Young Australians are likely to eventually prosper as well as their parents, research into the income battle between the generations has found, but they will struggle in their 30s as they contend with imposts their parents never had to face.
Compiled by independent think tank the e61 Institute, the research suggests younger people with rich parents who are sitting on large bequests will do best in coming years, with inheritances likely to be the biggest driver of inequality between Millennials.
Treasurer Jim Chalmers and Prime Minister Anthony Albanese have both said that next month’s federal budget will tackle “intergenerational equity” in a direct pitch to people in their 20s, 30s and 40s who believe the economy and housing markets are working against them.
Current capital gains tax and negative gearing settings, which critics argue benefit older Australians while putting upward pressure on rents and house prices, are expected to be overhauled in the May 12 budget.
But e61 principal economist Jack Buckley said that while intergenerational inequity may be a key theme of the budget, it ignored how the mix of income wealth and taxes changed as people aged.
He said the average inflation-adjusted income for a 35-year-old in 2023 was about $90,000, almost 80 per cent higher than the average 35-year-old in the late 1980s. Median household wealth, however, was about the same today, at $380,000, as it was for earlier generations at the same age.
According to Buckley, older Australians had largely benefited from a large run-up in the value of assets such as housing, which were also lightly taxed.
“The truth is that younger Australians are unlikely to be worse off than their parents over their lifetimes,” he said. “Income growth has slowed early in their careers, partly because young people are spending longer in education, but they are likely to see stronger earnings growth later in life.”
According to the e61 research, people in their 30s were being squeezed the most by policies not faced by their parents that will ultimately deliver them a boost in income in their later years.
More years in education, large HELP and HECS repayments and the 12 per cent superannuation guarantee all eat into the current incomes of people just as they try to save for a home and start a family.
This meant income growth for younger Australians was slower than for previous generations. But over time, higher wages plus the superannuation system would increase their wealth to a level on par with their parents.
Buckley said the run-up in house prices that had increased the wealth of older Australians who were now sitting on an “inheritance boom” would contribute to a large jump in inequality within generations rather than between the generations.
“Older Australians are sitting on a windfall from rising asset prices, and most of that wealth will be passed down unevenly through inheritance,” he said.
“That inheritance boom will increase inequality within a generation in a way that’s far more consequential than any gap between generations.”
The research does confirm that older Australians are, in some ways, doing better than younger generations. The post-tax income of over 60s is now 95 per cent of that of 18- to 60-year-olds. In the 1990s, it was about 61 per cent.
Over that same period, the share of tax paid by over 60s has not increased.
Buckley said reforms such as an inheritance tax, which was canvassed by the Henry tax review of 2010, could encourage older people to tap their wealth rather than building up inheritances, but they were likely to be politically unpalatable.
Support for changing capital gains tax in next week’s budget remains high among a large group of organisations, from the ACTU to the St Vincent de Paul Society charity.
This masthead revealed earlier this month that the government is likely to ditch the current 50 per cent concession on the tax, introduced by the Howard government in 1999, and return to the original inflation-adjustment system put in place when the Hawke government started the CGT in the mid-1980s.
Any change to the CGT concession, which applies to assets including shares and cryptocurrency, is expected to be grandfathered – only apply to new acquisitions – rather than made retrospective.
Westpac chief economist Luci Ellis warned that while a change to the CGT may increase government revenues, this was not guaranteed as much hinged on how fast asset prices climb.
She cautioned that just “tweaking” the tax system may not be the only or best way to deal with an issue like a shortfall in government revenue or housing affordability.
“Global economic and geopolitical developments pose challenges, while new technology and an expanding, ageing workforce create opportunities,” she said. “We should not assume that tweaking the tax system is the answer to every issue.”
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Shane Wright is a senior economics correspondent for The Age and The Sydney Morning Herald.Connect via X or email.