If baby boomers want choice in their retirement, they should be prepared to spend their own money.
Earlier this month, Germany’s ruling Christian Democrats proposed a generation-specific tax to finance the welfare costs of retirees, under which young people pay while baby boomers collect.
Like Australia, Germany and the rest of Europe is facing an intergenerational challenge caused by increased life expectancy and the largesse of the welfare state.
The important difference is that by avoiding collapse under the pressure of the global financial crisis, Australia has been afforded the time, and opportunity, to start fixing its lot. We should be learning from reform in other countries, such as the Dutch experience in reforming universal healthcare.
Joe Hockey’s recent speech to London’s Institute of Economic Affairs might come to be seen as the start of mature policy reform, though the way many Liberals ducked commenting on the proposal and hostility from the government are not encouraging.
As the Treasury’s three inter-generational reports explain, an ageing population will place considerable strain on public finances as the ratio of taxpayers to welfare dependents declines.
The latest report from 2010 shows health and aged care expenses will roughly double and pension rates will increase by around half by 2050 as a percentage of GDP.
Concurrently the number of people aged 65 and over will more than double in nominal terms and as a percentage of the population.
The most concerning statistic is that the number of people aged over 85 will more than quadruple as a percentage of the population.
They’re the least likely to work and most likely to add considerable costs to the health budget.
A Productivity Commission analysis found 20 per cent of a person’s lifetime health expenses occurred at the end of their life.
As Hockey put it: “An inadequate level of revenue has forced nations into levels of indebtedness that, in an age of slowing growth and ageing population, are simply unsustainable.”
We know we have a cost problem but behind it we also have an intergenerational political problem.
Baby boomers have financially contributed to a welfare and transfer system on the promise that it will be there for them when they need it.
As a result, those now 30 and younger are expected to spend their working life paying pensions for the under-superannuated and the health and aged care costs of baby boomers.
Concurrently, the same working generation is paying their superannuation costs and increasingly, health insurance. Gen Y’s incomes are also strained by the financial overhang of the concentration of wealth in the hands of their parents and grandparents.
The situation is particularly prevalent in property where boomers have invested or can outbid those younger for housing stock.
And it will only be exacerbated by the government’s excluding the family home from calculating access to aged-care services.
Nostalgia has trumped economic reality as homes sit vacant for non-returning owners, reducing supply. Meanwhile, rising house prices mean those who inherit homes, particularly in inner cities, will enjoy a wealth advantage against those who do not.
And this further contributes to young families being priced out of the market because of housing under-supply.
Unless Australia follows the disastrous European debt path, we are expecting a whole generation to pay for a structurally flawed (if not quite a Ponzi-like scheme) welfare and transfers system that won’t exist when it is their “turn” to “collect”.
Calls for a rainy day sovereign wealth fund won’t solve the problem: we can’t accumulate enough and it locks capital away, for the state to use, not for people to spend on their own needs. Only comprehensive public sector reform will, by putting responsibility back on to individuals.
Structurally, the problem with our welfare and public services is that the objective of achieving universal access has equated to the government’s financing and providing services.
Government service provision is riddled with inefficiencies and cost. To sustainably provide a universal safety net requires breaking the link between government financing and service provision.
There’s plenty of evidence of how it can be achieved.
Monash University’s Just Stoelwinder wrote about the reforms to the Dutch healthcare system in his Australian Centre for Health Research paper, Medicare Choice? .
Stoelwinder says the Dutch reformed their universal healthcare system towards compulsory insurance with the government providing equalisation payments.
These payments provide an appropriate safety net for the poor or those with specific health needs.
A key step for the Netherlands was for the government to get the population to realise that healthcare is expensive, and that preserving universal healthcare would require individuals to shoulder some of that cost.
Alternatively, Australia could consider a system of individual health savings accounts, complimented with Netherlands-style equalisation payments.
Such reforms would mirror the objectives of moving from universal state-sponsored pensions towards our individual superannuation system: universality remains, but responsibility shifts.
Widespread reforms requiring ageing Australians to continue contributing to their safety net might appear frightening but the alternative is growing more dependent on the charity of a generation to a welfare system they don’t expect to enjoy themselves.