By Stephanie Thomson
Stephanie attended the 2015 United Nations Economic and Social Council Youth Forum in New York.
Intergenerational inequality threatens the sustainability of Australia’s welfare system and the prosperity of future generations. This report sets out the findings of Australia’s first comprehensive measure of intergenerational inequality: the Intergenerational Holistic Equity Index (‘IHE Index’). The index is the result of collaboration between the author and the Intergenerational Foundation, an independent UK charity that pioneered the index methodology in this field. It has long been assumed that future generations will live better lives than their predecessors. This report illuminates trends in Australian data over the last 15 years that challenge such assumptions. Significantly, the IHE Index reveals that overall outcomes for youth and future generations have worsened 13% since the year 2000, driven by both economic and environmental factors. Economic outcomes alone have declined significantly, down 34% since 2000. Environmental factors also indicate deterioration in outcomes for future generations, worsening 8% over the past 15 years. Individual and societal wellbeing is the only component seen to improve, rising 3%. If these trends continue into the next 35 years, this report argues that the future of Australia’s tax and transfer system is under threat, with overall lifestyle outcomes predicted to worsen by 70%.
- The Australian Government should develop an institutional framework or appointed ombudsmen to represent the rights of future generations and encourage intergenerational solidarity.
- Within this framework, or elsewhere, there should be increased investment in cohort data analysis and longitudinal studies with the purpose of revealing existing intergenerational inequality trends. To do so successfully, there must be improved collection and access to data where paucity persists.
- Tough policy decisions are needed to ensure that Australia remains prosperous and its tax and transfer system sustainable. Budget repair, climate change, superannuation reform, and modifications to age care assistance must be prioritised by the current government.
- Representatives in society must encourage increased youth participation in dialogue, democracy and policymaking that pertains to future generations.
Intergenerational inequity occurs when future generations are disadvantaged due to the actions and implications of previous generations. The Treasury’s recent Intergenerational Report (IGR) was an important step forward in recognising the future economic ramifications of government budgets and policy. However, the IGR fails to address the potential inequalities faced by disparate cohorts within the population, both currently and into the future. Furthermore, there is little recognition of the role that the environment and societal wellbeing play in determining experiences of future generations.
The Intergenerational Holistic Equity Index (‘IHE Index’) has been designed to quantitatively measure the implications of today’s actions on youth and future generations. It is a systematic barometer of quality of life and therefore amalgamates a representative set of economic, environmental, societal wellbeing indicators. With improved life expectancies, technology and financial systems, there is an assumption that subsequent generations will experience improved outcomes in all facets of life. However, closer observation and data analysis of contextual idiosyncrasies of cohorts reveals substantial differences in key indicators such as debt burden per capita, housing affordability, participation in education, and quality of environment. Within the IHE Index, these indicators can be mapped throughout time to provide unique insights.
The IHE Index is the result of collaboration between the author and the Intergenerational Foundation, an independent UK charity designed to protect the rights of future generations. The IHE Index shares many features with the UK ‘Intergenerational Fairness Index’, including its founding methodology and base year. Naturally, the IHE Index employs Australian data and indicators that are an appropriate reflection of Australian culture. To deliver a holistic set of results, the IHE Index places emphasis on environmental and wellbeing factors more than its UK counterpart. Nevertheless, contrasting the two indices proves to be an insightful exercise. The subsequent findings are explored in a latter section of this paper.
The Dangers of Intergenerational Inequity
The IHE Index supports the notion that Australia’s intergenerational bargain is currently at risk. The intergenerational bargain is the implicit social contract between different generations, whereby younger working age individuals agree to subsidise the lifestyle of older, non-working Australians. The intergenerational bargain remains in a sustainable balance when working age cohorts are capable of accumulating sufficient personal wealth along with subsidising retirees. If an imbalance is reached, younger cohorts lose their capacity to accumulate a personal stock of wealth and their ability to self-fund retirement.
