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There are two very significant intergenerational inequalities in Australian public policy: the age pension and revenue from our natural resources. Both involve current government spending that 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, Treasurer Jim Chalmers announced a surplus of $9.3 billion and gross debt of $1 trillion. With government spending growing by 4.5% in 2023/24 and 3.6% in 2024/25 (in real terms), gross debt will exceed $1.1 trillion by 2025/26. As usual, there was no mention of the unfunded liability for age pensions. This is inappropriate policy.
The retirement income system is based on three pillars: the old-age pension, mandatory superannuation and private savings. In current public policy, woefully without a clear framework, the three pillars are independent of each other. This is inadequate, as was made clear in the 2020 Retirement Income Review Report. A proposed change to the superannuation regime with a $3 million cap and the imposition of taxes on unrealised capital gains has introduced another layer of separation and complexity.
Payment of old-age pensions is made on an emerging cost basis. Old-age pension obligations arise when Australian residents reach the age of 67. Under this approach, payments will be funded by future generations. This obligation represents an intergenerational inequity that should be addressed in the federal government’s intergenerational report 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 community expectations. Australians, including new immigrants, expect the age pension to be a key part of Australian life in retirement.
Under the current federal government there has been an extraordinary growth in Australian immigration, approaching 550,000 people per year. The consequences are significant and include an increase in the obligation to pay old-age pensions. This increase must be taken into account in any estimate of the obligation.
In 2023, the Federal Government published the latest intergenerational report looking at the outlook for Australian finances to 2063. It projected a reduction in Australians’ entitlement to the age pension, partly reflecting growth in retirement savings. Subsequent changes to superannuation policy indicate that this was a heroic assumption. However, an ageing population is projected, and limited policy action can change this. For the estimation of the unfunded age pension liability, policy levers are assumed to remain largely unchanged.
The unfunded superannuation liability for the current population is estimated at $2.05 trillion. This indicates that the Federal Government’s current reported net debt of $1 trillion, which will rise to at least $1.1 trillion, substantially understates the extent of financial obligations. This is a liability that, without any policy change, will be borne 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 earmarking revenues from taxes, royalties or rents on the nation’s natural resources into a wealth fund.
In Norway, a wealth fund was created “that would ensure the long-term management of revenues from oil and gas reserves, so that the wealth would benefit both current and future generations.” Wealth funds reflect a policy in which revenues are generated from the country’s natural resources today for the benefit of the population in the future, not just the current population.
Australia is generating significant wealth from raw material resources, including gas and iron ore. Through taxes and royalties, it is generating revenue for the federal and state governments. In Victoria, where the ALP has an aversion to gas, the prospect of revenue from natural gas resources, estimated at a minimum of 4.996 trillion cubic metres, would contribute to a partial solution to the state’s extraordinary debt nightmare. The creation of a future Victorian wealth fund could be considered.
In the 2010 Henry Tax Review the following statement was made regarding natural resources: “The current structure does not generate sufficient returns for the Australian community”In other words, revenue from current taxes is being used to pay benefits to today’s population without regard to future generations.
It is clear that taxpayers of the future are the ones who bear the brunt when it comes to unfunded old-age pension liabilities and the way in which natural resource revenues are used. To correct these inequalities, we need to look at a policy that recognises and funds old-age pensions. In addition to this, the creation of a federal or state sovereign wealth fund based on the Norwegian model for investing natural resource revenues should be considered.
Both issues can be addressed simultaneously, as was done with the Future Fund and the Commonwealth Government employee pension liabilities.
Ken Atchison has been involved in financial markets since the early 1970s and is founder of Atchison Consultants.
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