1. finance
2. personal finance
3. financial planning
4. retirement and pension

Intergenerational fairness
Presentation to CEDA Council on Economic Policy
John Daley
Grattan Institute
20 March 2015
Intergenerational fairness
Government budgets are unsustainable: spending on older households is a
substantial cause of the problem
•  Australian government budgets have been unsustainable for 7 years
•  The dominant pressures on Australian government budgets are increased spending
on older households
•  Governments are spending more on older households, to pay for increased health
services, Age Pensions and aged care
•  The increase spending reflects policy choices, not ageing
The wealth of older households is increasing much faster, although some are
doing it tough
•  Most older households are much wealthier than their forebears
•  Younger households are missing out, even though they are are saving much more
•  There are substantial risks to relying on economic growth to fix the problem
•  A minority of older households are under more pressure than wage earners, but
much less pressure than the unemployed
Responsible budget repair will disproportionately affect older households with
more assets
•  Better targeting of age pensions, superannuation, and asset taxation dominate the
options for budget repair that are both large and socially responsible
•  Reforms would also create incentives for more older workers to work for longer
2
The Commonwealth’s structural deficits
was masked by mining boom and GFC
Commonwealth budget balance
per cent of nominal GDP
Terms of trade
Cyclical impacts
3%
Cash balance
Structural
underlying balance
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
2003
2005
2007
2009
2011
2013 2015f 2017f
Financial year ending
Note:
Cash balance is equal to receipts minus payments, minus Future Fund income, (under 0.25 per cent of GDP)
Source: Budget Pressures 2014
3
Both revenue and expenditure are worse
than longer-run levels
Commonwealth own purpose expenditures and revenues
per cent of nominal GDP
24%
Forecast
C’wth Revenue
(ex GST)
22%
20%
18%
C’wth Expenditure
(ex tied grants)
16%
14%
2003
2005
Source: Budget Pressures 2014
2007
2009
2011
2013
2015
2017
Financial year ended
4
Capex has driven increase in State debt
State net debt and operating balance
$2013 bn
80
60
40
Forecast
Interest and
depreciation
increased from 7% to
10% of State
government revenue
Net debt
20
Net operating balance
0
-20
-40
Grattan Institute, Budget Pressures 2014
5
Forecasts of a budget surplus show the
triumph of experience over hope
Actual and forecast Commonwealth underlying cash balance
per cent of GDP
2
Forecast made in
2011 2012 2013
1
0
2014
2015
-1
2015
MYEFO
-2
Actual
-3
-4
-5
2010
2011
2012 2013 2014 2015
Financial year ended
Grattan analysis of Commonwealth Budget Papers
2016
2017
2018
6
Increasing spending on older Australians is
the dominant pressure on budgets
Real change in government recurrent expenditure, 2003 to 2014
$2013 bn
50
Real growth
Growth at GDP
40
Age-related
30
Predominantly
older recipients
20
10
0
Welfare Health
Aged
InfraIndustry Comm’s
Super
carers
care
structure
-10
Climate
Legal,
Foreign
Age
Other
Education Other
Gvt &
affairs,
Pension welfare
services change & justice,
debt
env’t emergency defence
Note: Based on analysis of Commonwealth, NSW, Vic, Qld and WA data. Categories that changed by less than $1 billion not shown.
7
Source: Grattan Institute, Budget Pressures 2014
The net cost of older households to
government has jumped in the last 6 years
Average net benefits per household (government payments, less tax)
2010$
$35,000
$30,000
$25,000
$20,000
1988-89
1993-94
1998-99
2003-04
2009-10
$15,000
$10,000
$5,000
$0
-$5,000
-$10,000
-$15,000
15-24
Source: The Wealth of Generations
25-34
35-44
45-54
55-64
Age of head of household
65+
8
Governments spend more on older
households, due to Health and Age Pension
Government expenditure per household
$ per person, 2009-10
50,000
Other in
kind
Education
40,000
30,000
Health
20,000
10,000
Cash
0
15-24
25-34
35-44 45-54 55-64 65-74
Age of head of household
75+
Note: Other in kind includes child care assistance, other social security and welfare benefits, housing benefits and electricity concessions.
