How Australia copes fiscally with an ageing population in the coming years needs to be discussed. It is the elephant in the room.
But the fact is the current trajectory of a growing proportion of the population being over the age of retirement is fiscally unsustainable without policy changes. As the years go on, a declining percentage of the population will be of working age.
Boomers hang on to unsustainable old age
PETER VAN ONSELENFollow @vanOnselenP
How Australia copes fiscally with an ageing population in the coming years needs to be discussed. It is the elephant in the room.
Myriad self-interested commentators line up on a daily basis to argue against change: don’t touch superannuation, don’t change the assets test for the pension. Of course the family home must be tax exempt; death duties are the stuff of a socialist state.
Baby boomers at or near retirement age seem to think that as long as the system sees them through the rest of their lives, everything will be OK.
Which isn’t surprising really when you consider their similarly do-nothing obtuse attitude towards younger generations wanting action on climate change.
While such thinking doesn’t permeate the minds of all baby boomers — apologies for the many reasonable people of that age — it does appear to be disproportionately prevalent among those with a platform to express themselves.
But the fact is the current trajectory of a growing proportion of the population being over the age of retirement is fiscally unsustainable without policy changes. As the years go on, a declining percentage of the population will be of working age.
Kicking the reform can down the road is weak politics.
Our major parties like to talk about what is “fair”. But how is it fair that a couple at retirement age can earn an annual income off their investments of $200,000 tax free yet a working-age person making the same amount of money (before tax) also has to pay nearly 50c in the dollar in tax on any interest they may earn off their savings when trying to build enough for a deposit for a home?
Or how is it fair that retirees living in multi-million-dollar dwellings can claim the taxpayer-funded pension and simply pass the property on (tax free) to their children? Especially when government-run reverse mortgages exist to allow them to fund themselves in retirement, all while somebody without asset-rich parents is forced to pay one of the highest income tax rates in the OECD to help fund such largesse.
At the most recent election, Scott Morrison disingenuously argued that Labor, were it elected into government, planned to introduce death duties. Labor had no such plans and ran as far as it could from the Coalition claims. But death duties aren’t exactly the definition of a socialist panacea. Most OECD countries have them, including the US, Britain, Germany and Japan.
It’s not as if death duties represent radical policy. In 2017 that noted left-leaning publication, The Economist, examined death taxes, pointing out just how fair they really were. Not only do they lower the amount of tax the living have to pay, death duties also help reduce inequality, which according to respected economists such as Oxford University’s Tony Atkinson is an inhibitor to economic growth.
No developed nation other than Australia has a policy mix that both exempts the family home from incurring any form of taxation and avoids death duties altogether. These twin policy scripts are a sure-fire way to entrench inequality, all the more so when wage earners are hit with such high income taxes, and therefore lower economic growth.
When all sides are telling us productivity needs to improve, the stifling effect of these policy settings acts as a handbrake on growth. These policies don’t just put fiscal pressure on the budget, with the pressure building as the nation’s ageing demographic increases. They also act as a disincentive for younger generations to continue to work in Australia.
The brain-drain effect is significant as well-qualified high-income earners seek better opportunities overseas, moving into lower-taxing jurisdictions during their prime working lives, then returning to Australia and the generous retirement concessions on offer here.
At this point in the article the odds are that some baby boomers have turned the page or closed their minds to what’s being said. One attack often levelled at anyone with the temerity to advocate tax changes to correct generational disadvantage is that they simply want higher taxes and hence are big-government proponents. The misplaced slur of being a socialist.
Removing distorting tax concessions for retirees is rather different to advocating higher taxes, especially when the purpose is to reduce taxes elsewhere — the type of taxes that reduce productivity and contribute to the brain drain, for example.
Whether it’s lower personal income taxes that act as an incentive to work, or reductions in capital gains taxes, which would be possible were death duties introduced, there are many ways to maximise the efficiency in the tax system by better targeting wealthy retirees and the dead.
The problem, politically speaking, is that the baby boomer generation is an unusually large voting cohort.
The high post-World War II birthrate coupled with longer life expectancy have turned baby boomers into the generation politicians chase most for votes. Hence politicians are loath to adjust baby boomers’ over-generous tax concessions. The situation is made worse when you consider the age profile of MPs. However, any politician capable of arguing their way out of a paper bag really should be able to sell reforms that include taxing the dead rather than the living. The dead don’t vote, after all. I understand people like the principle of working hard and passing on their accumulated wealth to their children. But the last time I looked that still happens in nations such as the US and Britain, where death duties have long existed.
It is not a black-and-white debate. Surely those same defenders of building a legacy for their children, helped along by taxpayers covering the cost of their pensions, can see the benefits to their working-age children from lower income taxes that generate more spending options?
Unfortunately, reforming the way older Australians are taxed — or more accurately not taxed — is risky business politically. And in the wake of Labor losing the unlosable election spruiking a large-scale policy manifesto, taking risks is the last thing on anyone’s mind in Canberra.
Peter van Onselen is a professor of politics at the University of Western Australia and Griffith University.
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