There is a growing sentiment that young individuals today are facing significant challenges. This notion will be central to the upcoming federal budget announcement on Tuesday, which is expected to introduce extensive tax reforms aimed at addressing the generational divide.
Despite clear indicators of difficulties for millennials and Generation Z, quantifying the generational gap remains complex. The prevailing discussion revolves around the assertion that today’s youth may be the first in recent history to experience a decline in living standards compared to their parents.
This debate is anticipated to gain momentum in the weeks ahead. In the meantime, we can explore what economists have determined regarding this issue, as well as the limits of their findings.
Concerns over generational inequality are not exclusive to Australia; they are evident in many developed nations. The post-war era of the 1950s and 60s, characterized by a significant “baby boom,” shaped the demographic landscape. As this generation matured, changing societal norms and the increasing participation of women in the workforce led to delayed family formation and smaller family sizes.
The resulting demographic shift, with a larger older generation followed by smaller ones, has contributed to an aging population in affluent countries. Although the migration of younger individuals has somewhat mitigated this effect, advancements in healthcare have increased life expectancy, creating a substantial population of retirees.
The implications of these changes were highlighted in the federal government’s inaugural Intergenerational Report, released in 2002 under then-Treasurer Peter Costello. The report warned that an aging population would exert considerable pressure on government finances, suggesting that if policy adjustments were not made, the current taxpayer generation would likely face a heavier tax load to support future generations.
This projection has since come to fruition. In 1975, there were seven working-age individuals for every retiree; today, that number has decreased to four. This demographic shift results in fewer working individuals contributing taxes to support a growing number of retirees, who also incur higher healthcare and support costs.
Moreover, this imbalance has challenged the “social contract,” which traditionally posits that individuals contribute through taxes during their working years and receive support in retirement. Recent research from the Australian National University indicates that the net contribution of working-age individuals to the budget has increased, while the net benefits received by retirees have also surged dramatically.
The analysis reveals that a decreasing number of young people are shouldering a greater financial burden, while a larger population of older individuals is receiving more. The authors of the study argue that this trend is not the result of specific policy changes, but rather the outcome of existing policies that have not adapted to contemporary realities, particularly Australia’s reliance on taxing wages.
They suggest that unless there is a deliberate effort to support younger Australians, it may be necessary to consider policies that reduce benefits for older citizens while redistributing the tax burden more equitably.
In addition to demographic factors, wealth disparities, particularly concerning housing, play a crucial role in the generational divide. Research conducted by the Grattan Institute in 2014 and 2019 revealed a widening wealth gap between younger and older Australians. The studies indicated that while the wealth of older households increased by 50% in the early 2000s, the financial situation of those under 35 remained largely stagnant.
The Grattan Institute attributed this disparity primarily to rising housing prices and the implementation of compulsory superannuation. They noted early signs that millennials might be at risk of entering adulthood with lower incomes than previous generations.
However, a more recent study from the e61 Institute presents a different perspective. It suggests that while income growth for individuals in their 20s has slowed, those in their 30s and 40s have experienced stronger growth, leading to a scenario characterized more by delayed earnings than an overall decline.
The researchers believe it is likely that younger generations will still achieve higher earnings, albeit later in life, and that delayed home ownership may be balanced by larger superannuation balances in retirement.
They emphasize that the critical factor is whether the Australian economy will continue to thrive. If economic growth remains robust, each generation could receive more benefits than they contribute in taxes, although this assumption is now under scrutiny.
The ongoing discussion revolves not just around whether one generation fares better than another, but rather whether the system remains viable amid changing economic conditions.
Furthermore, generational trends often overlook familial ties, which can complicate wealth transfer across generations. The Grattan Institute posited that inheritances and financial assistance from parents could exacerbate inequality, with the most significant transfers often benefiting those who are already wealthy.
e61’s findings support this view, arguing that inheritances transform a generational issue into an intra-generational one, creating uneven benefits within the same age group. This phenomenon is particularly evident in the housing market, where prices have surged fivefold over the past 25 years, while incomes have only roughly doubled. Consequently, young people face heightened challenges in affording deposits and mortgages, while older homeowners have seen their assets greatly appreciate.