Economic, environmental and general societal wellbeing factors all play a role in determining the state of the intergenerational bargain. However, the bargain is particularly vulnerable to demographic change and economic policy. The combination of an aging demographic and a smaller, economically stifled working age population is dangerous. The pool of taxable, wealthier individuals dwindles whilst the number of welfare recipients grows, as does their needs. The number of Australians aged over 85 is projected to swell to two million people by 2050, compared to only 500,000 in 2015. This aging demographic structure places increasing pressure on working age Australians. For example, it is projected that working age individuals in 2050 will be required to pay an average of 2.1 times the cost of their own health care to subsidise the health care costs of older Australians, compared to 1.4 times currently. Furthermore, younger households will be burdened with an estimated $10,000 of additional tax for every year of debt growth between 2010 and 2014.
The Treasury’s predicted slowdown of the Australian economy over the next 50 years will only compound the problem. Working age Australians will have relatively less real income, and will be obligated to contribute a higher proportion of their income to pay for today’s government deficit and to subsidise the swelling costs of aged care support. Furthermore, the degeneration of the natural environment will play a part in economic slowdown and will reduce general wellbeing of Australians in the future. The combination of such economic, environmental and demographic factors is likely to curb the capacity of future working age Australians to accrue personal wealth. In the long term this could result in a self-perpetuating cycle whereby each successive working age cohort will be increasingly disenfranchised to fill the funding gap left by the previous cohort. Without action, this imbalance will intensify and threaten the sustainability of the entire welfare system.
The existence of a link between intergenerational fairness and intra-generational outcomes means that Australians in lower income brackets are particularly exposed to the dangers of intergenerational inequality. Intergenerational fairness relates to the median outcome across disparate generations whilst intra-generational equity relates to the variability within a single cohort. Evidence suggests that when intergenerational inequity is present within a society, intra-generational injustice is aggravated and those in the lowest socioeconomic groups become particularly vulnerable. Additionally, there is growing evidence that inequality in various forms limits overall economic growth in the long run. As such, Australians of lower socio-economic status are likely to be particularly susceptible to the consequences of intergenerational inequality in the future.
Intergenerational Inequality and the Sustainable Development Goals
At the 2012 United Nations (UN) Conference on Sustainable Development in Rio de Janeiro, world governments formally called for a universal set of Sustainable Development Goals (SDGs) to replace the expiring Millennium Development Goals beyond 2015. Crucial to the success of the SDGs within Australia and elsewhere is a consideration of newly emerging threats to sustainability within Australia and on the global stage. Intergenerational inequality is one such threat and thus must be considered in the context of the SDG framework.
As a relatively advanced nation within the global SDG syndicate, the relevance and implications for the SDGs is likely to be sufficiently different when compared to other nations. In response to this, the Monash Sustainability Institute has pioneered a set of proposed Australian goals to gauge the implications of the SDGs in the Australian context. Importantly, the Institute proposes a goal pertaining to the achievement of improved social inclusion within Australia. According to Institute’s interim report, ‘social inclusion ensures that the wellbeing of sustainable development are shared equally by all members of society. For this reason, it is also a key driver of true intergenerational equity …’. As such, it is recommended that the Australian government view the mitigation of intergenerational inequitably in the light of their SDG obligations. Additionally, as a relatively developed and influential nation, Australia is uniquely placed to promote increased global awareness of the need for intergenerational solidarity. The author encourages such a commitment by the Australian governments and other Australian SDG stakeholders.
The Intergenerational Holistic Equity Index
To measure the holistic outcomes for future generations over time, the IHE Index amalgamates five economic, four environmental and ten overall wellbeing indicators. These indicators have been founded on publicly available Australian data that extends back to the year 2000 or earlier. Each of the three components; economy, environment and wellbeing contribute equal weighting to the overall IHE Index.
Given that quality of life is based on numerous socio-economic and environmental factors, a comprehensive set of indicators has been selected. The full set of indicators is listed below in Figure 1. A comprehensive list of data sources for each indicator is provided in Appendix 1.
The IHE Index exposes a 13% increase in intergenerational inequality since the year 2000. A rise in the index depicted in Figure 2, indicates a decline in intergenerational fairness. The clear regression in outcomes contests the supposition that the welfare of Australians is progressively improving year on year. In fact, it exposes that the choices of generations living today are at the expense of future Australians.
The IHE Index Components
To shed light on the nature of intergenerational inequality, the IHE Index can be dismantled into its three key inputs; economy, environment and wellbeing. The trend in the three inputs is visible in Figure 3. Most concerning is the rapid decline in economic outcomes for youth and working age Australians since the Global Financial Crisis. Overall, the economic prospects for younger Australians has plunged 34% since 2000. Environmental indicators have also regressed, worsening by 8% in the past 15 years. Wellbeing was the only component exemplifying improvement, rising 3%. Nevertheless, this improvement is not sufficient to offset the regression in economic and environment outcomes for future generations.
