Boomer welfare and the path to reform

The federal Social Securities Minister Scott Morrison has again this week revealed just how reluctant politicians are to discussing the sacred cow – the family home. With the Federal Government struggling to build a narrative for budgetary integrity, discussion has focused on the extensive superannuation concessions provided to retirees.

Fairfax’s Peter Martin has warned these tax expenditures could soon breach $35bn, comparing to the mere $20bn medicare cost some conservatives would like to tear apart. Martin quoted broadcaster Alan Jones, on Q&A recently:

“The notion that someone like me should be getting concessions – I pay 48¢ in the dollar tax but if I put my super in, I pay 15. I get a 33¢ in the dollar concession … now, someone somewhere along the line has got to say, look, in an ideal world that would be terrific, but we ain’t in an ideal world.”

Today’s AFR included this key quote (for the second successive day) from Deloitte Access Economics Chris Richardson:

“There is a stunning generational unfairness in our [budget] settings and all those disengaged younger Australians need to wake up to the fact they’re being massively screwed by … what the baby-boomers are leaving for them,”

The reform pathway is the pincer manoeuvre for the government. Scott Morrison raised genuine concerns:

“There is a big penalty at the moment for people who want to choose to sell the family home and to use income to support them as they age,” Mr Morrison said. … “The system is actually penalising people for wanting to make what might be very rational choices.”

John Daley at the Grattan Institute points to retirees being able to reverse mortgage their homes to make up pension shortfalls enforced by a (long-awaited) means test. This may assist budget savings of $7bn a year:

“This is roughly the combined effect of the May, 2014 budget measures to impose a Medicare co-payment, reduce family tax benefits, tighten Newstart eligibility, increase income tax for high-income earners, and increase the amount students contribute to their degrees.”

The concern is just how far we are away from serious traction on this element of the inequality matrix. A friend commented on facebook:

Ok, so let me get this straight… The baby boomers bought their properties when the price of a house was x 4 of the average annual income… allowing them to then go ahead and buy all their investment properties…(which are owned mostly by that generation)

This had the effect of pushing up property prices to about x 12 of the average annual income. Thus keeping many Gen X’s and most Gen Y’s out of the property market….

The boomers are currently allowed to own a house worth….lets say…

5 mill, and still draw the pension… Which who pays for?? Yep.. the Gen x and Gen Y’s….. UM?????!!!!! what? Be damned if they are going to let that be changed without a fight…. cause they earned it!! Geez, young people today are just so selfish.

The demographic challenges are well summed up by Leith van Onselen at our 121st annual Henry George Commemorative dinner. The key point – boomers own 47% of total wealth. That has certainly increased since then as per the Wealth of Generations report:

Despite the global financial crisis, households aged between 65 and 74 today are $200,000 wealthier than households of that age eight years ago. Meanwhile, the wealth of households aged 25 to 34 has gone backwards.

The bigger question is how we get beyond superannuation handouts and onto the big inter-generational issue – home ownership. Some 30 years of State and Federal tax inquiries have largely been supportive of our stated desire to replace taxes on the productive sector with those on economic rents ie land and mining. However, well meaning tax inquiries fall over due to vested interests polluting the public interest.

South Australian Premier Jay Weatherill is the latest brave politician daring to mention the replacement of Stamp Duty with Land Tax. A public educated by a constant roll call of reality TV shows from ‘The Block’ to ‘Selling Houses Australia‘ (the series that keeps on giving) have fuelled a property investment mentality beyond the reality of our wages. Let’s hope the the public interest one day tops what Adam Smith called the public enemy.

But alas whilst all this posturing goes on, our sacred cow doesn’t need to move or improve. It can just sit there as society grows and develops. Lightly taxed capital gains ensures competition drives prices higher. So high that national land prices jumped a staggering $418bn (ABS, 5204 table 61) in the 2013-14 financial year. The news cycle celebrates whilst First Home Owners scream ‘how high?’ What – only a $300,000 mortgage!

But alas we cannot touch this sacred cow.

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