Are we being unfair to Gen Y?

Current debate on intergenerational issues has been triggered by the Federal Treasurer’s recently released Intergenerational Report (IGR 2015) as well as the recent Grattan Institute papers: The Wealth of Generations (Grattan Wealth Paper) in December 2014, and Balancing Budgets: Tough Choices We Need (Grattan Budget Paper) in November 2013.

The Actuaries Institute held a colloquy on 12 March 2015 to discuss these papers, and the broader questions:
• Are current public policies unfair to younger Australians because they are so heavily focussed on the needs of older Australians?
• What changes are needed to return the Commonwealth Government budget to structural balance or to address proven intergenerational inequity?
• What options are available to individual actuaries and to the Actuaries Institute to promote the need for changes to public policies?

“…much of Australia’s public policy focus involves the payment of increasing government subsidies to older Australians who are not necessarily needy.”

Public Policy Focuses Currently on Older Australians

While older Australians are generally unaware of it, much of Australia’s public policy focus involves the payment of increasing government subsidies to older Australians who are not necessarily needy. As the Grattan Budget Paper states “Australian welfare policies systemically favour older people over the young, and older people pay less tax and receive more benefits than younger households with similar incomes…….. current arrangements for the Age Pension and superannuation provide significant benefits to those in the middle and upper-income deciles…”.

Examples of public policies which favour older Australians include:
• Tax free superannuation investment income and drawdowns after age 60
• Substantially free medical, hospital and pharmaceutical care, community rating of private health insurance, and GST-free health services
• Recent relaxation of means testing of the Age Pension, and recent increases to pension rates and indexation
• Subsidised at-home care for older Australians, as part of the Commonwealth Government’s Ageing-in-Place policy.

At the same time as changes to these public policies have resulted in increasing payments to non-needy older Australians, public policies which are applicable to younger Australians have either not been maintained or their anti-young focus has been increased, for example:

• Public policies which increase the price of residential property have been extended (borrowing by DIY super funds, failure to enforce residential property ownership laws, Ageing-in-Place provisions)
• Increased Commonwealth Government debt will require younger Australians to pay increased future taxes (because older Australians pay relatively low taxes)
• The quality of Australia’s public education and university systems have eroded through underperformance and underpayment of teachers, and by publicly funding poor quality university courses
• The Commonwealth Government payment to the unemployed (NewStart) is widely acknowledged as inadequate in amount, and eligibility for payment is tight for those who obtain part-time work
• Few publicly funded programs exist to assist the school to work/study transition
• Younger Australians are being required to pay both the Superannuation Guarantee out of their incomes, and the (substantially means test free) Age Pensions of current older Australians.

In contrast to these six examples, Commonwealth Government payments towards the cost of child care have increased over recent years, arguably benefiting younger Australians.

Commonwealth Government Budget

The current Commonwealth Government public policy focus on older Australians might be appropriate if Commonwealth Government finances were balanced. The table below analyses Commonwealth Government revenue and expense statements (data for prior year budgets and outcomes are in the Grattan Budget Paper).

Ambitious cuts in spending

The Commonwealth Government deficit for FY14 was 13.5% of the FY14 net taxation revenue, and the projected FY15 deficit is 12.1%. The projected interest bearing liabilities at 30 June 2015 are 139% of the FY15 net taxation revenue. The Commonwealth Government is projecting rapidly reducing deficits after FY15 and up to FY18 caused by tax revenue being projected to increase at materially higher rates (about 7%pa) than expenses (about 3% to 4%pa). The Grattan Budget Paper comments (based on prior year evidence) “The commitments of the Commonwealth and state governments to reduce spending growth over the forward estimates are extremely ambitious compared to their recent records”.

Potential growth in interest costs

Current low interest rates mean that the forecast interest expense for FY15 ($16 billion) is 5.4% of FY15 Net Taxation Revenue. Using a long term interest rate (consistent with the Reserve Bank’s 2% to 3% pa price inflation target) of say 5%pa, interest bearing liabilities of 200% of Commonwealth Government net taxation revenue would result in annual interest payments equal to 10% of net taxation revenue ($31bn pa in FY15$), a $15 billion increase from the projected FY15 amount which additional amount would absolutely require Commonwealth Government tax increases and/or benefit reductions in the short term. The table shows that this level of interest bearing liabilities and annual interest expense could be reached if the current rate of increase in interest bearing liabilities was continued for the next 5 years and interest rates returned to long term levels (as might be expected over this period).

Options for budget repair

What changes to public policies would be appropriate if these Commonwealth Government forecasts prove optimistic for either political (Senate or media) or economic reasons? The Grattan Budget Paper (published in November 2013) lists 27 potential individual alternatives for budget repair (each with an annual saving of at least $2 billion), and then presents a package of changes “that would distribute the burden across the community, affecting both rich and poor“.