Source: The Wealth of Generations
9
Government spending per person escalates
rapidly from pension age
Government spending per person
$ thousands per person, 2011-12
80
70
Aged
Care
60
50
40
Health
30
Education
20
Aged Pension
10
Note: ‘Other’ includes the Disability Support Pension, Parenting Payment, Family Tax Benefit, Disability Support Services (both
Australian Government and state and territory), Other social security and welfare payments, Defence and other expenditures and other
state and territory expenditures not classified elsewhere
Source: Productivity Commission (2013)
100+
95-99
90-94
85-89
80-84
75-79
70-74
65-69
60-64
55-59
50-54
45-49
40-44
35-39
30-34
25-29
20-24
15-19
10-14
5-9
0-4
0
Other
10
Health spending and cash benefits for over
65s have increased significantly
Change in government benefits per household, 1988-89 to 2009-10
$2010
16,000
Other in kind
14,000
Education
12,000
10,000
Health
8,000
6,000
4,000
Cash
2,000
0
15-24
Source: The Wealth of Generations
25-34
55-64
35-44
45-54
Age of head of household
65+
11
Government health spending increased the
most for the over 70s
Government health spending per person, $2010
$16,000
1988-89
1993-94
1998-99
2003-04
2009-10
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
0s
Source: The Wealth of Generations
10s
20s
30s
40s
50s
60s
70s
80+
12
Policy choices, not population ageing, drove
health and pension spending increases
Real increase in expenditure 2003-2013
($2012 billion)
45
40
35
30
25
Health
Age Pension
More,
improved,
and new
services per
person
GDP
growth
16
14
Rate &
eligibility
change
10
8
20
15
10
5
0
12
Health inflation
>CPI
Population
ageing
Population
growth
Source: Grattan Institute, Budget Pressures 2014
Indexation
>CPI
Population
growth and
ageing
6
4
2
0
13
Commonwealth government spending on
aged care almost doubled in the last 10 years
Commonwealth Government aged care expenditure
2013$b
14
12
10
8
6
4
2
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Financial year ending 30 June, assumed CPI rate of 2.5%.
Source: PBO (unpublished)
14
Because of super tax concessions, older
h’holds pay less income tax than 20 years ago
Change in taxes per household, 1988-89 to 2009-10, 2010$
8,000
Net tax
6,000
4,000
2,000
Indirect taxes
0
-2,000
Income taxes
15-24
Source: The Wealth of Generations
25-34
35-44
45-54
55-64
Age of head of household
65+
15
Intergenerational fairness
Government budgets are unsustainable: spending on older households is a
substantial cause of the problem
•  Australian government budgets have been unsustainable for 7 years
•  The dominant pressures on Australian government budgets are increased spending
on older households
•  Governments are spending more on older households, to pay for increased health
services, Age Pensions and aged care
•  The increase spending reflects policy choices, not ageing
The wealth of older households is increasing much faster, although some are
doing it tough
•  Most older households are much wealthier than their forebears
•  Younger households are missing out, even though they are are saving much more
•  There are substantial risks to relying on economic growth to fix the problem
•  A minority of older households are under more pressure than wage earners, but
much less pressure than the unemployed
Responsible budget repair will disproportionately affect older households with
more assets
•  Better targeting of age pensions, superannuation, and asset taxation dominate the
options for budget repair that are both large and socially responsible
•  Reforms would also create incentives for more older workers to work for longer
16
Some households on the Age Pension are
struggling
Percent of households under stress
Main source of household income
Job seeker payment
60
Other government payment
Wages and salaries
50
40
30
20
10
0
>2 household
deprivations
>2 financial
stressors
>30% of income In poverty for ≥ 2
going to housing
years
Notes: ‘Job seeker payment’ includes Newstart and jobseeker Youth Allowance. ‘Other govt payment’ is dominated by age and
disability pensions.
