economic inequality australia essay

Economic Inequality in Australia

David Donnison discusses the phenomenon of increasing income inequality, which has led to declining standards of living for a significant portion of Britain’s population. The author claims that the widening gap between the rich and the poor has introduced challenges regarding access to basic health care for most Britons (Donnison 2013, p.1). The sustained economic growth in Australia for the last twenty years has led to an increase in earnings in various sectors, which has translated into improved average income in the country. Although Australian low-income earners have experienced a 3 percent annual growth in their earnings on labour, the country has had an expanding income inequality from around 1995 (Greig & Lewins 2003, p.103).

Reports on the evaluation of the top income earners in Australia illustrate that the group owes a significant portion of the national income. Income inequality in Australia has largely been a factor of capital earnings rather than labour inequality, which has been on a decline since 1999 (Tiffen & Gittins 2004, p.139). Increase in employment opportunities for Australian low-income earners has helped to offset the increase in wages for the top-income earners (Jamrozik 2009, p.73).

Economic analysts agree that the inclusion of capital and other income in the calculation of households’ income skews the distribution of income and offsets the reduction in income inequality due to increased wages for low-income earners. Direct government taxes and payments have played a crucial role in reducing income inequality in Australia because the taxes on top income earners contribute to the benefits and services provided to the low- income earners (Salverda 2014, p.115).

Although the tax and transfer system in Australia has played a key role in reducing the tax burden on the poorest of the population, the alteration on the income inequality due to the differences in investment income between the top-income earners and low-income earners remains a factor of concern. There is the need for the Australian government and concerned stakeholders to shift their focus on tax and transfer systems towards facilitating access to public services in health, education and other sectors, which will help to increase opportunities for personal and professional development. ABS report on the distribution of wealth and income in Australia illustrates that 20 percent of Australian wealthiest households has a household net worth about 68 times the household worth of the poorest 20 percent. On the other hand, 20 percent of Australian wealthiest have a disposable income net worth about 5 times the disposable income of 20 percent of the poorest (Stilwell & Jordan 2007, p. 87).

David discusses the importance of responsive social security measures to address basic needs such as access to health for low-income earners. He highlights the importance of government intervention to cushion low-income earners from the costs of accessing basic needs. Australian welfare programs constitute of income support, supplementary payments, accommodative tax and transfer systems (Chenoweth & McAuliffe 2012, p.121). The age pension for Australians above 65 years exempts worker from contribution to the kitty. The pension scheme focuses on maintaining the standards of living of the retired people and is subject to testing to establish capital earnings of the applicants. While the average wealth for the old people is likely to be high, the group’s earnings on labour are lower than the income for young people.

Youth allowance for Australian students, apprentices and job seekers between 16 and 24 years has been pivotal in addressing the income inequality due to capital earnings because the young people have not accumulated funds to allow them to acquire assets to generate additional earnings. The inequality in wealth distribution in Australia arises because accumulation of wealth occurs over time. As people grow older, they accumulate significant disposable income to allow them to acquire assets and enhance their capital earnings (McLean 2013, p.49).

Disability support pension to help individuals who cannot work due to long-term disabilities to pay for necessities such as healthcare counters the effects of lost earnings. Austudy Payment contributes to the educational expenses of Australians above 25 years to improve their access to opportunities such as employment. Supplementary payments include rent assistance and pharmaceutical allowances, which support non-homeowners and costs of prescription drugs respectively. The design of the Australian welfare system focuses on minimizing the costs of living for the low-income earners giving them an opportunity to improve their capital earnings (Mendes 2003, p.149).

The concept of inequality in Australia is a distinct aspect in that it largely relates to discrepancies in wealth accumulation unlike the general case of income inequality in Britain. Accumulation of wealth occurs over time making the redistribution of wealth a challenging task in addressing the inequality on capital earnings. The most Australia reasonable approach is enhancing access to opportunities and funds to facilitate the accumulation of assets. The Australian government has adopted programs to assist investors through provisions of grants, training, project facilitation and exports. Australians can exploit the programs to improve their capital earnings, which would help to minimize the inequality in wealth distribution.

Reference List

Chenoweth, L & McAuliffe, D 2012, The Road to Social Work and Human Service Practice , 3rd edn, Cengage Learning Australia, South Melbourne. Web.

