We have come to expect that each generation will be better off than its parents: wealthier, healthier and better housed. But the world is changing. Today's generation of young Australians may have lower standards of living than their parents at a similar age.
Over the last decade, older households captured most of the growth in Australia's wealth. Despite the global financial crisis, households aged between 65 and 74 today are $200,000 wealthier than households of that age eight years ago. Meanwhile, the wealth of households aged 25 to 34 has gone backwards.
In part, the wealth of generations has diverged because of the boom in housing prices. Older households made big capital gains. With lower and falling rates of home ownership, younger households shared less of this windfall.
Incomes also grew fastest for older Australians, allowing them to add more to their wealth by saving. Households aged 55-64 saved $12,000 in 2010, up from $1000 in 2004. Households aged 25 to 34 controlled their spending just as tightly, but their savings only increased to $11,000 in 2010 from $4000 in 2004, because their incomes did not rise as much.
Governments are also spending much more on older households for pensions and services, particularly health. In 2010, governments spent $9400 more per household over 65 than they did six years before. Budget deficits funded much of the increased spending. Future taxpayers will have to repay the debt, dragging further on the prosperity of younger generations.
In the past, each generation took out more from the budget over its lifetime than it put in. This generational bargain was sustainable when incomes rose quickly, as they did for 70 years. Yet government transfers from younger to older cohorts are now so large that future budgets may not be able to afford them as the population ages. In other words, the generational bargain is at risk. Many expect that incomes will rise more slowly over coming decades. If so, the last decade in the United States and Britain illustrates the potential outcomes. The wealth and incomes of younger age groups in these countries have fallen behind those of their parents at a similar age.
Although older generations will ultimately pass on much of their accumulated wealth, this may not help younger generations much. On current trends, inheritances are typically received later in life and primarily benefit those who are already wealthy. Gifts to younger generations are typically small, and also primarily benefit well-off households.
Governments can choose to prevent the next generation being worse off than its parents. Targeting the Age Pension, reducing superannuation tax concessions and shifting towards asset taxes could reduce the transfers between today's younger taxpayers and older retirees. These reforms would fall most on those who have benefited from windfalls, government largesse, and paying lower taxes while deficits accumulated. And we shouldn’t delay: later implementation may leave a younger generation even worse off, as they miss out on the benefits their parents enjoyed.