Oct 1 GST increase: Transfer from the old to the young

There has been a large number of people, specifically Gen X and Gen Y people, saying that baby boomers are selfish and have eaten up all the resources for themselves.

The case has been that baby boomers took free education, then when they got jobs they cut taxes and charged their children for education, then they purchased multiple houses and charged their children rent.  Sure, this is all probably true.

However, today GST has gone up and income tax has fallen.  This implies that younger people, who generally borrow to build up human and physical capital, have experienced a lifetime tax cut.  Meanwhile, older people who have assets and net savings have experienced an increase in their lifetime tax burden.

Yet have we heard any more rubbish about “intergenerational war” and transfers between generations in the lead up to this?  Well no.

Ultimately, the idea of intergenerational transfers has been overplayed.  New generations are benefiting from the established capital stock and technology – in fact if we care about each generation equally we would WANT to transfer resources backwards in time.  I get the feeling that Gen X and Gen Y (my generation) are simply a little bit to argumentative, and would like to pretend that they are being horrendously wronged – this makes sense to me, as I happen to be very argumentative myself 😉

There is a good article on the issue here, by Nigel Pinkerton from Infometrics.

  • dragonfly

    I just cannot agree with you on this one Matt. First up, I am a baby boomer myself, born in 1961 (so at the tail end of that generation). I first became aware of issues of intergenerational inequity in the late 1980s, when I noticed that the retired always seemed to be the recipients of special subsidies and concessions, in spite of having no dependents and usually with no mortgage or rent to pay either. Later, I read a book called Selfish Generation by David Thomson, which outlined how this had come to be. Some of his methods and calculations have been criticised, but my feeling has always been that he was broadly correct. Of course, he was talking about the generation that preceded the baby boomers. In those days I believed that there was something especially selfish about that particular generation, but I have since realised that it is to do with human nature, combined with democracy. Human beings are selfish, and if they are given great voting power courtesy of their numbers, they will vote for resources to be transferred to themselves from others. And so I see now that my generation is easily as bad as the previous one.

    No offence (and I could be wrong) but I suspect that you and Nigel Pinkerton are relatively privileged member of Gen X and Gen Y, and life no doubt does look good for you. But the sense I have, looking at my children (aged from 5 to 23, also middle-class and well educated) is that the outlook for them is more uncertain than it was for the average baby boomer. Whatever the truth about relative incomes (as discussed by Nigel Pinkerton), I am pretty sure it is going to be much more difficult for future young people to buy a house and raise a family than it was for my generation, or for the generation that preceded mine.

    I used to think that the unfair directing of resources to the elderly would have to stop for reasons of unsustainability. Well, it’s unsustainable now and it still hasn’t stopped. It occurs to me that free trips to Waiheke and over-the-top end-of-life care for the elderly may be is sustainable if you don’t make the terrible mistake of frittering away tax dollars on stuff like preventing rheumatic fever in children.

    Of the OECD countries, NZ has one of the lowest levels of poverty for the elderly, and one of the highest levels of poverty for children. That says it all, really.

  • “I just cannot agree with you on this one Matt”

    That is fair enough – it is definitely an open issue.

    “Human beings are selfish, and if they are given great voting power courtesy of their numbers, they will vote for resources to be transferred to themselves from others”

    Oww, I don’t disagree with this – in fact I did say that there has been a transfer backwards. This is very true.

    “No offence (and I could be wrong) but I suspect that you and Nigel Pinkerton are relatively privileged member of Gen X and Gen Y, and life no doubt does look good for you.”

    No offence taken. We of course both work together as economists.

    “Whatever the truth about relative incomes (as discussed by Nigel Pinkerton), I am pretty sure it is going to be much more difficult for future young people to buy a house and raise a family than it was for my generation, or for the generation that preceded mine.”

    See this is an interesting point. How much of the decline in household formation and marriage has to do with higher relative prices, and how much has to do with a change of preferences in the current generation? I would say that the entire structure of society is very different – even if houses were much cheaper, our generation would be behaving very differently to prior ones.

    And it is a fact that objective living standards for the current generation are a lot higher than for previous generations – what people can afford, and the quality of goods, is significantly higher.

    “Of the OECD countries, NZ has one of the lowest levels of poverty for the elderly, and one of the highest levels of poverty for children. That says it all, really.”

    Is that relative poverty? If so, it captures the distribution of income – but not the fact that the current generation gets to experience higher levels of technology and general income.

    I recognise what you are saying – my mother constantly complains about the fact that tertiary education is no longer free and the high level of house prices because of the backwards distribution this implies.

    However, we have just seen a situation where there IS a significant redistribution from the asset rich old to the asset poor young – and no-one blinked an eye-lid or rose the idea of “intergenerational equity”. This is the fact that I found inconsistent most of all.

    We can legitimately disagree regarding whether the current direction and size of the redistribution is fair – it is a value judgment. However, it is a fact that we have just seen a distribution to the young, and I felt that needed to be raised in that context – given prior discussions on intergenerational equity.

  • It is interesting to see how different tax strategies affect different generations. I’m the politicians are doing their best to balance these effects to win the most votes. They are not going to purposely neglect one generation at the risk of losing so many votes.