Donnison, D 2013, Some ideas for reversing Britain’s gross inequality. Scottish Review. Web .

Greig, A & Lewins, F 2003, Inequality in Australia , Cambridge University Press, Cambridge, UK. Web .

Jamrozik, A 2009, Social policy in the post-welfare state: Australian society in a changing world , 3rd edn, Pearson Education Australia, Frenchs Forest, N.S.W. Web .

McLean, I 2013, Why Australia prospered: the shifting sources of economic growth , Princeton University Press, Princeton, NJ. Web .

Mendes, P 2003, Australia’s welfare wars the players, the politics and the ideologies , University of New South Wales Press, Sydney. Web .

Salverda, W 2014, Changing Inequalities in Rich Countries: Analytical and Comparative Perspectives , Oxford Scholarship Online, Oxford. Web .

Stilwell, F. J & Jordan, K 2007, Who gets what? Analysing economic inequality in Australia , Cambridge University Press, Cambridge. Web .

Tiffen, R & Gittins, R 2004, How Australia compares , Cambridge University Press, Cambridge. Web .

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What income inequality looks like across Australia

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With affordable houses increasingly out of reach , wage growth slow and household debt high , Australians are certainly feeling poor. But how do they compare to their neighbours? New Census data confirms there’s a lot of variability in income.

The Census breaks the country up into 349 geographic regions (named in quote marks below), some of which cover more than one major town and some of which group related suburbs within cities. We examined 331 of these regions, excluding those containing fewer than 1,000 households.

The data show there are high levels of income inequality within these regions. A simple way to measure this is to look at the ratio of income between those who are well off (the top 20% within a region) and of those who are relatively disadvantaged (the bottom 20%) in the Census data. In Australia the weekly household income for the top 20% (A$1,579 per week) is 3.5 times the income of the bottom 20% (A$457).

The “Melbourne City” region has the most unequal incomes in Australia, where the top 20% have an income that is 8.3 times as high as those in the bottom 20%. “Adelaide City” (ratio of 5.5) and the “Sydney Inner City” (4.8) also have quite high levels of inequality.

Two of the poorest regions in the Northern Territory also have very high inequality. These are the vast region that encircles Darwin, called “Daly, Tiwi, West Arnhem” (ratio of 5.2) and the “East Arnhem” region (5.3).

However, there are regions with varying income levels, that also had relatively low inequality ratios. The region of “Molonglo”, in South Canberra (ratio of 2.2), “West Pilbara” in Western Australia (2.4) and “Kempsey, Nambucca” on New South Wales’ north coast (2.5) all have low levels of inequality.

For our analysis, we used equivalised household income. Equivalisation is a technique in which members of a household receive different weightings, based on the amount of additional resources they need.

The Australian Bureau of Statistics assumes that the first adult in a household has a weighting of 1, each additional adult a weighting of 0.5, and each child a weighting of 0.3. Total household income is then divided by the sum of the weightings for a representative income.

Incomes across Australia

For the whole of Australia, the equivalised median household income (the income in the middle of the distribution) is A$878 per week. The region with the lowest median income was “Daly, Tiwi, West Arnhem” in the Northern Territory, at A$510 per week.

However, several regional areas like “Maryborough, Pyrenees” (northwest of Ballarat in Victoria), “Kempsey, Nambucca” (NSW), “Maryborough” (between Bundaberg and the Sunshine Coast in Queensland), “Inverell, Tenterfield” (in NSW’s Northern Tablelands) and “South East Coast” in Tasmania all had median incomes of A$575 per week or less.

At the other end of the distribution, households in leafy suburbs of North Sydney – “Mosman” (NSW) had a median income of A$1,767 per week. Areas like “South Canberra” (ACT), “Manly” (in Sydney’s east) and the mining-dominated “West Pilbara” (WA) all had median incomes of A$1,674 or more per week.

We also looked at the extremes of the distribution. We define high income as those households with an income of A$1,500 or more per week. This equates to about 22% of the population. We defined low-income households as having an income of less than A$400 per week (about 14% of households).