Source: Grattan analysis of Phillips and Nepal (2012).
17
Young households are accumulating less
wealth …
Mean wealth by age of head of household
$ thousands ($2011-12)
1,200
2003-04
1,000
2005-06
2009-10
2011-12
800
600
400
200
0
15–24
25–34
35–44
45–54
55–64
Age of head of household
65–74
75+
18
… even though household incomes have
increased for all age groups
Household wage, business and welfare income before tax, 2012$ 000s
200
180
160
140
2003-04
2005-06
2007-08
2009-10
2011-12
120
100
80
60
40
20
0
15-24
Source: ABS (HES)
25-34
35-44
45-54
Age of head of household
55-64
65+
19
Over half of household wealth is in property
Mean wealth by age of head of household
$ thousands ($2011-12)
1,400
1,200
1,000
Net worth
All other
wealth
Other financial
Super
Other property
800
600
400
200
Home
0
-200
Liabilities
15-24 25-34 35-44 45-54 55-64 65-74
-400
Source: The Wealth of Generations
Age of head of household
75+
20
Increased wealth for older workers is due to
more investment in property and savings
Change in mean wealth per household, 2003-04 to 2011-12
$ thousands ($2011-12)
300
250
200
Net worth
All other
wealth
Other financial
Super
150
100
50
Other property
0
Home
-50
-100
-150
Liabilities
15-24 25-34 35-44 45-54 55-64 65-74
75+
Age of head of household
21
Falling wealth for younger households was
not a result of lower savings
Savings as a proportion of disposable income, per cent
16%
14%
2003-04
2009-10
12%
10%
8%
6%
4%
2%
0%
15 to 24
25 to 34
35 to 44
45 to 54
Age of head of household
55 to 64
65+
22
Younger cohorts missed out on the windfall
of buying a house before 1997
House prices and full-time weekly earnings
Index: 1970 = 100
350
300
250
Real house prices
200
150
Real average
full-time earnings
100
50
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
23
Changes in household wealth are primarily
driven by asset values and deficits
Annual changes in household wealth
2014$ 000
30
Age of head of household
25
25-34
35-44
45-55
55-64
65+
20
15
10
5
0
-5
-10
Savings Other changes Inheritance & Change in
gifts
in wealth
HECS debt
Annual changes in private wealth
2004 to 2010
Future tax impact of annual
increase in government debt
2004 to
2010
2010 to
2014
24
Historically there have been long periods of
little income growth in Australia
Real per capita incomes
$ 2010
70,000
60,000
50,000
40,000
30,000
20,000
25 years
45 years
10,000
0
Source: Butlin
25
Younger cohorts in the UK now earn less
than their predecessors at the same age
Median gross annual wages in UK
2013£
30,000
1973-77
25,000
1978-82
1968-72
1963-67
20,000
Born in 1983-87
15,000
10,000
5,000
0
20
25
30
Age
35
Source: Belfield, C et al, Living standards, Poverty and Inequality in the UK , Institute of Fiscal Studies Report, p.10
40
26
The incomes of 24-34 year olds in the US
have declined relative to older workers
Median incomes in US
2013USD
40,000
25-34
30,000
55-64
20,000
10,000
0
1947
1957
1967
1977
1987
1997
Source: Data from US Department of Commerce (2013), US Census Bureau, Historical income tables (table 8).
2007
27
Wealthy people of a given age tend to
receive larger inheritances
Average inheritances if one one received
2002-2012, nominal
$200,000
$150,000
Average inheritances of richest quintile Based on
Average inheritances of middle quintile wealth in 2002
Average inheritances of poorest quintile
$100,000
$50,000
$0
26-36
37-47
48-58
59-69
70-80
Age when the largest inheritance was received
Note: Wealth quintiles are based on relative wealth in 2002 and therefore do not include the effect of inheritances received after this
time. The HILDA survey asks about payments received from inheritances. It is possible that some respondents did not include housing
assets in their estimates.
