The kids will be alright with a generational future fund

Tension between the generations is not new. The young over throw the ideas of their elders and recast them as their own. But intergenerational tension, based on inequities and access to economic opportunities, is an entirely different and far more serious matter.

We need to start an intergenerational war chest for future generations to fund infrastructure and human capital projects of their choosing.

There are about 5.8 mature age people aged 55 and over in the population. Around 2 million of them are working fulltime (1.3 million) and part time (700,000). Of the 3.8 million not in the labour force, 2.2 million currently access the aged pension. We can expect another one million boomers to draw on the age or disability pension over the next 20 years.

The so called 'generation Y' and those born after them, will be taxed to build infrastructure projects and support the ageing boomers while saving for a home and paying off HECS debt. Where's the fairness in that?

Last year the Australian Parliament voted against establishing a national intergenerational future fund while South Australia and Western Australia took steps to establish their own future funds.

The Barnett Government will build a $4.7 billion nest egg by 2032 to be spent on roads, ports and medical research to spread the benefits of the mining boom to the next generation.

One would have thought that by looking at Europe and its sovereign debt issue that an intergenerational future fund (or sovereign wealth fund) would be a 'no brainer'.

Look at Norway. The Norwegian Sovereign Wealth Fund which was started in 1990 is now worth $US600 billion. Its income comes from taxes on oil companies, exploration licence fees and dividends from the state-owned Statoil. Norway is thinking of future generations.

Even though older workers are working longer, the fiscal gap between government revenue and outlays to fund health and pensions will still be in the order of 2-3 percent of GDP.

According to the 2010 Intergenerational report, 'Australia to 2050, future challenges', the proportion of working age people is projected to fall, with only 2.7 people of working age to support each Australian aged 65 years and over by 2050. In 1970 it was 7.5 people.

There has been little discussion of demographic workplace contraction, so I have listed three issues, which will hit business practice over the next 30 years.

Wage inflation

For the last 20 years, Australia has been very successful in keeping wages from breaking out. Yet this time around it will be employers not workers behind the push to increase salaries to hunt for talent. Wage inflation by sector will rise and it will push up the CPI. How much? We don't know but an increase of two percentage points would not be far off. Inflation is a cancer that kills savings and value.

Pirating

Pirating is fun (avast!) until someone poaches your head of IT or someone who is the 'go to' person of the organisation. If recruiters and employers can't get the people they need, they pirate. Over the next 30 years as the post war generation retires, poaching will become an epidemic.

Offshoring

Put your managing directors hat on, pull out the SWOT plan and look in to the future. He or she can see labour shortages. Not so in Thailand, Singapore, India or China. Because the Government has failed to correctly design and implement it's older job seeker and employer suite of programs, most employers are still at the 1970s default position – older workers are a risk, not an asset. The services and manufacturing sectors can see the writing on the wall. Not only can they access cheap labour offshore but also they can see a shortage of workers and increased costs for the workers they can attract onshore.

Population growth is projected to slow to an average annual rate of 1.2 per cent over the next 40 years, slightly lower than the 1.4 per cent average annual rate of growth over the previous 40 years. Proportionately, fewer people will have to carry more of the tax load to pay for boomer public healthcare needs.

A prudent and precautionary principle should be to assume that future generations will not have a significantly higher capacity to contribute to government coffers and therefore should not have a higher tax burden passed on to them.

Young people have watched as the generations before them have been showered with one-off senior's payments, family payments, baby bonuses, tax-exemptions on family homes and superannuation tax breaks while house prices have skyrocketed.

They rightly assumed that they'd earn these government entitlements too. While Australia will remain a strong trading nation, structural changes in the labour market and falling multifactor productivity will force future governments to be more circumspect about welfare payments.

While inheritances will certainly help some, the average life span of the boomer generation is about 83 years for men and 85 for women. The children will be well in to middle age before any largesse comes their way.

According to the Association of Superannuation Funds of Australia, the average retirement payouts in 2009-10 were around $198,000 for men and $112,600 for women. The median figures are much less. It is clear that many retirees (especially in the 1945-54 cohort) will rely on the age pension.

Even if we accept that tomorrow's children may be richer on average than today, the costs of caring for their parents and grandparents will also be greater. The principle that such costs should be borne by those who generate them, underpins Australia's world-leading superannuation system. It is also the basis for generational equity.

Are future generations always richer? One need only look to youth unemployment levels in Spain, Italy, Greece and Portugal. They are in the order of 40-50 per cent. Their future is bleak. We have to go back to the 1950s (when there was war debt in play) and before that, to the 1930s, to see debt levels in Europe this high. The last time debt burdens were this high, not a single country in the world had a median age above than 36.

Australia should follow Norway's lead and plan beyond the election cycle to ease the challenges of foreseeably worse-off generations.