The wealth of Australian generations NZ Treasury John Daley Grattan Institute 2 September 2015
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 2
Young households are accumulating less wealth … Mean wealth by age of head of household $ thousands ($2011-12) 1,200 2003-04 2011-12 1,000 800 600 400 200 0 15 – 24 25 – 34 35 – 44 45 – 54 55 – 64 65 – 74 75+ Age of head of household 3
… but falling wealth for younger households is not due to lower savings Savings as a proportion of disposable income , per cent 16% 2003-04 2009-10 14% 12% 10% 8% 6% 4% 2% 0% 15 to 24 25 to 34 35 to 44 45 to 54 55 to 64 65+ Age of head of household 4
Over half of household wealth is in property Mean wealth by age of head of household $ thousands ($2011-12) 1,400 1,200 1,000 Net worth All other 800 wealth Other financial 600 Super Other property 400 200 Home 0 Liabilities -200 15-24 25-34 35-44 45-54 55-64 65-74 75+ -400 Age of head of household 5 Source: The Wealth of Generations
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) 300 250 Net worth 200 All other 150 wealth Other financial 100 Super 50 Other property 0 Home -50 Liabilities -100 15-24 25-34 35-44 45-54 55-64 65-74 75+ -150 Age of head of household 6
Younger cohorts missed out on the windfall of buying a house before 1997 House prices and full-time weekly earnings Index: 1970 = 100 350 300 250 Real house prices 200 150 Real average full-time earnings 100 50 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 7
Home ownership is falling for younger ages, particularly low incomes Home ownership rate by age Percentage point change in home Per cent ownership rates, 1981 to 2011 90 10% Age-group 65+ 25-34 35-44 45-54 55-64 80 0% 55-64 45-54 70 -10% Income 35-44 quintile 60 -20% Lowest 2nd 3rd -30% 50 4th 25-34 Highest -40% 40 1981 1991 2001 2011 8 Source: Grattan Institute, Wealth of Generations
Homes are relatively affordable – assuming current interest rates persist Initial repayments on new mortgages as percentage of household disposable income Standard Short-term rates variable Long-term rates mortgage Discount variable mortgage 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 9 Source: Macrobusiness, based on RBA, APM Abelson & Chung
It is difficult to see interest rates going much lower Global interest rates % “Lowest interest rates at least since Ancient Babylon” 20 Andy Haldane Chief Economist, Bank of England 15 Short-term rates 10 Long-term rates 5 0 3000 1 1575 1735 1775 1815 1855 1895 1935 1975 BC AD Source: Andrew Haldane, speech to Open University Milton Keynes 30 June 2015, 10 www.bankofengland.co.uk/publications/Documents/speeches/2015/speech828.pdf
Wealthy people of a given age tend to receive larger inheritances Average inheritances if one one received 2002-2012, nominal $200,000 Based on Average inheritances of richest quintile wealth in 2002 Average inheritances of middle quintile Average inheritances of poorest quintile $150,000 $100,000 $50,000 $0 26-36 37-47 48-58 59-69 70-80 Age when the largest inheritance was received 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. 11 Source: Grattan Analysis of HILDA (2002); (2012)
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 12
Incomes have increased for everyone aged over 25 over the long term Median annual income , $2013 $60,000 1976 1981 1986 $50,000 1991 1996 $40,000 2001 2006 2011 $30,000 $20,000 $10,000 $0 15-19 20-24 25-34 35-44 45-54 55-64 65-74 75-84 85+ Age of individual 13
Household incomes have increased for all age groups over the medium term Household wage, business and welfare income before tax, 2012$ 000s 200 2003-04 2005-06 180 2007-08 160 2009-10 2011-12 140 120 100 80 60 40 20 0 15-24 25-34 35-44 45-54 55-64 65+ Age of head of household 14 Source: ABS (HES)
Historically there have been long periods of little income growth in Australia Real per capita incomes $ 2010 70,000 60,000 50,000 40,000 30,000 20,000 45 years 25 years 10,000 0 Source: Butlin 15
Younger cohorts in the UK now earn less than their predecessors at the same age Median gross annual wages in UK 2013£ 30,000 1973-77 1968-72 25,000 1978-82 1963-67 20,000 Born in 1983-87 15,000 10,000 5,000 0 20 25 30 35 40 Age Source: Belfield, C et al, Living standards, Poverty and Inequality in the UK , Institute of Fiscal Studies Report, p.10 16
The incomes of 24-34 year olds in the US have declined relative to older workers Median incomes in US 2013USD 40,000 25-34 30,000 55-64 20,000 10,000 0 1947 1957 1967 1977 1987 1997 2007 Source: Data from US Department of Commerce (2013), US Census Bureau, Historical income tables (table 8). 17
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 18
Government spending per person escalates rapidly from pension age Government spending per person $ thousands per person, 2011-12 80 70 Aged 60 Care 50 40 Health 30 Education 20 Aged Pension 10 Other 0 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+ 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) 19
Governments spend more on older households, due to Health and Age Pension Government expenditure per household $ per person, 2009-10 50,000 Other in kind Education 40,000 30,000 Health 20,000 10,000 Cash 0 15-24 25-34 35-44 45-54 55-64 65-74 75+ Age of head of household Note: Other in kind includes child care assistance, other social security and welfare benefits, housing benefits and electricity concessions. Source: The Wealth of Generations 20
The net cost of older households to government has jumped in the last 6 years Average net benefits per household (government payments, less tax) 2010$ $35,000 1988-89 1993-94 $30,000 1998-99 $25,000 2003-04 2009-10 $20,000 $15,000 $10,000 $5,000 $0 -$5,000 -$10,000 -$15,000 15-24 25-34 35-44 45-54 55-64 65+ Age of head of household 21 Source: The Wealth of Generations
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