Around 40% of households in the “Daly, Tiwi, West Arnhem” region were classified as being in poverty compared to around 6% in “North Sydney, Mosman” region. Conversely, around 60% of households in this region were classified as having high income, compared with only 6% of households in “Kempsey, Nambucca”.

How segregated are we within regions and cities?

While government policy is often delivered at the regional level, people live their lives at the local or neighbourhood level. However, the relatively disadvantaged and the upper-middle class are often segregated within these regions.

Richard Reeves of the Brookings Institute argues the segregation of the upper-middle class in Australia means this group “hoards” the benefits in the region they live in. Among the location advantages he lists are: access to the best schools, opportunities to network with the wealthy and powerful and the ability to disproportionately accrue capital gains on housing assets. To avoid this kind of “opportunity hoarding”, the rich and poor would need to be evenly spread within a region.

A simple way to look at this is through a “dissimilarity index”. In essence, this measures the evenness with which two groups are spread across a larger area. It ranges from zero to one, with higher values indicating a more uneven distribution and zero indicating complete mixing.

Looking at the distribution of the high income. Across Australia, the dissimilarity index has a value of 0.27. This means that around 27% of high-income households would have to move neighbourhoods to make the distribution completely even.

This varies quite substantially by region. “Far North” (encompassing Cape York in QLD) has a dissimilarity index of 0.42. “Auburn” (in western suburbs of Sydney, NSW) and “Playford” (on Adelaide’s northern fringe) also have quite large values.

Our richest regions tend to have the most even distribution of the wealthy, with “North Sydney, Mosman”, “Molonglo” and “Manly” having values of 0.06 or less.

“East Arnhem” has a very high level of concentration of low income individuals by neighbourhood, with a dissimilarity index of 0.70. The next two highest regions (“Katherine” and “Alice Springs”) are also in the Northern Territory, with index values of 0.53 and 0.55 respectively.

We can also compare the measures we used, to find out how they relate to each other. The following figure shows that the richest regions tend to be those with the highest level of income inequality.

However, as inequality goes up, there tends to be a greater concentration of low income households by neighbourhood (there’s also less of a concentration of high income households).

Have and have nots

It’s true that the level of income mobility is higher in Australia than it is in the US. However, Australia also has prominent examples of economic policies that disproportionately benefit the upper-middle class, such as the capital gains tax discount and superannuation tax incentives.

Australia also has a geographically concentrated income distribution, with the rich living in neighbourhoods with other rich people. The poor are also more likely to live in close proximity to people who share their disadvantage.

If Richard Reeves is right, and the spatial segregation of high and low income households reinforces inequality across the generations, then policies that encourage the mixing of different social classes in the same neighbourhood and region should be a way forward.

This article was put together with research assistance from Hubert Wu, Australian National University and Harvard University.

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Income and wealth inequality in Australia was rising before COVID-19

2020-09-02T00:00:00+10:00

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A new report by UNSW Sydney and ACOSS provides a baseline to measure the pandemic’s impact on an already widening income and wealth gap.

UNSW Social Policy Research Centre (SPRC) and Australian Council of Social Services (ACOSS) have released a new analysis of inequality in Australia pre-COVID-19, providing a baseline to measure the impact of the pandemic on income and wealth inequality.

The Inequality in Australia 2020: Part 1 – Overview report highlights the ameliorating effects of timely government policy responses, including increased JobSeeker and JobKeeper payments. However, it warns the pandemic’s long-term effect on income and wealth inequality will depend on how these policies evolve.

Using Australian Bureau of Statistics (ABS) data (2017-18), the findings show that, pre-COVID, the incomes of those in the top 20 per cent were six times higher than those in the lowest 20 per cent. That gap has widened since 2015-16, when the ratio was 1:5.

Data shows that, for the first time, average household wealth exceeded $1 million in 2017-18. However, the distribution of wealth in Australia was deeply unequal, with the average wealth of the top 20 per cent ($3,255,000) some 90 times that of the lowest 20 per cent ($36,000). Those in the lowest 10 per cent held $8000 in average net wealth, and the bottom 5 per cent held net debts of $5000.

Associate Professor Bruce Bradbury at the SPRC, the report’s lead researcher, says most Australians seem to think they are ‘middle income’, but middle incomes are lower than generally thought.

