Dear Boomers, please, do the country a favour and stop spending.
First off, let me say of course, #notallboomers. I know plenty of older Australians who are still renting or working, and many of you are struggling to get by.
But many of you are not in a pinch. You are likely to own your home outright, and have a nest egg that’s growing as interest rates have risen.
As a collective, over-65s increased spending by 6 per cent year-on-year to September, while inflation rose by 5.4 per cent.Credit: Michele Mossop
That means more money to spend, and I know you have worked hard for the right to do so.
A recent report from CommBank iQ showed that spending behaviour varies quite markedly between generations, and you Boomers have picked up spending.
As a collective, over-65s increased spending by 6 per cent year-on-year to September, while inflation rose by 5.4 per cent. And that lift in spending was for almost everything, from home insurance to dining out.
I know dining out is fun, and you want to treat your children and spoil your grandkids this holiday season. But right now is not the time to splurge.
Let me explain why.
The cost-of-living pressures that have made near-daily headlines since early last year do not affect us all equally. Take interest rates for starters.
When the Reserve Bank lifts the official cash rate – as it has done 13 times since May last year – commercial banks pass those rates on to customers, lifting mortgage interest rates, and also (albeit with more of a lag) rates on saving accounts.
So households with mortgages face ever-increasing monthly repayment bills. On an average $600,000 loan, the RBA’s increases since last year would have added $1600 a month to repayments.
The flip side is that those rainy day funds are also accruing more interest. RBA governor Michele Bullock said higher interest rates should encourage those with the means to keep saving, rather than spend that cash. But the central bank’s own research shows households have pulled back their rate of saving.
This means that while roughly a third of households are dealing with higher mortgage repayments, the third of households that own their homes outright aren’t affected and are to likely be benefiting from higher interest rates on savings.
(An important aside, rents have also skyrocketed, but that is less about higher interest rates and more about an ongoing lack of available properties. Those increases are really hitting the budgets of the predominantly younger third of Australians who rent.)
There’s also a mismatch in how inflation affects different age groups.
Independent economist and self-confessed Boomer Chris Richardson says wages have not kept pace with inflation, so wage earners are losing out. Personal income tax payments have also risen, partially through increased hours worked but also because earners no longer have the low-and-middle-income tax offset.
Richardson says while there are wage earners, people with mortgages and lower-income people across age brackets, younger people were predominantly affected by the drop in real wages and higher mortgage payments, while older people were less likely to face those burdens.
“The pain that we’re seeing in borrowing costs and taxes and spending power of wages is all disproportionately hitting younger Australians,” he says.
“Bottom line is yes, if we’re trying to share the pain, the pain is not shared.”
So this brings me back to the spending problem.
Now not all spending is frivolous – home insurance bills have absolutely skyrocketed and vehicle insurance is also pricier. As we age, we inevitably need more medical treatment, which comes at a cost.
It’s all the other non-essential spending that’s the issue. Why? Well, as the RBA governor said last week, local demand (that is, local spending on goods and services) remains strong and is outstripping supply, which means prices can continue rising. That demand and supply imbalance is helping to keep inflation high across a broad range of areas, Bullock said.
The central bank wants to get inflation back down to its 2-3 per cent range by the end of 2025 (it’s currently at 5.4 per cent).
Persistent, strong demand would keep inflation higher for longer, and Bullock said the central bank won’t be shy about using its “blunt tool” of raising interest rates further in order to keep inflation on its downward trajectory.
Other generations have cut back spending.
Gen Xers, faced with higher household expenses but benefiting from higher incomes and some savings, increased their spending over the last year in dollar terms but were buying less with inflation taken into account, according to the CommBank iQ report.
Under-40s spent less year-on-year even without accounting for inflation, and 25- to 29-year-olds pulled back the most. They even cut their spending on non-essentials.
What I’m saying, dear Boomers, is that you are a big part of the strong economic demand problem.
Richardson says the Reserve Bank can’t level the spending field. The government’s potential levers such as a higher tax on superannuation earnings (beyond what the government has already announced on earnings over $3 million) are both complicated and political dynamite.
That means no one can force you to stop spending (unless your kids or grandkids forcibly pry your credit card out of your hands). It also means Bullock might need to keep her foot on the economic brake for longer, and raise interest rates further next year.
While that might not be bad news for you directly, it’s terrible news for us: your children and grandchildren who are struggling with a combination of backward real wages growth, higher mortgage repayments or rents, and the increased cost of essentials.
And I know I said last week that Black Friday sale shopping shouldn’t give the central bank any extra reason to raise interest rates, but after Bullock’s comments, I think we could all afford to be restrained in our holiday spending.
Like I said earlier, I know you’ve worked hard and earned your right to enjoy your retirement, but if you could hold off any major purchases for the next few months, we younger folk might be able to thank you for helping avoid further rate rises.
Ross Gittins is on leave.
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