‘Genius’ shield for millennials’ retirement

The Intergenerational Report, to be released by the government on Thursday, will reveal that while spending on the aged pension will decline over the next 40 years, superannuation tax concessions as a proportion of GDP are projected to increase in its place.

With projections twice as many Australians will be 65 or over by 2062-63, and the number of people aged over 85 to triple, the government will spend less from the public purse in supporting retirees thanks to the “intergenerational genius”.

The number of people on the age pension is expected to fall by 15 percentage points as super balances increase to almost 220 per cent of GDP – up from 116 per cent currently – within 40 years.

As it stands, Australians with superannuation balances under $3 million enjoy a 15 per cent concession, while recent changes mean that from 2025-26, the concessional tax rate applied to future earnings for balances above $3 million will be 30 per cent.

With those changes built into the long-term estimates, the proportion of GDP spent on tax concessions is set to increase from around 1.9 per cent in 2022-23 to 2.4 per cent in 2062-63, while spending on the age pension is set to decrease from around 2.3 per cent of GDP in 2022-23 to two per cent by 2062-63.

Treasurer Jim Chalmers faced backlash when he announced changes to the super tax concessions scheme, but at the time warned it was necessary to claw back more revenue.

In releasing the report, Dr Chalmers said thinking long term – as the Keating government did when it introduced superannuation – was key to protecting the budget long term.

“Our population is ageing but our spending on the age pension will fall – that’s the intergenerational genius of super,” he said.

“Super is delivering on its promise – providing a better retirement for more Australians and a better outcome for the budget over the next 40 years.

“Labor built the super system and we’ve always worked to protect it and make it stronger.”

As it stands, the age pension is one of the governments largest spending programs, and the IGR is set to show the spending decline – thanks to the superannuation system introduced in 1991 – will have a major impact on the budgets long term sustainability.

By 2035, Australia is projected to have the lowest public spending on pensions among OECD countries as a share of GDP. By the 2060s, Australia is set to be around one-fifth of the OECD average for pension spending.

While the decline in spending on the aged pension is sure to be welcomed, the IGR more broadly is set to be a mixed bag.

The IGR will show that the five fastest growing areas of government spending – the NDIS, health, aged care, defence, and interest on debt – will go from one-third of Australia’s GDP to one-half.

With broad expectations the 2022-23 financial year will have ended with a surplus north of $20 billion – with the final figure be confirmed in September – the report will paint a gloomier picture of the economy over the medium- and long-term.

While the Treasurer is expected to spruik the budget repair work done by the Albanese government in the last 15 months as having taken some pressure off the long-term, he’s set to blast the Coalition government for not doing more in the preceding decade.

And, off the back of sluggish growth, the IGR is set to show that Australia’s economy is facing an uphill battle.

The short-term economic outlook is gloomy, but with no changes to the Treasury’s outlook since budget, Australia is not expected to experience a recession. But the combination of global uncertainty – particularly arising from China, coupled with the lagging impact of rising interest rates, are set to significantly slow down the economy in the year or two ahead.

The best estimates are flat growth over the next nine to twelve months, and unlike a spike in unemployment usually preceding a recession, the government is largely expecting a more general softening of the labour market in line with projections as inflation moderates.

Beyond that, Dr Chalmers says the report will “illuminate a path forward” for the next forty years.

And, while the IGR is set to pave the way for Australia to have a “mature conversation” around tax reform, as Nationals leader David Littleproud suggested; Dr Chalmers is set to back in the three areas of tax changes already being pursued by the government – the changes to superannuation tax concessions, the petroleum resource rent tax, and a crackdown on multinationals.

While the government is not anticipating making any further tax reform announcements during this term of government, it thinks it’s inconceivable to go 40 years without making some change.