The Generational Bargain

A short time ago, I stepped off the merry-go-round, into a digital-detox retreat for baby-boomers. All digital devices were duly expelled on arrival. Trading this for qi-gong, bush walks, yoga, pampering and organic food wasn’t that much of a stretch really. The NO gluten, dairy, sugar, caffeine and wine slant on things was tricky at first, but it does grow on you.

It was about re-exploring the idea of living a simple life, based on gratitude and purpose. The truth is that we are designed as an ancient body, but live in a modern world, where convenience is killing us. The rise in cancer rates, obesity, heart disease and auto-immune diseases all tell this story. Sugar is not our friend, chemically enhanced foods and trans-fats are toxic, and if it’s low-fat – forget it.

Their verdict is that guys are on the money when it comes to multi-tasking (sustained by the odd “told you so”). Focus, concentration and blending information is how we build new brain connections and stay youthful. Exercise and happiness are up there too, for enhancing memory and creativity.

Above all else, connect with those you love, because we’re all in this together. Whatever it is, let it go, forgive and communicate. Cut negative thoughts in their track (before they become a life-force), and let your worst experiences become your best teachers. Take time out for stillness, stay curious and grow with the world. This all helps preserve your energy for what really matters (something to think about).

Everyone had their own unique story, and the transformation for all of us (in just 5 days) was amazing. I’m home now, with my blueberries, fish, nuts, bergamot (and steely resolve not to ditch or relegate them). Driving home, I found myself pondering whether our grandchildren will be blessed with the same opportunities we had, and what their path will look like.

It is clear from the latest ABS unemployment figures (6.4%) and Roy Morgan survey (9.8%) that new jobs are not keeping pace with demand. Youth joblessness has reached its highest peak since 1998, with 14.2% of 15-24-year-olds looking for work and one in five 15 to 19-year-olds unemployed, according to ABS figures.

I then stumbled across the Grattan Institute’s new report, which highlights the growing divide in wealth, and opportunities, between today’s generations.

Their ‘Wealth of generations’ report highlights the end of a 70-year run of strong wages growth, known as the ‘generational bargain’. The concept is that, over the course of their life, a worker could take more money out of tax revenues (in real terms) than they put in.

In essence, each retiring worker helped grow the economy, and created higher real wages than when they joined. This covered a pension and healthcare costs for their offspring.

The report says: “The generational bargain has been sustainable because real per capita incomes have grown consistently and strongly for 70 years. Younger generations have been able to finance the retirement of older generations while also improving their own living standards.”

We are now entering an era where that bargain is less attractive, and young Australians are facing a perfect storm:- flat wages growth, falling terms of trade and the burden of accumulated deficits.

At the core of this, an ageing population means more wealth is transferred up the demographic ladder, which is likely to coincide with flat or even falling real wages growth in the years ahead.

At the same time, younger generations will be expected to pay off an accumulation of the nation’s debts that began with the GFC.

To top that off, they missed a once in a lifetime period of asset inflation in the housing market – something which transferred wealth to older cohorts, while simultaneously driving up the cost of living for their children.

For young Australians in their early careers, the new generational bargain is simple: You will pay more in taxes, in real terms, than you’re likely to take out.

The report notes that Australia has run deficits for the past six years. This is unsustainable, as paying back these debts will drag on the ability of younger generations to spend on consumption.

There are not too many places to run and hide from this, other than:

  •  The young pay more taxes than previous generations (but raising the tax/GDP ratio too much becomes counterproductive).
  • Slash Government services to the bone, including pensions and healthcare for older Aussies (but no-one wants that, either).
  •  Tax concessions for the asset-rich are curtailed, and housing market equity is traded for tax-dollars (ouch). That’s even less popular than the 1st two options.

The Grattan report identified a politically fraught way to rebalance the generational bargain. “It is likely that large savings could be made if owner-occupied housing were included in the means test for the Age Pension, but with a government sponsored home equity release scheme for those who are asset rich, cash poor.”

In other words, if you live in a $2 million home and receive a full pension, the government would replace your pension with an annuity that entitled taxpayers to recoup their outlay by taking a percentage of the property’s value when you move to a higher place. (Now it’s been officially denied by all sides – watch this space).

Personally, I’m going with a 4th (way more optimistic) solution:

  • If we can increase productivity dramatically in the years ahead, real wages will be sustainably increased too, and we’ll be back to the old generational bargain.

Needless to say, right now, the rocky unemployment levels do speak for themselves. Whichever opinion you go with, we’re all in this together and every Australian has a vested interest in seeing it through. Irrespective of who is in power, the Government of the day needs to tackle this problem as soon as possible, as it only gets harder from here on in, and life for the new generation doesn’t come with a guarantee.