Source: Grattan Analysis of HILDA (2002); (2012)
28
Intergenerational fairness
Government budgets are unsustainable: spending on older households is a
substantial cause of the problem
•  Australian government budgets have been unsustainable for 7 years
•  The dominant pressures on Australian government budgets are increased spending
on older households
•  Governments are spending more on older households, to pay for increased health
services, Age Pensions and aged care
•  The increase spending reflects policy choices, not ageing
The wealth of older households is increasing much faster, although some are
doing it tough
•  Most older households are much wealthier than their forebears
•  Younger households are missing out, even though they are are saving much more
•  There are substantial risks to relying on economic growth to fix the problem
•  A minority of older households are under more pressure than wage earners, but
much less pressure than the unemployed
Responsible budget repair will disproportionately affect older households with
more assets
•  Better targeting of age pensions, superannuation, and asset taxation dominate the
options for budget repair that are both large and socially responsible
•  Reforms would also create incentives for more older workers to work for longer
29
There are few options for budget repair that
are both large and socially responsible
Budgetary impact of tough budget choices
2013$b per year
0
5
10
Age Pension assets test
Negative gearing
Pharmaceutical spend
Pension and super access
CGT discount
Higher ed subsidies
Defence spending
Cost effective medicine
Super contr concessions
Super earn concessions
Fuel tax indexation
Transport infra costs
Industry support
School class sizes
GST broaden
Health rebate
Mining royalty
CGT owner occ
Payroll threshold
Fuel tax credit
Bracket creep
Source: Grattan Institute, Balancing Budgets
15
Collateral impact
$11b
Positive
$24b
Neutral
$12b
High risk in
execution
Mild
negative
$14b
$19b
Negative
$40+b
Very
negative
30
Better targeting of age pensions, super, and
asset taxation dominate the attractive options
Budgetary impact of tough budget choices
2013 $b per year
0
5
10
Age Pension assets test
Negative gearing
Pharmaceutical spend
Pension and super access
CGT discount
Higher ed subsidies
Defence spending
Cost effective medicine
Super contr concessions
Super earn concessions
Fuel tax indexation
Transport infra costs
Industry support
School class sizes
GST broaden
Health rebate
Mining royalty
CGT owner occ
Payroll threshold
Fuel tax credit
Bracket creep
Source: Grattan Institute, Balancing Budgets
15
Pensions & super
Assets taxation
Other
$27b pensions & super
$ 7b asset taxation
$12b other
31
Pages 32 – 34 have been left intentionally blank
2
Tax free earnings on super for over 60s
mostly benefit rich old people
Income by source for those in their 60s, by income decile,
$k yearly
180
150
Other income
120
90
60
Age Pension
Super earnings
tax concession
Super income
30
0
1
2
3
4
5
6
7
8
Gross income decile
9
10
Note: Numbers presented are the income decile averages for each income category for those aged 60-69.
