Should Gen Y subsidise baby boomers?

By Rodney Maddock, Monash University

 

A lot of public debate at the moment is focused on the issue of intergenerational fairness. People argue for instance that it is unfair for the baby boomers to pass debts on to the next generation.

According to the Grattan Institute:

“The housing boom plus rapid increases in government payments on pensions and services for older people risks creating a generation of young Australians with a lower standard of living than that of their parents at a similar age. The generational bargain, under which each generation of working Australians supports retirees while still improving its own standard of living, is under threat.”

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This is probably completely wrong.

The Intergenerational Report makes the point quite clearly when it says that “Real gross national income (GNI) is projected to grow at 1.4% over the next 40 years … If this level of growth is achieved over the next 40 years, the average Australian income will increase from $66,400 today to $117,300 in 2054-55 in today’s dollars”. Quite simply the current generation is likely to be much richer than the baby boomer generation.

There are really three separate elements to the discussion: productivity, longevity and gender.

The Intergenerational Report (IGR) focuses on productivity. It points out that over recent decades the baby boomers have managed to raise their productivity by around 2.2% per year. This has led to very substantial increases in Australian living standards and means the next generation starts with a much higher standard of living than its parents started out with. Even though the IGR expects the next generation to increase productivity by smaller increments, down to 1.4% improvement per year, the next generation will have a much higher average annual income than the retiring generation, growing as it does and off a much higher base.

The big driver of these productivity gains is intellectual. Over time we have consistently learnt to work smarter, to produce more with less. And knowledge cumulates; we build on the shoulders of giants, so that breakthroughs lead to subsequent productive inventions, better machines and better processes.

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Living longer, with more choice

The next generation will also have much longer lives than the baby boomers. A male born in 1950 had a life expectation at birth of 66.5 years: a male born in 2000 expects to live for 77.6 years. Eleven more years of adult life are a second valuable advantage the next generation has relative to the previous one. To the extent that people can now work longer, they have more productive years in which to generate income and wealth.

The statistics for females in terms of life expectancy are similar to males but there are two additional drivers. Females now have a much wider range of employment opportunities than did their mothers, with female labour force participation more than doubling since the late forties. Female wages have also risen considerably faster than those of men over the period, rising from about 60% of male wages to over 80% currently [See The (2014) Cambridge Economic History of Australia for data on female participation and wages].

The combination of these three factors means Gen-Ys will have much higher lifetime incomes than their parents.

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As an illustrative calculation, compare a male born in 1950 with one born in 2000. For the calculation assume they each enter the workforce at age 20, and then work for 70% of their remaining life. This gives the baby boomer 32.5 years of work, and the millennium person 40.3 year of work. Wages have risen over time and are expected to continue to do so. We can just assume that for the 1950 baby wages rose at the rate of productivity growth of 2.2% per year, and for the future that wages will grow in line with the IGR report of 1.4% per year up to his retirement in the 2060s. This is all inflation adjusted.

The experiment suggests that the male born in 2000 will have three times the expected income of one born in 1950. For females, as suggested above, the gains are probably even greater.

While the numbers are conjectural, they do suggest that there is little doubt the current generation will be much richer than its predecessor. So what does intergenerational fairness mean?

If we accept the ethical principle that the rich should subsidise the poor, then logically later generations should subside their parents, and Gen Y should be subsidising the baby boomers.

We can complicate the issue by considering environmental issues, congestion and other factors which the next generation will have to deal with as negative offsets to their income gains. However the quantum of these effects would have to be very large to offset the direct income gains the current generation is most likely to enjoy.

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There are other factors too, such as the reduced probability of world war, which the baby boomer generation has handed on to the next generation as a benefit which might be considered in a broader calculus. People growing to adulthood in the 1970s and 1980s certainly considered nuclear war likely, and that prospect has diminished to the considerable benefit of the next generation.

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