The biggest burden on the economy isn't the ageing population at all...  

For the last five years anyone over the age of 60 has been framed as a burden on the Australian economy. The ageing population brings with it several economic challenges, however, this is nowhere near Australia’s biggest problem. The real problem is our attitude to money – particularly our children’s generation.

Over the last century the average household debt in Australia has continued to rise exponentially. When we were in our 30s and 40s, the average household debt sat at equivalent to six months of annual income. At that point in time it felt like a lot. But our children have managed to throw our measly six months out of the ballpark. Average household debt now sits at equivalent to 18 months of annual income.

The statistics released by The Bankwest Curtin Economics Centre concluded that yes, Australians are living well beyond their means. There are a couple of interesting things that come into play here.

Firstly, the upward swing in average debt per household closely aligns with the introduction of mortgage packages in the 1990s where people could draw down against their mortgage without having to sell their home. While this gave a lot of people financial freedom, it turned out to be a little too much. Funding holidays, cars, home furnishings, boats and the dream lifestyle became all too popular.

Secondly, the cost of a home is a greater portion of annual income than it was 25 years ago, which means yes, some natural progression and an increase in borrowed percentage is warranted – but it sure isn’t three times more.

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Then there’s the fact that Australians don’t want to live within their means. Why? It’s because younger generations work on perceptions of wealth as a measure for societal value. They make judgements on the worth of an individual not based on personality traits or characteristics but on their perceived material wealth. They look for brand names, the latest editions of technology, expensive cars, large homes and an enviable lifestyle. But the sad reality is that for most Australians this is simply a delusion of grandeur. A study by Pimco, the world’s largest bond manager highlighted the fact that the expenses incurring debt in Australian households were increasingly liabilities and not considered assets in terms of retained value.

We know that Australians have a big problem when it comes to their attitudes towards money, but how does this actually influence the economy? It’s actually in a few different ways.

Firstly, debt is a problem. When a nation has such high volumes of debt it puts strains on the economy because people have difficulties paying the debt off and the banks face challenges in funding. The inability to continue lending was, in a simplified way, at the crux of the 2007 American GFC and people with loans had little to no disposable income. This meant that business slowed, economic growth almost halted and they found themselves in a downward spiral. While Australian banks are currently stable and it is unlikely that we’ll face this same problem soon, but it’s always a consequence everyone should be wary of.

Secondly, increases in household debt also widen the gap between the rich and the poor. In Australia the 20% richest people own 61% of all household wealth, whereas the 20% poorest people own just 1% of total household wealth. Debt counterbalances wealth. When someone incurs debt, his or her wealth reduces. The increasing household debt is pushing more and more households into the poorest 20% of Australians as their true wealth diminishes and this is creating a serious financial class divide the is masked from sight.

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And finally, the injection of money into the economy that is derived from debt is considered valuable under false pretences. With an entire generation of people in debt with cars, boats and expensive computers who owe the banks everything, the economy is incredibly unstable because there’s no wealth to support it. It’s like having a house with two walls but no inside stability, if it looks like it is going to fall down, there’s nothing to stop it.

So the next time the ageing population is to blame for the Australian economic problems, perhaps younger generations should reconsider their finances and try living within their means. It could give them a more stable life and they won’t be crying poor and poverty stricken simply because they got a credit card to buy the latest iPhone. And this would mean the government would have less welfare expenses for those people and could actually contribute more to us – as we were promised all of our lives.

Tell us, do you agree that people don’t live within their means anymore? Do you think that younger generations don’t understand the economic impacts of living on credit and debt all for the sake of image? Share your thoughts in the comments below…