The Grattan Institute’s subsequent December 2014 Wealth Paper goes on to ask whether there is a need to focus changes both on budget repair and to address their finding that “Australian welfare policies systemically favour older people over the young, and older people pay less tax and receive more benefits than younger households with similar incomes”. In particular, it seems from the Grattan Institute’s comments that younger Australians with lower means are those that have suffered the highest degree of relative disadvantage over the period covered by the Grattan Wealth Paper. Appropriate focus of such changes on older Australians with means along with clear communication to all Australians of the extent of the relative disadvantage of such younger Australians may even enable carefully prepared changes to achieve broad public acceptance.

Health costs the largest threat to Budgets

The Grattan Budget Paper states “The largest threat to future budgets is the sustained pressure on health expenditure. Over the last decade, health has been responsible for most of the spending increases above GDP, for both Commonwealth and state governments.”

Despite this, the Grattan Budget Paper presents few suggestions to limit the growth of health care spending by governments. The health components of Commonwealth Government Expenses in the Table above increase by only 3% to 4%pa in nominal terms, which compares with the average 3.9%pa per person real increase in total health expenditure over the nine years to 30 June 2012, indicating that the Commonwealth Government is projecting that its payments will constitute a reducing proportion of total health care spending in future, consistent with the outcome for FY13 when Commonwealth Government expenditure reduced by an approximate 4% in real per person terms (AIHW, Health Expenditure Australia 2012-2013).

The Actuaries Institute December 2014 Health Green Paper Who Will Fund Our Health? comments “per capita health expenditure is growing faster in the older age groups, which will exacerbate the health expenditure effects of population ageing”, and “working age people bear most of the cost of health care, despite using a relatively small share of health services”.

The Green Paper considers potential funding related alternatives to address these problems, references the recent major reforms to the funding of aged care which introduce user fees subject to lifetime caps, and asks the question “could this work in Health?”. The Green Paper concludes that change “may mean taxes and a social welfare approach, rather than driving more individually-funded health care and out-of-pocket costs”.

Effects of Current Public Policies on Wealth of Different Age Groups

Much of the public policy focus on older Australians has either been introduced since the early 2000s, or has increased due to changes which have occurred over this period. What has been the effect on Australians from these policies? The Grattan Wealth Paper analyses changes in wealth for different age groups over the period FY04 to FY12, and concludes “The wealth of the median household over 55 grew strongly (more than 2 per cent annual growth), stagnated for households aged 35-44 (0.3 per cent annual growth) and declined for those aged 25-34 (minus 2.7 per cent growth)”. While there are significant limitations in the scope of the Grattan Wealth Paper (e.g. time specific, wealth not net income), the Grattan’s Wealth Paper does identify material wealth shift and wealth concentration.

Beyond the current Commonwealth Government budget need for public policy change, the future health of the Australian economy generally and jobs growth in particular may require a change in public policy focus away from older Australians with means.
Making Public Policy Change
If changes are to be made to public policies, I think it is difficult to escape the following conclusions:

1. Means testing of the Age Pension needs to be tightened materially (without reducing payments to older Australians with few means)

2. Unencumbered home ownership by older Australians is an important component of achieving satisfactory retirement income, and therefore needs to be encouraged by public policies which ensure affordability of residential property for younger Australians

3. Mechanisms need to be introduced to require older Australians with means to use their superannuation (and other financial assets) towards reducing the extent of government payment of their health care costs.

Options for Promoting Public Policy Change

The November 2014 Canberra meeting of “Senior Actuaries” held a discussion entitled “The Future of Australia”, based on notes prepared by past Actuaries Institute president Barry Amond. Barry’s notes ended “I am enthusiastic about the future of Australia. As in the past, our success might well depend on entrepreneurs taking risks”. The discussion at the meeting highlighted the need for public policies to ensure that younger Australians continue to be in the position to be entrepreneurs and to take risks (as has been the case in earlier decades), and the extent of the public policy advantage of older Australians with means currently. The need for older actuaries to advocate for appropriate public policy change among their older friends, their communities and within the Institute was discussed.

Older and more senior actuaries are well placed to advocate for reductions in spending on older age Australians with means. Younger actuaries generally are not well placed for such advocacy, both for career related and “perceived self-interest” reasons. Beyond advocacy, older Australians, including older actuaries, can provide practical assistance to younger Australians within their families, their communities, and by mentoring younger Australians, including younger actuaries.

It is clear that meaningful reductions to welfare programs covering older Australians with means will not occur at the initiative of any Commonwealth Government unless the budget reaches a position of stress. Meaningful reductions will occur earlier only if older Australians with means generally come to understand the extent of their current advantage, and a balanced message can be delivered to the community by the many advocacy groups which cover older Australians, and the retirement incomes and health care industries generally.

Individual actuaries and the Actuaries Institute can have a role in ensuring that appropriate changes are developed and then communicated. Australia’s continued economic wellbeing may depend on appropriate changes being implemented progressively over the next few years.

References and further reading

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