The economic component of the IHE Index has regressed the most severely in the past 15 years. On aggregate, the economic prospects for youth and future generations have worsened 34%. In the last five years, four of the five indicators that constitute the economic component have deteriorated significantly. This substantial increase in intergenerational inequity could see future generations unable to support themselves and welfare recipients in the same fashion as previous generations. Figure 4 summarises the key attributes of each contributing indicator within the economic component, and denotes whether it is representative of youth today or of future generations. Figure 5 depicts the trends in the key economic inputs.
Figure 4: Summary of Economic Indicators
The most sporadic and disquieting indicator contributing to the economic component of the IHE Index is government debt per employed person. Since 2000, the onus of government debt has swelled 103%, despite the surplus maintained up until the Global Financial Crisis. High levels of national debt is particularly concerning for intergenerational inequity as it is a means to fund spending today by borrowing from future Australian taxpayers. Resultantly, the level of government debt is a key measure of the implications of today’s spending on future generations. If deficits are utilised in a sustainable manner, a sizeable portion of funds are spent on long-term projects from which future generations can extract benefit; infrastructure, innovation and research projects. However, this is not the case with Australian’s current deficit with the government’s recent big-ticket items centering on increases to health and aged care. Although these increases are arguably important, it is unlikely that future generations will benefit. As such, it has been estimated that younger households could be burdened with an additional $10,000 of tax for every year that debt grew between 2010 and 2014. Future-working-age Australians are likely to be taxed for the costs associated with their generation, as well as the sunk costs incurred today. This has the potential to be financially destructive for future Australians.
The affordability of housing is a key determinant of intergenerational fairness. The relatively higher average wealth of older Australians in the baby boomer generation can be partly attributed to the housing boom of the 1990s. Over the past 50 years, there has been an inextricable link between net household worth and housing assets, as those who purchase a home have access to a myriad of financial and social benefits. As such, housing affordability plays a major role in shaping the long-term wealth of youth today, and generations tomorrow. As unaffordability intensifies, younger first homebuyers are pushed out of the market, forced to rent and subsequent intergeneration inequalities can arise. The economic index in Figure 5 incorporates indicators for both housing purchase affordability and rental affordability. Since 2000, buying a home and paying rent has become 17% and 13% less affordable respectively.
The government’s regular spending increases to age care assistance are unsustainable in the current context of demographic change. Commonwealth spending on aged care assistance per employed person has swelled 34% since 2000, driven simultaneously by the aging demographic and supplementary concessions. Axiomatically, one of fundamental purposes of the tax and transfer system is to support older Australians. Under no circumstances does this report recommend cuts to age care benefits to older Australians of lower socioeconomic status. However, it is imperative to consider whether aged care funding in its current state is sustainable. It is the opinion of this report that it is not. The dependency ratio; a measure of the number of working aged Australians 15-65, compared to those aged over 65, is expected to fall from 4.5 in 2014-15 to 2.7 in 2054-5. Resultantly, future generations of working aged people, including youth today, will need to be taxed at mounting levels to maintain the government’s current approach to aged care spending. Tighter eligibility requirements and asset testing are required such that retirees of lower socio economic status can be supported in a sustainable fashion. A balance must be reached such that future generations are not disenfranchised by the increasingly burdensome costs of the aging population.
To exacerbate the issue, historical trends reveal that individuals tend to underestimate their life expectancy and needs, which, according to the Actuaries Institute means that a ‘longevity tsunami’ is imminent. Longevity risk refers to the threat in which individuals outlive their expectations and savings. With increased life expectancies, the retirement age currently frozen at 65 and a culture of underestimating our remaining time alive, change is needed if the system is to be maintainable. It is crucial that the government continues to encourage older Australians to remain in the workforce past 65 and to promote innovation in the superannuation product space. As explored in the Murray Report, this would require the dissolution of several barriers to superannuation innovation and product development. The widespread introduction of products with inbuilt longevity risk protection would serve two purposes. Firstly, older Australians are more likely to maintain a higher standard of living and secondly, extensive use of such products would release the current pressure on age care support funding, and subsequently minimise the financial onus that falls on future generations. Symptomatically, Australians of all ages would benefit.