“In part, this stems from a confusion between average wages and average household incomes,” he says. “A couple with two full-time average wages ($82,000 each or $164,000 together) and two children is likely to think of themselves in the middle of the household income distribution. In fact, they are more likely to be in the second-highest fifth of living standards. If they don’t have children, they will be in the highest fifth of living standards.

“This discrepancy between perceptions and reality arises because many people don’t work full-time, average wages are greater than median wages and many households, particularly the retired, don’t have any people with earnings.”

Director of the SPRC, Professor Carla Treloar, says the report establishes a starting point to assess the impact of COVID19, high unemployment and government policies to protect incomes and jobs on the living standards of different groups in the community.

“This analysis is timely and important in setting a baseline against which we can measure the impact of the pandemic on income and wealth inequality in Australia,” Professor Treloar says. “Increasing inequality need not be an inevitable result of the current crisis. Whether we are ‘all in this together’ or driven further apart will depend on the severity and duration of the crisis and on the effectiveness of the national policy response.”

Dr Cassandra Goldie, ACOSS CEO, says timely action by the government to double the unemployment payment with the Coronavirus Supplement and create JobKeeper has temporarily raised the household incomes of people without paid work or at risk of losing their jobs.

“This report shows, however, that millions of people, pre-COVID, had very little by way of a financial buffer behind them. There is a real danger in now expecting people to spend down on their already meagre savings to survive. We need to support people’s incomes to prevent dramatic widening in both income and wealth inequality and the serious health, economic and social disadvantage that occurs.”

Dr Goldie says we have a choice about whether we prevent rising inequality from the COVID-19 crisis.

“A substantial, permanent increase in the JobSeeker Payment would ensure those who cannot get paid work can meet household costs. Well-targeted and jobs-rich economic stimulus could prevent a further increase in unemployment. Permanently removing liquid assets tests and waiting periods to receiving income support are also vital. Applied together, these measures will inoculate us against an increase in both income and wealth inequality and support our economic recovery from the pandemic,” she says.

The report also examines data on the impact of the pandemic and associated lockdowns on employment and incomes to explore the likely effect on inequality in Australia. It confirms the pandemic has had a stark impact on those in lower paid jobs. The average wage of people in the most affected industries is half that of people in least affected industries even before the pandemic. The majority of those affected by deep income losses are women and young people.

Key facts on income inequality

In 2017-18:

• The top 20 per cent of households have nearly six times the income of the lowest 20 per cent. This gap has grown since 2015-16 when the highest 20 per cent earned five times as much as the lowest 20 per cent.
• The average household disposable income for people in the highest 20 per cent of households is $4166 per week, more than twice the income of the middle 20 per cent ($1884 per week) and nearly six times that of the lowest 20 per cent ($753 per week).
• The main household income source across all households is wages and salaries (with 75 per cent of all income before tax), followed by 12 per cent from investments, 8 per cent from social security and 5 per cent from self-employment.
• Households in the highest 20 per cent receive almost two-thirds of all investment income (65 per cent), while those in the lowest 20 per cent receive over one-third (38 per cent) of all social security income.
• The unemployment rate stood at 7.4 per cent in June 2020 and is expected to rise to 10 per cent in December, assuming lockdowns are progressively eased. The outlook for employment and earnings is very uncertain.
• The industries most affected by the pandemic were twice as likely to employ workers with less than high school qualifications than the least affected industries, according to Melbourne Institute research. Average weekly wages in the most affected industries were less than half (46 per cent) of those in least affected industries, in part due to the high incidence of part-time employment in the former.
• To date, households in the lower half of the income distribution have benefited substantially from the JobKeeper and COVID Supplement payments, offsetting all or some of the increase in earnings inequality from COVID-19 and the lockdowns.
• However, from 28 September this income support is scheduled to be scaled back, with income support for people who are unemployed and the maximum rate of JobKeeper Payment both cut by $150pw. No commitments have yet been made to permanently increase the JobSeeker Payment when the Coronavirus Supplement is scheduled to end after 31 December – reducing payments for unemployed people, students and sole parents on the lowest incomes by another $125pw.

