How big is Australia's generation gap? Here's what the evidence tells us

You're hearing it more and more: it's hard to be a young person.

That message will be at the heart of Tuesday's federal budget, which is set to contain sweeping tax changes framed as a way to bridge the generation gap.

While there is plenty of evidence of challenging conditions for millennials and zoomers, pinning down the size of the generation gap can be surprisingly difficult, especially when it comes to assessing the popular claim that today's young people could be the first in living memory to fare worse than their parents.

That debate will really kick off in the coming weeks. Before then, here's a guide to what economists say the evidence tells us — and what it doesn't.

The baby boom

Concern about generational disadvantage is not unique to Australia. It crops up in almost every advanced country.

The prosperous years of the 1950s and 1960s set off a "baby boom" that gave a generation its name. When that generation grew up, shifting social attitudes and the rise of women in the workforce saw them start their families later and have fewer children.

A large generation followed by smaller ones has resulted in a "greying" of rich countries. Migration of young people has offset this a little, but health improvements have also meant longer lives and a demographic "bulge" of retirees.

The consequences of this were featured in the federal government's first Intergenerational Report, an initiative of then-treasurer Peter Costello, published in 2002.

"A steadily aging population is likely to continue to place significant pressure on Commonwealth government finances," it read.

"If policies are not adjusted, the current generation of taxpayers is likely to impose a higher tax burden on the next generation."

The prediction has played out. 

In 1975, there were seven working-age people for every retiree, but today there are four. This leaves fewer working-age taxpayers to fund services for a greater number of retirees, who also have higher health and care costs.

It has also strained the "social contract", the idea that people pay taxes throughout their working lives and are supported in retirement.

The net contribution of working-age people to the budget — accounting for taxes and government payments — has increased in recent decades, and at the same time, the net flow to retirees has increased dramatically, a recent ANU analysis has found.

Those are per-person figures, even before taking into account the fact that there are more retirees for every worker.

In summary, a small number of young people are paying more and a large number of old people are receiving more.

The authors argue this is not due to any specific policy change, but because policy settings designed for the old world have not been updated, especially Australia's heavy reliance on taxing wages.

"Unless Australian society wants to explicitly favour older Australians, policies should be considered that reduce payments to [them] and that shift the tax burden away from younger Australians towards older Australians," the authors wrote.

Riding the wealth wave

If population is one part of the puzzle, wealth is another — especially as it relates to housing, perhaps the most obvious part of the generation gap story.

A pair of papers by the Grattan Institute in 2014 and 2019 highlighted the growing wealth disparity between young and old, finding that while the wealth of older households had grown 50 per cent in the early 2000s, wealth for those under 35 barely moved.

The Grattan Institute found that the two main drivers were the growth in house prices and the introduction of compulsory superannuation.

The papers also cited early evidence that the incomes and wealth of millennials had not yet pulled ahead of their predecessors, leading the authors to warn that millennials risked being the first generation in a century to "emerge from young adulthood with lower incomes than the one before it".

Worse off, or late bloomers?

Research by the e61 Institute based on more recent data reached a more sceptical conclusion.

It found that while income growth had slowed for people in their 20s, it had remained stronger for those in their 30s and 40s, labelling this a case of "delay rather than decline".

"The most likely scenario is that younger generations will still earn more, but they will do so later in life," they wrote, also predicting that delayed home ownership would be offset by bigger super balances in retirement.

The authors argued the most important factor was whether Australia's economy would keep growing.

"If growth stays strong, each generation gets more in benefits than it put in via taxes. That assumption is now in question," they said.

"The question is not whether a particular generation does better or worse than another, but whether the system itself still works in a different economic environment."

The housing theory of everything

Generation-wide trends treat successive generations like strangers, bound together only by taxes and economic conditions. The fact that they are families, which often pass wealth across generations, has different implications.

The Grattan Institute argued that the combination of inheritances and the so-called "bank of mum and dad" would "exacerbate inequality", finding that the biggest cross-generation transfers tended to go to the already wealthy.

A similar conclusion was reached by e61, which argued that inheritances turned an intergenerational problem into a problem "within the next generation" because it would "flow unevenly".

Once again, this is seen most acutely in housing.

In the last 25 years, house prices have grown roughly fivefold while incomes have roughly doubled, making both deposits and mortgages more expensive for young people while also giving older home-owners a windfall.

Exacerbating this dynamic, both the Grattan Institute and e61 found that older Australians were holding onto their wealth or even increasing it in retirement, also giving them more to pass on to their children.

The ANU academics also found housing accounted for "a significant share" of the responsibility for the growing generation gap, coming "at the expense of younger Australians".

All three advocated for building more housing, a goal pursued by federal and state governments in recent years.

Capital gains tax and negative gearing

Economists are more divided on whether changes to the capital gains tax and negative gearing, which the government is set to pursue, will improve intergenerational inequality.

But most agree that if the changes are grandfathered, any intergenerational redistribution will be undermined.

"It makes a huge difference whether the changes are retrospective or not," Centre for Independent Studies chief economist Peter Tulip told ABC Radio National yesterday.

"The big capital gains that have occurred are in history, so it's a question as to whether you can recoup those or not. That's a more controversial policy than Labor took to the 2016 and 2019 elections."

The government is expected to grandfather changes to both negative gearing and the capital gains tax, at least in part, in next week's budget.

It has also ruled out making changes to the tax-free status of Australians' own homes, which the Grattan Institute, e61 and ANU academics all say accounts for a significant share of the generational divide.