Unsustainable?: Australia's affluence is facing some serious challenges. Authors John Daley and Danielle Woods warn that younger generations may have lower living standards than their parents at a similar age. They paint a stark picture by numbers that puts the lucky country's 20- and 30-somethings in the shadow of more fortunate elders. The average household of 65 to 74-year-olds in 2011-12 was $215,000 wealthier, in real terms, than the same age group eight years earlier. That takes into account all their wealth, most notably their homes. Households aged 55 to 64 were $173,000 better off. But in the same period, households of 25- to 34-year-olds went backwards – by $10,400. Home ownership has fallen for all but the oldest households. More than 60 per cent of 25- to 34-year-olds owned their own home in 1981. By 2011, it was down to 48 per cent. Daley worries that all of this puts at risk Australia's "generational bargain", under which people of working age pay more in taxes than they receive in taxpayer-funded benefits. When they retire, it becomes their turn to take from the budget.

In reality, each generation has taken more than it has contributed in taxes. This has been sustainable for the past 70 years while Australians' incomes have risen quickly and the national pudding has kept growing. But some of the magic is seeping from the pudding. Iron ore and coal prices have tumbled; income growth is slowing; successive governments have transferred wealth to the elderly in benefits and tax breaks, even while the population is ageing; the housing boom has further enriched the elderly while putting homes out of the reach of many young Australians, who instead will inherit today's mounting budget deficits. Much of that debt will be driven by better medical care, whip-smart diagnostic tools and subsidised drugs for the elderly, so they will become happily ever older. For households over 65, governments spent $9400 more in 2010 on pensions and services, particularly health, than they did six years earlier. "We're the generation where the maths stops working," says 24-year-old Holly Ransom, who chaired the Y20 youth forum at the G20 leaders' summit. She worries that she will struggle to afford her own home.

It's a good time to ask: What are we talking about as being fundamental to a better life for our kids? Tim Costello Costello considers it a profound challenge to an innate human desire. "The great engine that drives human history is that parents will make incredible sacrifices – to their own detriment – just so their kids will have a better life than them." But he also sees it as a big opportunity for a critical national debate. "This is a very healthy reality check," Costello says. "It's a good time to ask: What are we talking about as being fundamental to a better life for our kids?" Is the proposition – each new generation should be better off than the last – plausible or even desirable? Is it reasonable for a rich nation to expect to become eternally richer? He feels home ownership remains fundamentally important, but "we feel that somehow we're failing our kids if we can't guarantee them a swimming pool or a private education. I think we've got ourselves into a terrible cultural trap. Have we actually got to a point of such affluence that we've lost the plot?"

'Unfair' budget Australia's affluence, however, is facing some serious challenges, leading economists agree. However, John Daley also sees an opportunity in his glum report – for Prime Minister Tony Abbott and Treasurer Joe Hockey. Their government has struggled to convince Australians that the budget is in desperate need of repair, mainly because their proposed solutions – cuts that disproportionately hit low-income households – are perceived as unfair. Daley offers them a new narrative that frames the need for urgent budget action in ethical terms: is it fair that the young generation will cop it? For starters, it will fall largely on the young to pay for the last seven years of government deficits at federal and state levels. That amounts to $60,000 in future taxes for households aged 25-34 today, says Daley. And it could get worse. Federal governments have delivered budget deficits of more than $40 billion for four of the past five years. Every year that continues, each younger household will have to pay another $10,000 to fund it.

"I'd certainly be very uncomfortable," says Daley, "knowing that I've been part of a society that had made policy choices that led to my children being worse off than I was." Many of those policy choices were made under the Howard government and perpetuated by the Rudd Labor government, says Saul Eslake, chief economist of Bank of America Merrill Lynch Australia. John Howard's government halved capital gains tax, gave generous income and superannuation tax concessions to the elderly, and indexed pensions in line with male earnings, which outstripped the consumer price index, so the elderly got a slice of productivity gains. "But why should they when they are no longer contributing to productivity?" asks Eslake. Welfare, he says, was designed to protect people who, through no fault of their own, could not meet a minimum standard of living. "But in the last 20 years, if you tick a box you get welfare assistance: if you have private health insurance; if you have kids; if you are over 55, you pay less tax; or you pay no tax on super, simply for being over 60."