Key facts on wealth inequality

• Average wealth is relatively high and now exceeds $1 million for the first time ($1,026,000). Of this, 39 per cent is the main home, 21 per cent is superannuation, 20 per cent is shares and other financial assets, 12 per cent is investment real estate, and 9 per cent is other non-financial assets such as cars.
• However, wealth is distributed extremely unequally. The average wealth of the highest 20 per cent of wealth-holders is $3,255,000 – over 90 times the wealth of the lowest 20 per cent (with just $36,000).
• The wealthiest 20 per cent hold almost two-thirds of all household wealth (64 per cent), more than all other households combined.
• From 2003 to 2017, the average wealth of the highest 20 per cent grew by 68 per cent compared with 6 per cent for the lowest 20 per cent. This divergence has been driven by the asset types held by the top 20 per cent: investment property, superannuation and shares. Eighty per cent of financial assets like shares and property investment are held by the highest 20 per cent of wealth-holders.
• At the bottom of the wealth ladder, the most valuable asset holdings of the lowest 20 per cent are ‘other non-financial assets’ such as cars (48 per cent of their wealth holdings) and superannuation (38 per cent). At the top of the ladder, the wealthiest 20 per cent hold relatively less of their wealth in the main home (34 per cent) than those in the middle, and more of it in shares and other financial investments (26 per cent) and investment property (15 per cent).
• The average superannuation wealth of the highest 20 per cent is $496,000 – nine times that of the lowest 20 per cent ($58,000). The top 20 per cent hold 60 per cent of the value of superannuation holdings.

You can use this  income calculator  to see where you rank in the Australian income distribution.

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Inequality in Australia

What is inequality.

Inequality means the unequal distribution within society of income, wealth and goods. In this website we measure inequality in two ways:  income inequality and  wealth inequality.

What is income inequality?

Income inequality in the unequal distribution of income in society. ACOSS and UNSW measure income inequality by dividing the population into groups of 20% by income, then into the highest 10%, 5% and 1% income groups, which are compared with the income of the lowest 20% income group. We look at the main drivers of income inequality by breaking income down into earnings, investment income, government income support payments and income tax; and we look at where different population groups, such as sole parents, people receiving JobSeeker Allowance, and people receiving income from superannuation are located on the income scale. Income is measured using the Australian Bureau of Statistics’ Survey of Income and Housing . Find out more on our methodology page.

What is wealth inequality?

Wealth inequality is the unequal distribution of wealth in a society. Wealth is measured through assets held in the main home, superannuation, shares and other financial assets, investment real estate and other non-financial assets, such as cars. We divide the population into five groups based on household wealth, from the lowest 20% wealth group to the highest 20% wealth group. We also examine the highest 10% and 5% groups, and compare wealth holdings with those in the lowest 20% wealth group. Wealth is measured using the Australian Bureau of Statistics’ Survey of Income and Housing . Find out more on our methodology page .

Why is inequality a problem?

Excessive inequality in any society is harmful.

A system that leaves people behind is bad for the economy as well as people. When resources and power are concentrated in fewer hands, economic growth is diminished. People experiencing poverty face harsh barriers to finding paid work or gaining skills to improve their chances in the competitive job market. When people have to go without meals, sleep on the streets or can’t afford healthcare, we are seeing the impacts of inequality.

By reducing inequality, we can enjoy the collective peace of mind that there is enough funding for the services we need, such as health and aged care, and that when people fall on hard times they still have enough to meet their basic needs.

How unequal is Australia?

Everyone should be able to put food on the table and have a safe, secure place to live. Australia is one of the wealthiest countries in the world , and we pride ourselves on being ‘the land of the fair go’, but many people would be surprised to find how stark the gap is between the few who have a great deal and the many who are struggling to get by with very little.

Income inequality in Australia

In Australia, someone  in the highest 20% of the income scale lives in a household with almost six times as much income as someone in the lowest 20% of the income scale:

The differences between the average incomes of low, middle and high-income households in Australia are large. Someone in a household that falls in the highest 20% income group has more than twice the average disposable income of the middle 20% income group and six times as much as someone in the lowest 20% income group. The average income of the middle income group is almost three times that of the lowest income group.

At the top end, income is even more heavily concentrated. The average income of the highest 5% income group is nearly four times the income of the middle 20% and nine times that of the lowest 20% income groups; while the average income of the highest 1% income group is almost three times that of highest 20% income group.

