The wealth of Australian generations NZ Treasury John Daley - - PowerPoint PPT Presentation

The wealth of Australian generations

NZ Treasury John Daley Grattan Institute 2 September 2015

2

Intergenerational fairness

Older age groups have accumulated wealth that younger generations are unlikely to match

• Most older households are much wealthier than their forebears
• Younger households are missing out, even though they are are saving much more
• Older households have benefited from the housing price boom, but younger

households are paying for it

• Inheritances are unlikely to help many people

Incomes have continued to grow, but history and overseas experience provide warnings Governments have increased net transfers to older households, primarily funded through deficits

• Governments are spending more on older households, to pay for increased health

services, Age Pensions and aged care

• The increase spending reflects policy choices, not ageing
• This has led to unsustainable Australian government budgets for a decade

3

Young households are accumulating less wealth …

Mean wealth by age of head of household $ thousands ($2011-12) 200 400 600 800 1,000 1,200 15–24 25–34 35–44 45–54 55–64 65–74 75+ Age of head of household 2003-04 2011-12

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… but falling wealth for younger households is not due to lower savings

Savings as a proportion of disposable income, per cent 0% 2% 4% 6% 8% 10% 12% 14% 16% 15 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65+ 2003-04 2009-10 Age of head of household

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• 400
• 200

200 400 600 800 1,000 1,200 1,400 25-34 35-44 45-54 55-64 65-74 15-24 75+ Liabilities Home Other property Other financial All other wealth Super Net worth Age of head of household Mean wealth by age of head of household $ thousands ($2011-12)

Over half of household wealth is in property

Source: The Wealth of Generations

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Increased wealth for older households is due to more investment in property and savings

Change in mean wealth per household, 2003-04 to 2011-12 $ thousands ($2011-12)

• 150
• 100
• 50

50 100 150 200 250 300 25-34 35-44 45-54 55-64 65-74 15-24 75+ Liabilities Home Other property Other financial All other wealth Super Age of head of household Net worth

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50 100 150 200 250 300 350 1975 1980 1985 1990 1995 2000 2005 2010 1970 Real average full-time earnings Real house prices

Younger cohorts missed out on the windfall

• f buying a house before 1997

House prices and full-time weekly earnings Index: 1970 = 100

8

40 50 60 70 80 90 1981 1991 2001 2011 Home ownership rate by age Per cent 25-34 35-44 45-54 65+ 55-64

Home ownership is falling for younger ages, particularly low incomes

• 40%
• 30%
• 20%
• 10%

0% 10% Income quintile Lowest 2nd 3rd 4th Highest 25-34 35-44 45-54 55-64 Percentage point change in home

• wnership rates, 1981 to 2011

Source: Grattan Institute, Wealth of Generations

Age-group

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Short-term rates Long-term rates Initial repayments on new mortgages as percentage of household disposable income

Homes are relatively affordable – assuming current interest rates persist

Note: Assumes 10% deposit, 25-year repayment of principal and interest on median priced house; assumes household disposable income is 1.5 times average pre-tax individual earnings Source: Macrobusiness, based on RBA, APM Abelson & Chung

Standard variable mortgage Discount variable mortgage

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5 10 15 20 Short-term rates Long-term rates 1975 1935 1895 1855 1815 1775 1 AD 1575 1735 3000 BC Global interest rates %

It is difficult to see interest rates going much lower

Source: Andrew Haldane, speech to Open University Milton Keynes 30 June 2015, www.bankofengland.co.uk/publications/Documents/speeches/2015/speech828.pdf

“Lowest interest rates at least since Ancient Babylon” Andy Haldane Chief Economist, Bank of England

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Age when the largest inheritance was received $0 $50,000 $100,000 $150,000 $200,000 26-36 37-47 48-58 59-69 70-80 Average inheritances if one one received 2002-2012, nominal Average inheritances of richest quintile Average inheritances of middle quintile Average inheritances of poorest quintile

Note: Wealth quintiles are based on relative wealth in 2002 and therefore do not include the effect of inheritances received after this

• time. The HILDA survey asks about payments received from inheritances. It is possible that some respondents did not include housing

assets in their estimates. Source: Grattan Analysis of HILDA (2002); (2012)

