older Australians, often quite wealthy, older Australians,” Brendan Coates of the Grattan Institute adds.
“Essentially the intergenerational bargain is starting to fray.”
“We’ve reduced social mobility,” Emma Dawson of think tank Per Capita concludes.
“Australia prided itself on that sense of the ‘fair go’, of being an egalitarian nation, more so than just about anywhere else in the world … we’ve destroyed that in the space of a generation.”
No shock to youth
Things don’t feel fair to River Pearson, a 28-year-old living on Victoria’s Mornington Peninsula.
“It is definitely harder to get ahead with the way things are,” she says, having just unpacked her car after a long shift of cleaning.
“It is going to be harder than the past generations had it. And I think we get cut a lot.
“We get a lot of bad rap for seeing that and thinking that. But that’s just how it is right now.”
John Freehan has great sympathy. Aged 68, he is a self-funded retiree living 80 kilometres east in Drouin, in West Gippsland.
“We were just so blessed. We even had the best music, I think,” he laughs.
“The baby boomers just landed on their feet, and we’ve been so rapacious, we’ve been just terrible.”
There are inequalities within generations. For example, women aged 55 and over are the fastest-growing group of homeless people.
But a diverse group of experts agree that a storm of global factors and policy choices has generally seen older Australians benefit, as young people’s futures suffer.
A long, astonishing rise in house prices in a time of record-low interest rates has led to a massive growth in wealth for people who got in before the boom. The stock market, too, has powered ahead.
Wage growth has been stubbornly low. Combined with rising inflation, that means people’s purchasing power, what they can buy with their money, is becoming weaker.
Workers are shouldering a growing share of the tax burden, and tax cuts set to arrive will give the most back to those at the top of the income tree.
Meanwhile, older and wealthier Australians are benefitting from decisions that cost taxpayers billions:
- Superannuation concessions: You pay less tax on money you put into your fund and, once you’ve retired, the money you take out.
- Capital gains tax (CGT) discount: You pay tax on only half the profit made from buying and selling real estate and other assets.
- Franking credits: A tax rebate to shareholders who receive dividends that have already incurred company tax. Since 2001, retirees have been entitled to cash refunds of the tax already paid, even if they do not pay tax.
- Expansion of the Commonwealth Seniors Health Card: An election promise means people who own their home and earn $90,000 annually from super will get access to bulk-billed medical appointments and cheap medicines.
Some super concessions and the CGT discount are available to people of any age, but researchers suggest the bulk of the benefits go to older and wealthier Australians.
A super system
Superannuation concessions reduce the tax paid on funds in what is meant to be a retirement nest egg but is also used for intergenerational wealth transfer.
You can earn up to $250,000 a year and contributions into your super are taxed at 15 per cent, as opposed to the top tax rate, which is currently 45 per cent.
Once you retire, you can have $1.7 million in a super account – $3.4 million for couples – and not pay any tax on your earnings.
The money was taxed once – when it was earned. But this concession means current wage earners are subsidising some of the richest people in the country to not pay tax on their investment income.
Treasury produces an intergenerational report about every five years, projecting what Australia will look like.
It suggests that by 2040, the cost of the concessions will dwarf what we spend on the Age Pension. The cost is already far more than double what Australia spends on unemployment benefits.
“That looks like being unsustainable,” says Steven Hamilton, a tax economist at George Washington University and a visiting fellow at the Tax and Transfer Policy Institute at the ANU.
One of the issues with intergenerational inequalities is that most people are lucky enough to get old.
“So if older people are benefitting more than younger people, by the end of their lifetime everything should work out, right?”
Until recently, Mr Hamilton was the chief economist at the Blueprint Institute think tank, which has several prominent Liberals and a former NSW Nationals MP on its strategic council.
He sees the issue being that changes in policy settings “so that one generation wins, and the next generation loses” are distorting the overall picture.
“Well, I don’t have a lot of hair,” he laughs, “but I’m a young person. And I would very much like to see a greater level of equality within each generation.
“I think we’ve got to fix these problems.”
For Emma Dawson, executive director of left-leaning think tank Per Capita, the “real culprits” are tax concessions that go to people who already have a lot of wealth, primarily around property.
At the 2019 election, the concept of negative gearing – allowing property investors to deduct losses from being a landlord against their tax – was much debated.
Less discussed is the impact of a discount to capital gains tax (CGT) on property investment – something that exploded at the turn of the century.
“At that point, we saw the price of property, of land, in Australia take off compared to the rate of wage growth,” Ms Dawson says.
