There are two very significant intergenerational inequities in Australian public policy. They are the age pension and revenue from our natural resources. Both involve government spending today which will be paid for by future generations of taxpayers. Interest rates are higher today as a result of this stimulus.
In the May 2024 Australian budget, the Treasurer, Jim Chalmers, announced a surplus of $9.3 billion and gross debt of $1 trillion. With government spending growing at 4.5% in 2023/24 and 3.6% in 2024/25 (in real terms) gross debt will exceed $1.1 trillion through 2025/2026. As is common, no mention was made of the unfunded liability for age pensions. This is an inappropriate policy.
There are three pillars to the retirement income system being the age pension, compulsory superannuation, and private savings. In current public policy, unfortunately without any clear framework, the three pillars are independent of each other. This is inappropriate, as was made clear in the 2020 Retirement Income Review Report. A proposed change in the superannuation regime with a cap of $3 million and taxing of unrealised capital gains has introduced yet another layer of separation and complexity.
Payment of age pensions is made on an emerging cost basis. Obligations for the age pension arise with residents of Australia turning 67 years. Under an emerging cost basis, the payments will be financed by future generations. This liability represents an intergenerational inequity which should be addressed in the intergenerational report prepared by the Federal government every five years. It was not addressed in the 2023 report.
While the age pension is not a binding legal obligation, it is an integral component of the expectations of the community. Australians, including new immigrants, have an expectation that the age pension is a key part of Australian life in retirement.
Extraordinary growth in Australian immigration has occurred under the current Federal government. It is now approaching 550,000 per annum. Consequences are extensive and include an increase in the prospective age pension obligation. This increase must be factored into an estimate of the liability.
In 2023 the Federal Government released the latest intergenerational report which considered the outlook for Australian finances through to 2063. It foreshadowed a reduced entitlement of Australians for the age pension in part reflecting the growth in superannuation savings. Subsequent superannuation policy changes indicate that this was a heroic assumption. Nevertheless, an ageing population is expected, and limited policy action can change this. It is assumed for the estimation of the unfunded age pension liability that policy levers are largely unchanged.
Estimated unfunded age pension liability for the current population is $2.05 trillion. This indicates that the current declared Federal Government net debt of $1 trillion, growing to at least $1.1 trillion, materially understates the extent of financial obligations. It is a liability which, without any policy change, will be met by future generations of Australian taxpayers. It is a clear case of intergenerational inequity.
Government ‘wealth funds’
Many governments have attempted to address this intergenerational inequity by directing revenue from taxation, royalties or rent for natural resources of the nation into a wealth fund.
In Norway a wealth fund was established “which would ensure the long-term management of revenue from oil and gas reserves so that the wealth benefits both current and future generations”. Wealth funds reflect a policy where revenue is generated from natural resources of the country today for the benefit of the population in the future not just the current population.
Australia is generating significant wealth from commodity resources including gas and iron ore. Through taxes and royalties, it is generating revenue for federal and state governments. In Victoria, where the ALP has an aversion for gas, the prospect of revenue from natural gas resources which are estimated at a minimum of 4,996 trillion cubic metres would contribute a partial solution to the extraordinary debt nightmare of the state. A future Victorian wealth fund might be contemplated.
In the 2010 Henry Taxation Review a statement was made regarding natural resources as follows “The current structure fails to collect a sufficient return for the Australian community”. In other words, revenue from current charges is being applied to pay benefits for the population today without consideration of future generations.
It’s clear that future taxpayers are getting the worse end of the deal when it comes to unfunded age pension liabilities and how natural resource revenues are used. To right these inequities, we must examine a policy that acknowledges and funds the age pension. In addition to this, a Federal and/or state sovereign wealth fund drawing on the Norwegian model to invest natural resource revenue should be considered.
The two issues can be addressed concurrently, as was done with the Future Fund and the commonwealth government employees superannuation liability.
Ken Atchison has been involved in financial markets since the early 1970s and is Founder of Atchison Consultants.