Wealthy people of a given age tend to receive larger inheritances

Based on wealth in 2002

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Intergenerational fairness

Older age groups have accumulated wealth that younger generations are unlikely to match

• Most older households are much wealthier than their forebears
• Younger households are missing out, even though they are are saving much more
• Older households have benefited from the housing price boom, but younger

households are paying for it

• Inheritances are unlikely to help many people

Incomes have continued to grow, but history and overseas experience provide warnings Governments have increased net transfers to older households, primarily funded through deficits

• Governments are spending more on older households, to pay for increased health

services, Age Pensions and aged care

• The increase spending reflects policy choices, not ageing
• This has led to unsustainable Australian government budgets for a decade

13

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 15-19 20-24 25-34 35-44 45-54 55-64 65-74 75-84 85+ 1976 1981 1986 1991 1996 2001 2006 2011 Median annual income, $2013 Age of individual

Incomes have increased for everyone aged

• ver 25 over the long term

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Household incomes have increased for all age groups over the medium term

Household wage, business and welfare income before tax, 2012$ 000s 20 40 60 80 100 120 140 160 180 200 15-24 25-34 35-44 45-54 55-64 65+ 2003-04 2005-06 2007-08 2009-10 2011-12 Age of head of household

Source: ABS (HES)

15

10,000 20,000 30,000 40,000 50,000 60,000 70,000

Source: Butlin

Real per capita incomes $ 2010 25 years 45 years

Historically there have been long periods of little income growth in Australia

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5,000 10,000 15,000 20,000 25,000 30,000 20 25 30 35 40 Born in 1983-87 1968-72 1978-82 1973-77 1963-67 Median gross annual wages in UK 2013£

Source: Belfield, C et al, Living standards, Poverty and Inequality in the UK , Institute of Fiscal Studies Report, p.10

Age

Younger cohorts in the UK now earn less than their predecessors at the same age

17

10,000 20,000 30,000 40,000 1947 1957 1967 1977 1987 1997 2007 25-34 55-64 Median incomes in US 2013USD

Source: Data from US Department of Commerce (2013), US Census Bureau, Historical income tables (table 8).

The incomes of 24-34 year olds in the US have declined relative to older workers

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Intergenerational fairness

Older age groups have accumulated wealth that younger generations are unlikely to match

• Most older households are much wealthier than their forebears
• Younger households are missing out, even though they are are saving much more
• Older households have benefited from the housing price boom, but younger

households are paying for it

• Inheritances are unlikely to help many people

Incomes have continued to grow, but history and overseas experience provide warnings Governments have increased net transfers to older households, primarily funded through deficits

• Governments are spending more on older households, to pay for increased health

services, Age Pensions and aged care

• The increase spending reflects policy choices, not ageing
• This has led to unsustainable Australian government budgets for a decade

19

10 20 30 40 50 60 70 80 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+ Aged Care Aged Pension Education Other Government spending per person $ thousands per person, 2011-12

Note: ‘Other’ includes the Disability Support Pension, Parenting Payment, Family Tax Benefit, Disability Support Services (both Australian Government and state and territory), Other social security and welfare payments, Defence and other expenditures and other state and territory expenditures not classified elsewhere Source: Productivity Commission (2013)

Health

Government spending per person escalates rapidly from pension age

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Governments spend more on older households, due to Health and Age Pension

10,000 20,000 30,000 40,000 50,000 Health Other in kind Education Cash 15-24 25-34 35-44 45-54 55-64 65-74 75+

Note: Other in kind includes child care assistance, other social security and welfare benefits, housing benefits and electricity concessions. Source: The Wealth of Generations

Government expenditure per household $ per person, 2009-10 Age of head of household

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Average net benefits per household (government payments, less tax) 2010$

The net cost of older households to government has jumped in the last 6 years

• $15,000
• $10,000
• $5,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 1993-94 1998-99 2003-04 2009-10 1988-89 15-24 25-34 35-44 45-54 55-64 65+ Age of head of household

Source: The Wealth of Generations

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Change in government benefits per household, 1988-89 to 2009-10 $2010

Health spending and cash benefits for over 65s have increased significantly

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 15-24 25-34 35-44 45-54 55-64 65+ Age of head of household Other in kind Cash Health Education

Source: The Wealth of Generations

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$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 0s 10s 20s 30s 50s 60s 70s 80+ 40s 1993-94 1998-99 2003-04 2009-10 1988-89 Government health spending per person, $2010

