Australians are retiring with unprecedented levels of wealth. This wealth, primarily held in housing, superannuation and investment properties, allows retirees to draw incomes to support their retirement. As Australians have become wealthier, we might expect government spending on social safety nets for older Australians to fall. Instead, we have seen these programs grow in real, per-person terms.
The net result is that older Australians have much higher incomes than previous generations of retirees. Twenty-five years ago, the average 75 year old’s post-tax and transfer income was little more than 75% of an average Australian income. Today, it equals the average Australian income. Older Australians also enjoy a post-tax income one-third higher than Australians aged 18-30.
This astonishing fact has important implications for the efficiency and sustainability of our tax and transfer system. We first provide evidence to underwrite these assertions, then discuss their implications and the policy options they confront us with.
The evidence
The evidence summarised here was derived by combining individual level data from the Household Income and Labour Dynamics in Australia survey (HILDA) and the Survey of Income and Housing (SIH) with aggregate values from the Australian National Accounts. The data are freely and publicly available and the technical detail of our research is available in a working paper.
The tax and transfer system treats people differently at different ages. Individuals receive benefits from the state as a child, then contribute more in tax than they receive in transfers while at their most productive, before once again enjoying an excess of transfers later in life, as their productivity declines and they enjoy retirement. This lifecycle pattern in shown in Figure 1.
Figure 1: Average impact of the Australian tax and transfer system at different ages
Note: Figure 1 shows the net impact of the tax and transfer system on Australians at different ages. Positive values reflect government services while negative values represent taxes. The black line is the sum of the taxes and benefits, meaning that Australians below the age of 30 and above the age of 60 are net recipients of government services, while those in between are net taxpayers. This figure is calculated using average outcomes in the years 2018/2019-2022/2023, adjusted for inflation and presented in 2022 dollars.
In our research, we first measure how the lifecycle incidence of private income has changed in the past three decades. This calculation includes income from all sources, including capital gains from housing and superannuation. It shows that earnings have grown at all ages and our peak earnings continue to occur in our 50s. It also shows that Australians are earning more passive income in retirement today than in earlier periods.
Figure 2: Trends in private incomes of Australians at different ages
Note: Haig-Simons income is the sum of income from all sources. In additional to taxable income, it includes returns to superannuation, unrealised capital gains and imputed rent from owner occupied properties. Figures are adjusted for inflation and presented in 2022 dollars.
Next, we measure how the tax and transfer system impacts people of different ages in different periods. We show that the net tax burden at most ages has been relatively constant. The main exception being that the real, per capita spend on older Australians has increased significantly.
Figure 3: Trends in impact of the tax and transfer system at different ages
Note: Figures are adjusted for inflation and presented in 2022 dollars.
Finally, we can add together the private income (Figure 2) with the net impact of the tax and transfer system (Figure 3) to find the average post-tax and transfers income of Australians at different ages.
Figure 4: Trends in final income across the age distribution
This shows that the nature of the tax and transfer system has fundamentally changed in the past three decades. In the earlier periods of our study, older Australians earned relatively little income, while the tax and transfer system provided income through the aged pension and in-kind support to give them an income similar to those at the beginning of their working lives. In contrast, today’s average 60+ Australian has a substantially higher private income and receives substantially more from the tax and transfer system, leaving them with the post-tax income of an average 40-year-old (without the pressures of saving for the future or supporting a growing family). The intergenerational contract has lost its balance.
The implications
The evidence is stark: the Australian Government’s relative expenditure on older Australians has increased significantly in recent decades, funded by those of working age. This significant change in the nature of the Australian tax and transfer system and the age profile of post-tax and transfers income distribution has several and serious implications for the future of Australia, of which we highlight five: inter-generational equity; broader tax and transfer design (including lifetime income smoothing); housing policy; and budget sustainability.
Inter-generational equity
As Australian retirees have accumulated significant wealth and associated capital income, the Australian tax and transfer system has not adjusted. It has instead increased support to this cohort. As a result, Australians over the age of 60 now enjoy a post-tax income similar to that of mid-career working age Australians and much higher than Australians aged 18-30.
If the primary goal of redistribution through the tax and transfer system is to reduce variation in access to economic resources across the population (in simple terms, “taking from the well off and giving to the needy”), then current system violates this principle: redistribution results in higher average income amongst older Australians than amongst younger cohorts.
The imbalance is even worse when two other factors are taken into account. First, younger Australians need more income to build up assets (for example, paying for a home), while older, “asset rich” Australians require far less income to maintain equivalent standards. Second, our research doesn’t account for the costs of raising children. In fact, by including transfer payments in the income of child-raising Australians (which only partially account for associated costs), it disguises that additional and large contribution to imbalance.
Broader tax and transfer design
Australia’s tax and transfer system design focuses primarily on personal and corporate income taxation, placing far less emphasis on income from savings. As a consequence, “rational” economic behaviour has increasingly shifted wealth into forms subject to little or no taxation, to the point that only about two-thirds of income is still captured by the tax system.
The absence or restricted nature of taxation on income generated through owner-occupied capital gains, superannuation, and imputed rent, coupled with the increase in transfers to older Australians, leaves government with little option but to raise further revenue from those generating taxable income. As it stands, that is from working age Australians, in particular by leveraging “bracket creep”.
Government should implement taxation policy changes to broaden the tax base and capture the one-third of total income, overwhelming accruing to older Australians, that is currently untaxed and as a consequence rapidly growing in size.
Lifetime income smoothing
Governments often choose to support individuals to even out the amount of income they have throughout their life. This implies policy that will tax citizens most highly when they have the means to pay, and transfer to citizens more support when they most need it. Failure to implement such policy in Australia is evident from the difficulty younger Australians face buying a home and raising a family (while contributing 12.5% in superannuation), and from older Australians enjoying, unencumbered, similar levels of income (and often dying with significant superannuation balances).
Housing policy
Increases in house prices over the past decades have increased the wealth of older Australians, generating substantial growth in private income in the form of both capital gains and imputed rent. This income has come at the expense of younger Australians and migrants buying into the housing market, effectively keeping them poorer for longer (potentially a lifetime longer).
Addressable government policy is responsible for much of this inequity:
- preferential tax treatment of housing increases demand for this asset class and pushes up prices
- zoning and planning regulations limiting new housing supply contribute around 40% to the price of houses in Sydney and Melbourne (and a quarter of all land within 10km of Sydney’s CBD is subject to heritage protections)
- policies that disincentivise older Australians from downsizing include: capital gains exemption for owner-occupied housing, means test exemptions for owner-occupied housing, rates and utilities subsidies for older Australians, ageing in place programs, the lack of a broad-based property tax, and stamp duty.
Therefore, to the extent that housing prices are driven by government policies that restrict land supply, these policies should be reversed as a matter of urgency, generating large equity and efficiency gains.
Budget sustainability
The current tax and transfer system, with its growing obligations to the growing cohort of older Australians and shrinking resources from which to meet those obligations, is spiralling down and unsustainable.
As the government’s obligations to older Australians (in pensions, in aged and health care benefits, and others) increase relative to GDP, government will need to increase taxation on the productive sectors of the economy (most obviously through bracket creep). Postponed childbearing, exit from the workforce and other consequences will reduce the relative size of the economy’s productive sector, ultimately exacerbating the problem to the point of disaster. Clearly, policy must address this downward spiral sooner than later.
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