Thomas Walker, economist and CEO of Think Forward, explains the rejection of an income tax levy to fund aged care.
An intergenerational bargain under strain
My work promotes the idea of an intergenerational bargain in Australia’s tax and transfer system, which defines the relationship between older, younger, and future Australians and our tax and spending priorities. Upholding the intergenerational bargain means that working-age taxpayers support older and younger Australians who aren’t earning an income from work and can expect the next generation to support them in the same way. The aim is a just distribution of resources between generations and over time.
Unfortunately, that bargain is under severe pressure. Notwithstanding a recent surplus, Australia’s fiscal position isn’t in great shape, with Budget deficits forecast for the next 40 years (Figure 1). To quote the Treasury in the 2023 Intergenerational Report, “The Australian Government debt-to-GDP ratio remains high by historical standards, long-term spending pressures are growing, and the revenue base is narrowing as the population ages”. This is very similar to the experience in other advanced Western economies, too.
Figure 1: Australian government past and forecast annual budget balance (%)
A significant driver of this Budget pressure is an aging population and the increased demand for health and aged care services. It’s worth celebrating that people are living longer, healthier lives, but if nothing major changes in our tax and transfer policy settings, these high costs will fall on younger workers. Younger generations will have to pay higher taxes or cut government spending to make the Budget work.
The Aged Care Taskforce
In 2023, the Labor Albanese Government set up an Aged Care Taskforce to consider this situation and find a solution. The responsible Minister, Anika Wells, appointed sixteen experts from across the aged care sector, including providers, unions, and service users. Excitingly, I was appointed to represent younger generations and the long-term view. In launching the Taskforce, Minister Wells said, “Given this work is intended to support future generations as they move into aged care, the membership also includes a young economist with a strong interest in intergenerational issues and inequality.”
Over 6 months, the Taskforce held seven full-day meetings, where we were presented with evidence and held robust discussions on the best path forward for funding aged care. A key discussion point was the introduction of a new income tax levy to fund aged care improvements, which a Royal Commission had previously recommended. Using my position on the Taskforce, I argued that it was intergenerationally unfair to fund the increase in aged care spending by taxing younger workers.
Why the levy would be intergenerationally unjust
Our leaders have long been worried about the budget impacts of an aging population. To reduce the cost to taxpayers, both conservative and Labor governments in the 80s and 90s introduced tax changes to encourage Australians to save to fund their own retirement rather than rely on a public pension, including generous tax concessions for putting money into personal superannuation accounts and capital gains tax discounts for investing in property and other assets.
These policies have undoubtedly been successful, with the median wealth of older households booming across recent decades (Figure 2). The problem is that this wealth accumulation has come at the expense of younger generations, particularly through speculative activity in the housing market, which has pushed homeownership out of reach for new entrants. We also find ourselves in a position where the tax concessions to support wealth accumulation are now costing taxpayers more than the pension would have done.
Figure 2: Change in real household wealth 2010-2020 by age range
As a nation, we’ve spent billions of dollars on tax concessions, which have made older Australians independently wealthy. To then turn around and ask for younger generations to fund all of their aged care costs via a new levy would be unconscionable.
Thankfully, the Taskforce’s recommendations reflected these intergenerational equity concerns. The levy idea was rejected. Instead, the Taskforce recommended that “it is appropriate older people make a fair co-contribution to the cost of their aged care based on their means”.
The Government’s response and lessons
On September 12, 2024, the Government announced their response to the Taskforce’s recommendations and unveiled a revamped system of funding for aged care. The Government agreed with the Taskforce, and a new income tax levy was rejected. Instead, older Australians with the means (i.e. financial wealth) will be asked to contribute more.
What was most pleasing was the lack of opposition or a scare campaign against the reforms, which have been the norm over recent decades on policies related to tax reform and addressing intergenerational wealth inequality. Much of the credit for this needs to go to Minister Wells, who worked with the conservative opposition to secure bi-partisan support. However, it also points to the power of intergenerational thinking and dialogue in policymaking. By including younger voices on the Taskforce and using evidence to clearly lay out the wealth dynamics between generations and the long-term injustice of a new income tax levy, the case was easier for the Government to make. So unusual was the outcome that the Australian Financial Review said of the policy announcement, “reform is a word too easily bandied about these days, but this is worthy of the moniker”.
The job of restoring intergenerational equity to Australia is certainly not done, but the Taskforce and intergenerational reasoning for the reform package provide a case study for successful intergenerational dialogue and thinking in policymaking. We now want to introduce similar thinking to other policy areas, including tax reform, housing, and university education funding. We hope other Ministers will join us in using intergenerational frameworks to break through the difficult policy deadlocks that have been holding back meaningful reform for too long. That is the power of intergenerational thinking – it helps us to overcome short-term politicking by lifting our sights to the future.
Help us to be able to do more
Now that you’ve reached the end of the article, we want to thank you for being interested in IF’s work standing up for younger and future generations. We’re really proud of what we’ve achieved so far. And with your help we can do much more, so please consider helping to make IF more sustainable. You can do so by following this link: Donate.