Source: Grattan Institute, Balancing Budgets: hard choices we need
35
The Age Pension could be better targeted
0
4
3
2
1
0
100%
Household net
wealth for matureaged households,
$ million
Proportion of
mature-aged
households
receiving
government
benefits
10
Household wealth percentile
20 30 40 50 60 70
Current asset
test threshold
80
90
$1m in wealth
75%
50%
25%
0%
Benefits received 400
by those receiving
200
government
benefits, $/wk
0
Source: Balancing budgets. Note: “mature-aged household is household where oldest occupant is over 65
36
$7 billion a year in Age Pension is paid to
households with more than $750k in assets
Age pension expenditures and household wealth
2012-13, $ billion
45
40
35
30
25
20
15
10
5
0
<$100k $100 k- $200k - $300k - $500k - $750k $200k $300k $500k $750k
$1k
Household wealth
Source: Balancing budgets
$1m $2m
>$2m
37
Participation of older age groups and
women has trended up for over 15 years
Labour force participation rates (per cent of age cohort)
Men
Women
100
35-44
80
45-54
55-59
35-44
60
40
20-24
20-24
45-54
60-64
55-59
60-64
20
65+
0
1980 1985 1990 1995 2000 2005 2010
Grattan Institute, Budget Pressures on Australian governments
65+
1980 1985 1990 1995 2000 2005 2010
38
Until recently, increases in older age
participation outweighed the ageing population
Contribution to change in participation rate
Percentage points per year
0.5
0.4
0.3
0.2
55+ women
55+ men
16-34 women
35-54 women
35-54 men
0.1
0
-0.1
Total
-0.2
Ageing
-0.3
16-34 men
-0.4
2004-2011
2011-2013
Borland, Labour Market snapshot, December 2013: https://sites.google.com/site/borlandjum/labour-market-snapshots
39
Older age workforce participation is
relatively low in Australia
Adjusted workforce participation rates of 55-64 year olds (%)
90
80
70
60
50
40
30
20
Productivity Commission, 2006, Workforce Participation Rates – How Does Australia Compare?, Productivity Commission Staff Working Paper.
40
Lifting eligibility for Age Pension and taxfree super would increase retirement ages
Cumulative per cent of male labour force retiring by age
Percent
100
Eligible for
pension
80
60
Eligible for taxfree super
40
Public sector
“54/11”
20
0
51
53
55
57
59
61
63
65
67
69
Age
Source: Grattan analysis of ABS (2011b) cat no 6530.0
41
Most older people choose to leave the
workforce
Per cent of people retired
100%
Care for child or other
Other
Own sickness/disability
Terminated/no work
Issues finding
Temporary/seasonal job work
Left own business
90%
80%
70%
Holiday/leisure
Coincide with partner’s
retirement
60%
50%
40%
Reached retirement age Discretionary
exit
30%
20%
10%
0%
<55
60-64
70+
55-59
65-69
Retired at this age
Source: ABS (2013) Cat 6238 Table 6.1
42
Intergenerational fairness
Government budgets are unsustainable: spending on older households is a
substantial cause of the problem
•  Australian government budgets have been unsustainable for 7 years
•  The dominant pressures on Australian government budgets are increased spending
on older households
•  Governments are spending more on older households, to pay for increased health
services, Age Pensions and aged care
•  The increase spending reflects policy choices, not ageing
The wealth of older households is increasing much faster, although some are
doing it tough
•  Most older households are much wealthier than their forebears
•  Younger households are missing out, even though they are are saving much more
•  There are substantial risks to relying on economic growth to fix the problem
•  A minority of older households are under more pressure than wage earners, but
much less pressure than the unemployed
Responsible budget repair will disproportionately affect older households with
more assets
•  Better targeting of age pensions, superannuation, and asset taxation dominate the
options for budget repair that are both large and socially responsible
•  Reforms would also create incentives for more older workers to work for longer
43
Wealth is dominated by home ownership,
but younger people are struggling to buy
Composition of household
wealth, 2010
Busines Shares
Bank s
deposit
Home ownership rate by age
Per cent
90
80
Home
70
Other
financial
60
65+
55-64
45-54
35-44
50
Superannuation
Other
property
Source: Grattan analysis of HILDA 2010
25-34
40
Source: Yates (2011a)
44
Home ownership rates have fallen fastest
for young people on low incomes
Percentage point change in home ownership rates, 1981 to 2011
10%
0%
-10%
Income quintile
-20%
Lowest
2nd
3rd
4th
Highest
-30%
-40%
25-34
Source: Grattan Institute, Wealth of Generations
35-44
45-54
55-64
45
Questions
46