19 April, 2024
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The Stats Guy: Inequality is on the rise, how will Australia react?

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Read any description of the Australian people and you will quickly see us described as being an egalitarian bunch. It’s well and truly a core part of our collective national identity. We believe in the fair go and meritocracy.

Collectively we have a strong cultural aversion to arrogance or displays of excessive wealth. We even coined the term “tall poppy syndrome” to describe our deeply rooted instinct to cut down anyone we perceive as being boastful.

A look at the data suggests that we keep moving away from our egalitarian ideal. Our rich and poor cohorts keep drifting apart. We are getting more unequal by the day.

I showed data to this effect and explained how consumer markets reacted to such changes in previous columns but today we will focus on a report by ACOSS (the Australian Council of Social Service) and UNSW Sydney.

For all the visual learners, I handpicked my six favourite charts from the report.

The longitudinal data in the report shows shifts from 1999 to 2019. Since 2019 we lived through a pandemic and things have got only more unequal since.

I like the idea to only look at data up to 2019 because nobody can simply blame the pandemic for the outcomes in question.

Wages of the rich grew at faster rates than wages of the poor. A general pattern becomes apparent here. The poorest cohort (lowest 20 per cent) suffers economically by the sheer fact of being the poorest cohort, but their income grew at rates similar to the richest quintile (highest 20 per cent). It’s the middle that fell behind the most. The middle-class keeps shrinking.

Source: ACOSS

Income inequality is related to but different from net wealth inequality. The top 20 per cent ($3,240,000) are 90 times wealthier than the bottom 20 per cent ($36,000).

This is why I have argued in the past that measuring things in median terms in an environment lacking a strong middle is silly. A median house will be forever out of reach for the bottom 20 per cent while the top 20 per cent look down upon such a house.

Source: ACOSS

Let’s disregard wealth quintiles for a second. Where is Australian household net wealth stored? The family home (38 per cent) and superannuation (22 per cent) are the most important stores of wealth. Logic dictates this is where policy tackling inequality should aim at.

Source: ACOSS

Now let’s look at the same data but split into wealth quintiles. For the middle 20 per cent, the family home makes up half of the net wealth. Once you’ve scraped enough money together to become a homeowner you can move your way up the ladder.

If you want to tackle inequality, you need to be brave enough politically to tackle the housing affordability issue. I see modest political appetite for such reforms for the first time in my 16 years in this country.

While we are at it, let’s quickly (and superficially) discuss the role of superannuation for our net wealth.

Quick recap: Superannuation exists so that we save enough money to pay for our own retirement. In the 1990s, some forward-looking politicians realised that as the nation ages, we couldn’t finance a pension system for all. So, we put a system in place that forces (we have to put roughly a tenth of our income into our nest egg) and encourages us (generous tax cuts for money that sits in our super) to save money for retirement.

There is no reason (other than our financial self-interest) for our super to be higher than whatever amount is high enough to disqualify us from receiving a public pension.

I very much expect super reforms to limit how much money we can throw into our super. That means a chunk of wealth of the wealthiest households gets taxed at a higher rate.

How much money was left in your super account when you died? Did you have a little bit left? We nailed it! Did you have millions left? We failed to tax you appropriately. We currently have plenty of wealthier households that have much more money in their super than they need for their retirement. I am all but certain that policy reforms are about to tackle that.

Source: ACOSS
Source: ACOSS

While everyone got at least a little bit richer, the richest 20 per cent took share of wealth not from the very poorest but the middle-class.

If we managed to shrink the wealth gap, the chart below would be reversed. The highest 20 per cent would lose share of wealth (not absolute wealth!) while the bottom 80 per cent would grow their share of wealth. This is a bit of an obvious statement but it shows just how important this chart is in measuring wealth shifts.

Source: ACOSS

The bottom 20 per cent suffering isn’t anything new. Now that the middle class feels short-changed too, politics better listen very carefully. This is a recipe for political tumult. It is very much in the self interest of the two big parties to tackle economic inequality.

We now established that when left unchecked wealth inequality will only intensify. It’s much easier for wealthier households to accrue and hold on to their wealth. As poor households pay an ever-higher share of their income for basics such as housing, they don’t have money left over to start investing.

We’ve seen in Figure 22 above that a large share of the total wealth for the bottom 40 per cent of households consists of the family home.

Taking the option of homeownership away from people the poorer households diminishes their total wealth. This is an issue for everyone, even the upper classes.

Homeownership in retirement is the best indicator that you will not suffer from poverty in old age. We will need to subsidise poor elderly renters through the public purse. Lower homeownership necessitates more public spending in old age. It’s much smarter to increase homeownership in the lower income brackets now than to deal with the negative consequences later.

If we don’t narrow inequalities voluntarily, there will come a time where the growing disadvantaged cohort corrects the system. We are not talking about the French Revolution and guillotines on the streets here, but we are talking about a radicalisation of the political system.

In a previous column I explained how we voted increasingly for third parties (anyone other than Labor or Liberal). The preferential voting systems makes this huge systemic shift a bit hard to spot but don’t be fooled. Since 1987 the share of first preference votes going to third parties rose from 2 per cent to a third of all votes. The two big parties are in danger, and they better wake up soon if they want to retain their stranglehold on power.

This short column certainly didn’t solve the issue of increasing inequality in Australia but at least we pointed to a few levers that we can pull to narrow the wealth gap.

Ultimately this is the way to adhering to the Australian ideal of giving everyone a fair go. Our collective goal must be to create an economic system that ensures that anyone putting in a 40-hour work week has a decent quality of life, any family on 1.5 incomes has a pathway to (humble) homeownership open to them, and that we stay clear of the American model of creating an underclass of the working poor. We don’t want the political and social divisiveness that comes with that.

I am cautiously optimistic that the two big parties are slowly catching on to this issue. Shifting housing policy away from counterproductive interventions like first home buyer grants towards supply-based solutions is a first important step.

Demographer Simon Kuestenmacher is a co-founder of The Demographics Group. His columns, media commentary and public speaking focus on current socio-demographic trends and how these impact Australia. Follow Simon on Twitter, FacebookLinkedIn for daily data insights in short format.

The post <i>The Stats Guy</i>: Inequality is on the rise, how will Australia react? appeared first on The New Daily.

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