Australia’s Coalition government has discarded returning to policies that could release the pressure of demographic change from the budget, while favouring the baby boomers.
The government’s recent remarks have suggested that neither the promised investment allowance for business nor the fast-tracked income tax cuts are on the cards in the forthcoming mid-year economic and fiscal outlook.
Australian Economy Facing a Time Bomb - Treasurer Frydenberg
The ageing Australian population is an ‘economic time bomb’, said Treasurer Josh Frydenberg, advising young generation to pay for the retirement of the old with the country having few working age people to support each old one.
He justified the need for a budget surplus, clarifying it as an attempt to boost the economy saddled with debt.
According to him, the Australian population is ageing, thereby facilitating new demands for aged care, health and pension systems. He believes that the impact of ageing population will be sensed more in the approaching decade as the country’s baby boomer generation is retiring.
The Treasurer wants older people of Australia (mid- and late-60s) to work longer to support in keeping the nation afloat. In addition, he argued that older Australians should undertake training to continue contributing to the economy, staying in touch with the jobs market as pressure mounts on the country’s budget bottom line.
What do Opponents Say?
Opposition parties have accused the government of shifting the blame of their shortcomings on older Australians. They mentioned that the country’s wage stagnation situation is not because of the old generation, but due to low economic growth, weak retail trade, high unemployment and record low interest rates.
They argued that Mr Frydenberg could be engaging in ageism unintentionally, stigmatising older Australians wanting them to work longer and more.
Economists believe that asking older people to work longer may not help much as there are fewer jobs around. They argue that the country does not have fewer people to do jobs, rather it has fewer jobs for people. They have called for providing secure and decent pensions to old ones, encouraging them to retire.
The Treasurer ignored Baby Boomers of Australia (born between 1946 and 1966), that are enjoying a free ride amidst current policies related to franking credits, superannuation and pension rules.
How Baby Boomers are Benefitting?
Australia is at a demographic turning point, with many Baby Boomers nearing or reaching their retirement age. As per the ABS (Australian Bureau of Statistics), the country’s Baby Boomers were born during the post-war economic boom, between 1946 and 1966.
These people are categorised under the luxury generation as they are currently having the upper hand over others in terms of the following aspects:
The kind of tax credit that is paid by companies to their shareholders together with the dividend payments, is referred to as a franking credit or an imputation credit.
Franking credit was one of the significant reasons for Scott Morrison government’s win in this election campaign as the government opposed Labor’s policies to remove franking credit refunds for Australians who paid no tax.
Morrison’s win in election campaign made baby boomers glad that were benefitting from franking credit refunds.
Superannuation is a compulsory system in Australia of placing the smallest percentage of an individual’s income into a fund to meet his financial needs in retirement.
The income that is generated from assets kept in a superannuation fund is charged with 15 per cent tax rate in the country. However, the Baby Boomers generation are not required to pay tax on superannuation assets.
The ageing population indicates a decline in country’s revenue over the next years as a larger portion of the national income produced from superannuation assets will be exempted from tax.
Take a look at Australia’s super income stream tax table below:
In Australia, older people today have significantly greater income, wealth and expenditure relative to people of the same age decades earlier. However, the young generation has not made similar progress in terms of wealth. This is so because wage stagnation and climbing underemployment have hurt young folks particularly hard.
Australia’s existing tax and spending policies are financing unparalleled transfers from younger households to baby boomers. In the past 20 years, the spending on health and pensions for older people has increased while the taxes for the same age group have been reduced.
Also, certain Australians (retirees) are enjoying lucrative tax breaks which the young ones miss out. The country offers SAPTO or Seniors and Pensioners Tax Offset to eligible seniors and pensioners in Australia, that sometimes totally eliminate their tax liability and the requirement to lodge a tax return.
Take a look at the current Resident tax rates in Australia:
With the ageing population, a greater proportion of the income tax base is facing concessional taxation in Australia, leading to a decline in revenue.
Potential Effect of Ageing on Australian Economy
A recently released report by the Parliamentary Budget Office titled “Australia’s Ageing Population”, states that the ageing population is likely to add 0.3 percentage points to the annual real growth in spending and subtract 0.4 percentage points from the annual real growth in revenue over the next decade.
The report mentioned that the ageing population is likely to cost around $36 billion to the budget annually by 2028–29.
As per the report, ageing is projected to lessen about $20 billion in real terms from revenue in 2028–29, however, income and population growth are likely to boost revenue by about $187 billion (leading to a net increase in total revenue by $166 billion in 2028–29).
The ageing population is already lowering labour force participation rate in Australia, raising absorption of the Age Pension. Furthermore, the density of population in the age group of 65 years and more, will continue to rise over the next hundred years.
The report cited that the Age Pension spending is likely to increase at an annual average growth of around 1.8 per cent over the decade.
In addition to the Age pension, the Australian government also provides other spending programs to the senior citizens, including social security payments and funding for schools and universities. However, these programs target a larger base of the population, and their costs do not vary significantly by the age of the recipient.
Amidst the current scenario, it becomes essential for the Australian government to consider extensive tax and other reforms to balance the distribution of taxes to pay for services between generations as the population ages.
This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.
As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.