The Gini coefficient is a globally used method of measuring disparity within an income distribution. Income disparity provides an indication of intra-generational inequality within a society. Therefore, the Gini has been included in the IHE Index to recognise the relationship between intergeneration and intra-generational inequality. As explored earlier, when intergenerational inequality taints a society, those of lower socioeconomic status are expected to experience intensified vulnerability. Since 2000, the Gini coefficient has fluctuated around its starting value of 0.31. It reached its peak of relative income disparity of 0.336 in 2008, but has shown improvement since then, settling at 0.32 in 2012.
The economic prosperity of future generations is clearly under threat. The dangerous combination of an aging population, soaring government debt, rising housing unaffordability, increased longevity risk and unsustainable spending on age care services is distorting the intergenerational bargain. If new policy is not implemented to ameliorate these concerns, the economic aptitude of future generations is dubious at best. Without action, the intergenerational bargain will become increasingly inequitable and discriminatory, placing potentially insurmountable stress on Australia’s welfare system.
The degeneration of the natural environment is expected to impact the experiences of future generations significantly. The IHE Index reveals that intergenerational inequality has regressed 8% due to environmental factors. An assortment of environmental indicators, listed in Figure 6, has been employed to recognise the importance of the natural environment to overall human sustainability and satisfaction. The deterioration of the natural environment has cultural, social, health and financial implications on future generations. Levels of CO2 and Greenhouse Gases (GHG) have both been designed as proxies for climate change and reduction in air quality. Measured levels of CO2 alone suggest a decline in intergenerational fairness by 7% since 2000. It is anticipated that Australia will experience increased exposure to natural disasters and climate related catastrophes over the next 50 years due to climate change. By 2100, it is predicted that climate change will trim Australian GDP by 8%. A multitude of social, cultural and infrastructure concerns will also develop. Unfortunately, the current government has failed to include any substantial modeling or predictions surrounding climate change in its recent IGR. Although challenging, it is imperative that governments recognise the implications of climate change and encourage data focused modeling in this area.
In addition to climate change indicators, a measure of biodiversity has been included to account for the social and cultural losses due to environmental damage. Since 2000, the number of threatened species recorded under the Environment Protection and Biodiversity Conservation Act has increased 31%. As one of the 17 ‘megadiverse’ countries, Australia supports a relatively high proportion of the world’s flora and fauna. Not only is biodiversity a core part of Australian culture, it contributes immensely to health and financial outcomes. As revealed in Figure 7, the rise in threatened species does not appear to be slowing down. Much more must be done to protect and rejuvenate Australia’s unique collection of species if future generations are to live in today’s prosperity.
A measure of renewable energy use in Australia has been included to indicate the contribution and commitment of the current population to reduce environmental pressures through renewable practices. Between 2000 and 2008, the proportion of total energy production, consumption and generation that was renewable dropped 13%. However, since 2008 the proportion of renewable energy use has swelled by 6%, improving the outlook for future generations somewhat. However, there is still concern that Australia lags behind its global counterparts in promoting renewable energy and further reductions in greenhouse emissions. For Australia to remain faithful to the international agreement of capping global temperature warning to 2°C, total emissions between 2013-2050 must be limited to 8 -11 billion tonnes. On Australia’s current emission trajectory, this limit will be expended by 2035. As such, the modest increase in renewable energy other the last few years is still insufficient to meet our current commitments. Without revision of Australia’s long-term climate strategy, future generations will suffer from our inaction.
Figure 6: Summary of Environmental Indicators
Unlike economic and environmental factors, the wellbeing of youth and future working age Australians has improved 3% since the year 2000. The wellbeing component aims to capture both individual and societal experiences in areas such as education, health, technology, satisfaction and safety. Inherently, wellbeing is difficult to measure due to its subjective nature and extensive scope. As a result, a multitude of indicators have been selected to capture overall trends in this area. In some cases, proxies have been employed in response to data scarcity. For example, household access to the internet acts as a proxy for overall technological improvements and the benefits that flow through to future generations. Furthermore, house building acts as proxy for the improvements made to city living and living sustainability. A comprehensive list of indicators is provided below in Figure 8.
