Young Australians may eventually become as successful as their parents, research into the intergenerational income war has found, but they will struggle in their 30s as they contend with fraud their parents never faced.
Compiled by independent think tank the e61 Institute, research suggests that young people with wealthy parents who are sitting on large bequests will do better in the coming years, with inheritance likely to be a major driver of inequality among Millennials.
Treasurer Jim Chalmers and Premier Anthony Albanese have both said that next month’s federal budget will address “equity between generations” in a direct way for 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 The arrangements, which critics say benefit older Australians while putting upward pressure on rents and house prices, are expected to be overhauled in the May 12 budget.
But E61 chief economist Jack Buckley said that while intergenerational inequality may be a central theme of the budget, it ignored how the mix of income and tax wealth changes as people age.
He said the inflation-adjusted median income for a 35-year-old in 2023 was about $90,000, about 80 percent 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 previous generations at the same age.
According to Buckley, older Australians benefited greatly from the large increase in the value of assets such as houses, which were also taxed less.
“The reality is that young Australians are unlikely to be worse off than their parents throughout their lives,” he said. “Earnings growth has slowed earlier in their careers, because young people are spending longer in education, but they are likely to see more earnings growth later in life.”
According to e61’s research, people in their 30s were more likely to be squeezed by policies that their parents didn’t face that will eventually increase their income in their later years.
More years in education, higher HELP and HECS payments and a guaranteed 12 per cent pension all eat into people’s current incomes just as they try to save for a house and start a family.
This meant income growth for young Australians was slower than previous generations. But over time, higher wages and a pension system would increase their wealth to the same extent as their parents.
Buckley said rising house prices that have boosted the wealth of older Australians who are now sitting on “inheritance increases” would contribute to a jump in equity across generations rather than generations.
“Older Australians are sitting on a tightrope from rising property prices, and much of that wealth will be passed on disproportionately through inheritance,” he said.
“Inheritance increases will increase intragenerational inequality in a way that is more important than any gap between generations.”
Research confirms that older Australians are, in some ways, doing better than younger generations. The after-tax income of the over-60s is now 95 percent of that of people ages 18 to 60. In the 1990s, it was about 61 percent.
In the same period, the share of tax paid by over 60 years has not increased.
Buckley said reforms such as inheritance tax, which was criticized by Henry’s 2010 tax review, could encourage older people to use their assets instead of building an estate, but were likely to be politically unpalatable.
Support for changing capital gains tax in next week’s budget remains high among a wide range of organisations, from the ACTU to the charity St Vincent de Paul Society.
The hawk revealed earlier this month that the government is likely to ditch the current 50 per cent tax deal, introduced by the Howard government in 1999, and return to the original inflation-adjusting system put in place when the Hawke government introduced CGT in the mid-1980s.
Any changes to the CGT treaty, which applies to assets including shares and cryptocurrency, are expected to be progressive – only applicable to new acquisitions – rather than retrospective.
Westpac chief economist Luci Ellis warned that while the CGT changes could boost government revenue, this was not much guaranteed given how property prices were rising.
He cautioned that simply “fixing” the tax system may not be the only or best way to address issues like government revenue shortfalls or housing affordability.
“Global economic and political developments create challenges, while new technologies and an aging workforce create opportunities,” he said. “We should not assume that reforming the tax system is the answer to every issue.”
Cut through the noise of federal politics with news, opinion and expert analysis. Subscribers can subscribe to our weekly Domestic Politics newsletter.
Shane Wright is senior economics writer for The Age and The Sydney Morning Herald.Connect through X or email address.