“People were encouraged to chase a capital gain, knowing the money they were making from the income in that investment was going to be taxed more lightly than the income from their work.”
Research conducted for The Australia Institute found the concession cost $9.3 billion (super tax concessions topped $41 billion).
The amount of CGT discount claimed by high-income households was 87 per cent of that. Middle-income households used 11 per cent, and low-income households just 1 per cent.
“We don’t tax wealth, we are over-reliant on taxing incomes, which stifles innovation and it also stifles people’s ability to get ahead,” says Ms Dawson, who withdrew from a Labor preselection process after the Coalition proposed tax cuts for wealthy people and the opposition did not oppose it.
“So we have a lot of older people who are extremely ‘asset rich’ – they’re not paying a lot of tax on that wealth, on the income from their investments – and younger people, who only have income from work, being taxed relatively highly compared to the rest of the world, and [are] unable to get into the market to accumulate some assets.”
Another election promise sees the expansion of eligibility for the Commonwealth Seniors Health Card (CSHC).
More than 400,000 people aged over 67 who do not qualify for the Age Pension get the card, giving them access to cheaper Medicare services and prescription medicines.
With Labor matching the promise, it means a person earning up to $90,000 a year ($144,000 for couples) will get what used to be restricted to singles earning up to $58,000 annually ($92,000 for couples).
“What we’re doing is we’re giving cheaper medicines, cheaper doctor appointments to people who are essentially earning among the wealthiest 5 per cent of older Australians,” says Brendan Coates of the Grattan Institute.
“They have average wealth, outside of their home, of $1.5 million.
“So we are talking about extending these benefits to some of the wealthiest in our society, while at the same time we’re struggling to find the money to pay for support for people who are vulnerable, who are on low incomes and who are really struggling.”
In Australia, savings are taxed relatively lightly, giving bigger benefits to older people who have accumulated more over the course of their working lives. That is leading to problems, Mr Coates says.
“These are policies that see someone who’s older, over the age of 65, paying the same tax if they earn $100,000 as a younger person who earns $50,000. You know, that is not equitable.”
As the large baby boomer cohort gets older, there is likely to be a growing wave of wealth transfer through inheritances. But far from ending inequality, some experts are concerned it will cement it.
“It’ll turbocharge inequality,” Ms Dawson warns.
“Because what we’ll see is those families that already have some capital passing it down to their own children, and those that don’t have any capital will be even less able to get into the market.
“So we’ll be creating effectively a two-tier society again.”
More than $120 billion was passed on in 2018, before the pandemic (the entire health budget that year was $80 billion).
Mr Hamilton says that while inheritance may address some inequality between young and old, it “doesn’t address inequality within a generation between the haves and the have-nots”.
Where to now?
River Pearson isn’t angry about older generations. She lives with her grandfather, who she describes as “my best friend”, and appreciates that people who’ve worked a lifetime deserve a good retirement.
But as she considers buying property, she feels the cards are stacked against her.
“It’s daunting, it’s actually very daunting to think of because it’s such a hard thing to achieve these days in my age bracket with the cost of living going up and wages staying the same,” she says.
“And it’s only going to get worse if it continues to rise.”
John Freehan worked in the dairy industry and never reset his body clock. Rising about quarter to three in the morning, he hits the gym for several hours before most people are awake.
He thinks about the lives of his children, and those of his partner.
“I think it’s harder for them,” he says.
“I just walked into a factory, looking for a job, and 20 years later I was still there. We were the lucky generation.”
“I just think we’re so greedy, we don’t like to share.
“Maybe [dealing with] climate change might impinge on our portfolio, or it might cost us a little bit more to address it, but we just avoid those things. We don’t … want anything to change that might hurt us.”
The years ahead
The big problem, Emma Dawson says, is that when you make structural changes to any system — like the way we tax or give benefits — there are winners and losers.
When you’re trying to win the most votes in an election, that’s tough.
“No-one wants there to be any losers, but there has to be in this in this game,” she says.
“They may lose a little bit of wealth in order to allow other people to build some security. And I think that’s a trade-off most Australians would be willing to make.”
Mr Coates calls it a “unity ticket” from the Coalition and Labor: “pushing more benefits towards older Australians, often wealthier, older Australians”.
He argues that taking the intergenerational challenge seriously would involve increased rent assistance for young people and a winding back of concessions so that older people don’t pay so much less tax than younger people on the same incomes.
“We’re not seeing those kinds of policies this election campaign, essentially, because both major parties are worried about pissing off older Australians,” he says.
“They’re worried about pissing off older Australians and losing the election.”
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