The key drivers of wellbeing improvement are access to technology and participation in tertiary education, which have improved by 64% and 41% respectively since 2000. Factors such as reduced spending on research and development (R&D), the increased aged health care burden, and youth unemployment have contributed to the regression of wellbeing. Unemployment amongst those aged 15 - 24 compared to all age unemployment (15 - 64 year olds) has swelled 13% since 2000. Youth unemployment has a particularly acute impact on intergenerational trends, as it can transform into long term, persistent unemployment during the individuals lifetime even if unemployment rates improve. To witness more substantial improvements in intergenerational wellbeing, governments must support unemployed youth in a targeted and effective manner.
The rates of youth democratic engagement have fluctuated since 2000 and have dwindled in recent years. There is widespread concern in developed countries of increasing levels of youth ambivalence surrounding democracy and politics. The Australian Electoral Commission (AEC) has contracted a series of investigations to probe into why many young Australians do not register for the electoral role despite compulsory enrolment and voting under Australian law. In the past decade, voting enrolment rates for 18-25 year olds have oscillated around 82% compared to the older Australian participation rate of approximately 95%. The AEC recognises that should disenchantment trends amongst youth continue, the future of the Australian political system is under threat. This is particularly concerning roadblock for intergenerational development. With an aging population, older Australians are becoming a progressively significant voting bloc that remains relatively engaged in the political system. Naturally, older Australians are more likely to support policies that benefit their cohort; age care assistance, superannuation concessions and health spending. This is not to say that older Australians do not care about future generations, but it is recognising that policy designed to support future Australians may become increasingly difficult to pass. It is recommended that the government continue to educate and engage youth in democracy, and its role within Australia.
The aging Australian population is placing increasing pressure on the health care system and there is mounting concern for who will fund future health care costs. Currently, working age families are contributing an average of 1.5 times the government funded health care that they receive in benefits from the system. With the aging demographic, these ratios are expected to grow significantly over the next 50 years. The Institute of Actuaries has projected that younger households could be expected to contribute up to 2.1 times their own healthcare consumption to subsidise older Australians in 2049-50. These challenges are difficult to analyse and predict, given that comprehensive health data is sparse. It is strongly recommended that data collection in this area is improved and made publically available to stimulate research in this field. As a proxy, the number of hospital separation days experienced by those under 60 has been compared to those over 60. This indicator has risen 13% in a stable fashion over the last 14 years, reflecting the growing pressure on the health system.
Figure 8: Summary of Wellbeing Indicators
The improvements seen in overall wellbeing do not offset the regression in economic and environmental outcomes. Amalgamating all three factors shows an overall 13% reduction in intergenerational fairness since 2000. Economic, environmental and wellbeing factors are undoubtedly dynamic in nature and lack any clear trend suggesting future improvement. It is unreasonable to assume that each subsequent generation will be better off than their predecessors. In response to this, more must be done to model the discrepancies between dissimilar cohorts if equality and fairness is to triumph.
Comparison to the United Kingdom
For the purpose of meaningful comparison, the Australian IHE Index borrows many of its features from The Intergenerational Fairness Index (IFI), a measure of intergenerational inequality developed by the UK Charity, The Intergenerational Foundation. Due to natural disparities between the Australians and UK contexts, not all the indicators align. The IFI places more emphasis on education, democracy and pension indicators to reflect the UK context and data availability. Furthermore, the IFI does not include some of the more positive measures, such as rising life expectancy and access to technology that drive wellbeing improvement. This partly explains why the IFI exposes at 33% increase in intergenerational inequality for the UK, compared to the 13% increase in the Australian IHE Index since 2000. Similarly to the IHE Index, the UK’s IFI has been driven by large increases in government debt and the rising burden of age care assistance.