Daley's report prescribes tough budget action: seriously tightening eligibility for the age pension; reducing superannuation tax concessions; increasing tax on assets, including property and capital gains; but also reducing income and corporate tax. Daley acknowledges the diabolical politics of such measures: almost half of eligible voters in the last federal election were 50 or older. Willingness to pay James Allison is 59, but his vote might not be so predictably self-interested. He is a builder from Sydney's eastern suburbs. Unlike his son, 27, and daughter, 23, Allison had a free tertiary education. His son and daughter have substantial HECS debts – and both still live at home. "My son has taken over the rumpus room as his bedroom and work office," Allison says. "He and his partner have given up on the notion that they could ever buy a property in Sydney.

"The way I see the future, my generation is going to have to redistribute its wealth to the next … But every election I'm disgusted when the parties start talking about the hip-pocket nerve and cutting taxes. I don't want my taxes cut. "I want to know there'll be good health care, good education and good aged care, and I'm prepared to pay more for that. And the people I know are, too." Eslake says: "I've been saying for more than a decade that I'm surprised there isn't more anger among the young about this; that maybe they'll take their revenge, not by marching in the streets, but by refusing to move out of their parents' homes." Holly Ransom says: "It's really easy for this sort of research to lead to a generational fight or battle, but that won't serve the country well." The nation needs a debate, she says – because the generations that will become the engines of the economy and its tax base may be lumbered with debt – but a "tit-for-tat" will not help. Richard Denniss, director of the Australia Institute, agrees. It should be about taxing income, regardless of age, he says.

"I'm more interested in the fact that we've got multi-millionaire 75-year-olds who don't pay a cent in tax and we're worried about young people paying for the cost of ageing. Why don't rich old people have to pay for the cost of ageing?" Peter Whiteford, from the Crawford School of Public Policy at the Australian National University, has previously worked on pension and welfare policies for the Organisation for Economic Co-operation and Development in Paris. Australia needs "substantial budget adjustments", he says, but adds: "This will be hard." He refers to an earlier Grattan Institute study predicting Australian governments will need to find savings and tax increases worth $70 billion a year by 2024 to address rising health, pension and infrastructure spending. Where do they start? "We've already got the most targeted social security system in the OECD," Whiteford says. "You could target more and you might get hundreds of millions, maybe some billions." But not $70 billion. "Then there's a lot of talk about how older people arrange their financial affairs to get a part pension and a health care card. I'm sure there's some leakage there. But it's not billions."

All these options, and more, need to be considered, but Whiteford points to another dilemma. Older Australians may be asset-rich but many are cash-poor. The average income of Australians over 65, relative to those younger, is the second lowest in the OECD. He raises the example of a 92-year-old woman on a basic pension while living in a $2 million home in Mosman. "She didn't want any more money. She didn't want overseas holidays. All she wanted was to tend to the garden at her family home." There is no assets test on that home. If there was, she would need to sell it to fund her own retirement. Or governments could offer reverse mortgages – a loan to cover living costs – which would allow the elderly to remain in their homes until their deaths, when their estates would repay the money. That option is never politically popular, says Whiteford, because it would eat into the inheritances of younger generations. But inheritances, Daley points out, mainly benefit people who are already relatively wealthy. Political courage

The Abbott Government has proposed measures to wind back costly benefits for the elderly: lifting the pension qualifying age further, from 67 to 70, by 2035; returning pension indexation to the CPI; and tightening the means-testing of pensions. These might save $7 billion a year by 2025. But it is a small fraction of the level of reform – and political courage – that is required, says Eslake. "It will require more courage than any politician has demonstrated for two decades."