Government health spending increased the most for the over 70s

Source: The Wealth of Generations

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2.9 1.8 3.0 4.2 3.9 3.1 4.1 4.1 3.1 30.4 7.4 20.7 $0 $10 $20 $30 $40 $50 $60 $70 0s 10s 20s 30s 40s 50s 60s 70s 80s plus Total non- demographic Age- ing Pop. growth More services (to people of the same age) Contribution to growth in government health spending 1989 to 2010, $2010 billion

Source: The Wealth of Generations

All age groups have been material to the growth in health spending

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5 10 15 20 25 30 35 40 45 2 4 6 8 10 12 14 16 Population growth Population ageing More, improved, and new services per person Health inflation >CPI Rate & eligibility change Indexation >CPI Population growth and ageing Health Age Pension GDP growth Real increase in expenditure 2003-2013 ($2012 billion)

Policy choices, not population ageing, drove health and pension spending increases

Source: Grattan Institute, Budget Pressures 2014

26

As health spending increased, health improved

50 100 150 200 250 1987 1992 1997 2002 2007 5 10 15 20 2001 2004 2007 2011 Fair Poor

Source: AIHW Source: ABS

Amenable mortality deaths per 100,000 population Self-reported health status Percentage of population in lowest two categories (“fair” or “poor”)

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As health spending increased, life expectancy improved

65 70 75 80 85 90 1880 1910 1940 1970 2000 Women Men Life expectancy at 65 years of age years

Grattan Institute analysis of ABS (2008) cat no 3105.0.65.001 Table 7.6

65 70 75 80 85 90

Source: AIHW (2012), Figure 13

Non- severe disability Severe or profound core activity limitation Free of disability Expected life quality for 65-year-old years Men Women 1998 2009 1998 2009

28

Commonwealth government spending on aged care almost doubled in the last 10 years

2 4 6 8 10 12 14 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Note: Financial year ending 30 June, assumed CPI rate of 2.5%. Source: PBO (unpublished)

Commonwealth Government aged care expenditure 2013$b

29

Change in taxes per household, 1988-89 to 2009-10, 2010$

• 2,000

2,000 4,000 6,000 8,000 Net tax Age of head of household 15-24 25-34 35-44 45-54 55-64 65+ Income taxes Indirect taxes

Because of super tax concessions, older h’holds pay less income tax than 20 years ago

Source: The Wealth of Generations

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• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 2003 2005 2007 2009 2011 2013 2015f 2017f 2019f Terms of trade Cyclical impacts Cash balance Structural underlying balance

The Commonwealth’s structural deficits was masked by mining boom and GFC

Commonwealth budget balance per cent of nominal GDP

Note: Cash balance is equal to receipts minus payments, minus Future Fund income, (under 0.25 per cent of GDP) Source: Budget Pressures 2014

Financial year ending

31

Financial year ended Forecast Commonwealth expenditures and revenues per cent of nominal GDP

Long term spending increased while revenue fell

Source: Commonwealth Budget Papers, 2014-15

20% 21% 22% 23% 24% 25% 26% 27% 2003 2005 2007 2009 2011 2013 2015 2017 2019 Expenditure Revenue

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• 10

10 20 30 40 50 Real change in government recurrent expenditure, 2003 to 2014 $2013 bn

Real growth Growth at GDP

Note: Based on analysis of Commonwealth, NSW, Vic, Qld and WA data. Categories that changed by less than $1 billion not shown. Source: Grattan Institute, Budget Pressures 2014

Age Pension Welfare - carers Other welfare Health Education Aged care Other services Infra- structure Industry Comm’s Climate change & env’t Legal, justice, emergency Foreign affairs, defence Super Gvt & debt Age-related Predominantly

• lder recipients

Increasing spending on older Australians is the dominant pressure on budgets

33

• 10
• 5

5 10 15 20 25 30 25-34 35-44 45-55 55-64 65+ Age of head of household

Savings Other changes in wealth Inheritance & gifts Change in HECS debt Future tax impact of annual increase in government debt Annual changes in private wealth 2004 to 2010 2004 to 2010 2010 to 2014

Annual changes in household wealth 2014$ 000

Changes in household wealth are primarily driven by asset values and deficits