The differences in the indicators used are unlikely to account for the discrepancies in experience between the UK and Australia entirely. Unlike Australia, the UK has experienced sluggish economic growth over the last decade, which has aggravated the vulnerability of younger, relatively asset-poor cohorts. In the decade following the year 2000, median income in the UK grew less than 0.1% a year. This is a stark comparison to its average UK growth of 1.5% per year in the 25 years prior to 2000. The sluggish economic growth since the new millennium has shown to have a significant impact on cohorts living in this time period, with younger working age cohorts facing lower real incomes than the previous birth cohort at the same age. Generational Accounting estimates for the UK suggest that the average British 25 year old today will be a net contributor to the tax and transfer system, contributing approximately £124,000 more than they receive in benefits. Contrastingly, the average 65 year old in the UK will be a net benefiter; extracting £223,000 more in benefits than they contribute. As Australia is predicted to experience slower economic growth in the next 40 years, this narrative should be a warning not taken in vain. If circumstances within Australia play out as they did in the UK, the wealth accumulation of future working age cohorts could become particularly stifled. As such, we could expect to witness a sharper decline in intergenerational equality in the near future.
Projections and Analysis
Assuming that the economic, environmental, and wellbeing indices follow the same trends as witnessed in the last decade, the IHE Index is expected to reach 170 by 2050. This could see generations living in 2050 70% worse off than generations in 2000. As depicted in Figure 10, this is likely to be driven by economic factors, with the economic component projected to reach 291 in 2050. In other words, the economic status and prospects of youth in 2050 could be almost three times worse than in 2000. Environmental outcomes are also projected to deteriorate, but at a less rapid rate. Working age Australians of 2050 are expected to experience environmental outcomes that are 30% worse than those in 2000. Wellbeing is expected to improve slightly, with generations projected to be 11% better off in this category.
The projections above directly challenge the notion that successive generations experience improved lifestyles compared to their immediate predecessors. If government debt continues to rise, housing becomes increasingly unaffordable, and the aged care burden continues to grow at current rates, working age people of 2050 may lack the economic capacity to support older generations or themselves. If nothing is done, the sustainability of Australia’s tax and transfer system is dubious at best. The deterioration of the natural environment will only intensify the future financial, social and cultural challenges and improvements in technology, health and education will not undo the damage. Instead, relevant policy changes must be implemented urgently to minimise the economic and environmental damage.
It is acknowledged that in reality the past is often not an accurate predictor of the future. As such, this prediction is simply a representation of what the future could look like if no action is taken and past trends continue. Either way, this forecast should be a resonating wake up call for Australian policy makers. There is a clear need for more advanced modeling and predictions surrounding outcomes for disparate cohorts within Australia’s current and future population. Although the IGR touched on economic models and predictions, there is much more to be done if Australian lifestyles are to be sustainable. It is recommended that the current government and independent organisations conduct further research and modeling involving cohort analysis. Assumptions should be clearly established at the outset and sensitivity analysis should be conducted. Such research would play a fundamental role in developing government policy that effectively targets the most vulnerable in society without irreversibility disenfranchising the working age population. This would not only benefit future generations, but all Australians living today.
It is both erroneous and unwise to assume that the economic, technological and social improvements of the last century will continue homogeneously into the future. Rising government debt, acute housing unaffordability, and the growing costs of supporting older Australians have seen economic outcomes for younger, working age Australians decline by an average of 2.4% every year since 2000. Climate change is expected to have fiscal, social, cultural and health implications on future generations. At its current rate, generations living in 2050 will be 30% worse off due the irreversible environmental decay triggered by today’s generations. Increases in technology, education and healthcare cannot be relied on to outweigh these negatives. Since 2000, overall wellbeing has improved at a rate of just 0.2% per year. Even with this improvement in wellbeing indicators, overall outcomes for youth and future generations have decreased 1% each year on average since 2000.
The IHE Index has been designed to be a simplistic, holistic measure of the relative changes in outcomes for future generations. It clearly exemplifies that economic, environmental and wellbeing outcomes are fluid, shifting and changing year on year. As a result, it embodies the need for further data analysis in this space to ensure the sustainability of Australian society. Intergenerational inequality is undoubtedly a growing concern within Australia and other nations such as the UK. It is imperative that governments and organisations alike invest time and finance into longitudinal studies that map the relative outcomes of disparate cohorts overtime. The author welcomes government initiatives such as the IGR, but more must be done to assess the impact of budget decisions and policy on different age cohorts. If further analysis is not conducted, it is impossible to understand the status of Australia’s intergenerational bargain. Without this critical knowledge and context, today’s governments are developing policy without completeness of information.
Full Footnotes and Bibliography can be found here or by copying the following URL into your browser: http://bit.ly/Stephanie-Thomson-2015