‘Out of balance’ tax system favours retirees to the detriment of workers, study finds

Over the past few decades, Australian retirees have enjoyed the double whammy of growing private wealth and increasing government benefits, analysis by ANU economists Peter Varela, Robert Breunig, and Matthew Smith found.

In a recently published working paper, the economists argued that Australia’s current tax and transfer settings have tipped the balance too far in favour of older Australians, at the expense of younger Australians.

“Government expenditure targeting older Australians – such as the age pension, aged care and health care – has increased significantly in real, per-person terms over this period [1993-2023],” the working paper said.

“This increase in transfers to older Australians has occurred in a period in which older Australians have also earned significantly more private income, primarily as a result of higher capital income from real estate and superannuation.”

These trends have caused a significant shift in the income distribution across age groups on a per capita basis, which has placed a growing burden on workers and given increasingly preferential treatment to retirees, the researchers argued.

Unless there was a specific policy intent to explicitly favour older Australians, the economists urged policymakers to consider measures to reduce payments to older Australians and shift the tax burden away from younger Australians.

“As Australian retirees have accumulated significant wealth and associated capital income, the Australian tax and transfer system has not adjusted. It has instead increased support to this cohort,” the working paper said.

“The Australian tax and transfer system is ‘out of balance’ and … policy changes should be considered that partially reverse the changes that have occurred over the past 30 years.”

One of the paper’s authors, economist Robert Breunig, is set to present these findings at the government’s economic reform roundtable this week.

Ahead of the roundtable, Breunig told The Australian Financial Review that he would advocate for a flat tax on personal savings and investments of between 7 and 20 per cent, and a reduction in personal income tax.

“The tax system is penalising people in their 30s and 40s and then making them super wealthy towards the end of their life, and they could probably use a bit more of that money when they’re paying for childcare and trying to get a mortgage,” he said.

“If we tax savings a bit better it means you can improve equity and can also afford to cut the corporate tax rate to increase productivity.”

The ANU study found that from the 1995 to 2003 financial years, the average Australian aged over 60 had a pre-tax and transfer income equal to 41 per cent of the income of Australians aged 18 to 60, and post-tax income equal to 61 per cent.

This dynamic shifted notably in the final ten years of the study. From the 2014 to 2023 income years, the average pre-tax income of older Australians was 65 per cent that of working Australians, and their post-tax income climbed to 95 per cent.

The economists also called out skyrocketing house prices as a key factor driving the growth in private wealth amongst older Australians.

“Increasing house prices over the past decades have increased the wealth of older Australians, generating substantial growth in private income in the form of both capital gains and imputed rent. This income has come at the expense of younger Australians and migrants buying into the housing market,” the paper said.

The economists said that policies that pushed up house prices, including supply-limiting zoning restrictions and preferential tax treatment that boosted investor demand for housing, should be addressed to alleviate intergenerational inequity.

To fix Australia’s structural budget deficit, the paper acknowledged that the government would need to raise taxes or reduce its spending. It argued that any shifts to Australia’s tax and transfer system should avoid placing further burdens on workers.

“To achieve a fiscally sustainable budget over the coming decades, Australia must choose between increasing taxes and reducing government expenses. The consequences of this adjustment should be borne, at least in part, by older Australians.”