People in the highest 20% income group receive 42% of all national income, which is more than the share of the lowest 60% combined. People in the lowest 20% receive only 6% of all household income, while the second lowest 20% receive 12%.

* Note the data is based on the latest available figures, which are from 2019-20.

Wealth inequality in Australia

People in the highest 20% of the wealth scale hold nearly two thirds of all wealth (64%), while those in the lowest 60% hold less than a fifth of wealth (17%).

The average wealth of a household in the highest 20% wealth group, at $3.25 million, is six times that of the middle 20% wealth group, at $565,000, and over ninety times times that of the lowest 20% wealth group, at $36,000.

The average wealth of the highest 5% wealth group is $6,795,000.

Australia has the fifth highest number in the world of people with ultra-high wealth (more than US $500 million).

What are the components of income and wealth inequality?

Components of income.

Households in Australia get their income from three main sources:

(1) Wages and salary;

(2) Investments, including superannuation; and

(3) Social Security payments.

Wages make up the largest portion of these three sources, representing 77% of household income. This means that wages are a large contributor to income inequality. The highest 20% income group receives almost three times the average wages of the middle 20% income group, averaging $4,363 a week before tax, compared with $1,645. The middle income group receives six times more wages as the lowest 20% income group, at $1,645 a week compared with $256.

Employment status is a key driver of inequality. Within the lowest 20% income group, only 24% of adults have paid employment, and less than half of these jobs are fulltime. In the middle 20% income group, the rate of paid employment is higher, with 68% of adult household members employed, and 42% of these workers in full-time jobs. The highest 20% income group is relatively ‘work rich’, with 87% of adults in these households in paid work, with 67% of them in full-time jobs.

Investment income

Income from investments, such as interest, rent, dividends, royalties and superannuation represents a small part of total income, but is highly concentrated in high-income households. The middle 20% income group have an average $150 a week from investments and other private sources, while the highest 20% income group had five times as much investment income, at $705 a week; and the highest 5% income group had eight times as much investment income, at $1,125 a week. The greater disparity in investment incomes (compared with earnings) is a by-product of the highly unequal distribution of wealth in Australia.

Social Security payments

Social Security payments account for the majority of income at the lower end of the income distribution. Recipients of the maximum rate of JobSeeker Allowance are over-represented (compared with other social security payments) in the lowest 5% income group, while those receiving the maximum rate of pensions are over-represented in the second 5% income group.

Components of wealth

Wealth in Australia is made up of:

– main home;

– superannuation;

– shares and other financial assets;

– investment real estate; and

– other non-financial assets, such as cars.

The average wealth per household is made up of 39% main home; 20% superannuation; 19% shares and other financial assets; 12% investment real estate; and 10% other non-financial assets.

Ownership of some types of wealth is very concentrated. The highest 20% wealth group owns over 80% of all wealth in investment properties and shares, over 70% of all superannuation assets; and 54% of all wealth in main homes.

However, wealth holdings across income groups is more evenly distributed, due in large part to high levels of home ownership among retired people on relatively low incomes. The highest 20% income group had an average wealth of $1,952,000, almost three times the middle 20%, at $711,000, and almost four times that of the lowest 20% income group.

Who is affected by inequality?

Income inequality.

Social security payments represent 54% of income for those in the lowest 20% income group. People receiving JobSeeker Payment (formerly Newstart Allowance) and Parenting Payment are more likely to be in the lowest 10% income group, while those reliant on Age and Disability Pensions are more likely to be in the second lowest 10% income group.

Older people and children are more likely to be in the lowest 40% income group, which contains 66% of people aged 65 and over, and 45% of children under 15.

Almost half (48%) of people of working age (between 16 – 64) were in the highest 40% income group.

Households where the main earner is female , especially those with dependent children, are more likely to be in the lowest 20% income group  than those where the main earner is male (29% compared with 14%).

Various groups of people are over-represented in the lowest 20% income group . These are: 39% of sole parents; 41% of those aged over 65; and 24% of people born in non-English speaking countries.

Other groups of people are over-represented in the  highest 20% income group . These are: 25% of people of working age; 28% of couples without children; 29% of people in households with a male main earner, aged under 65, with no children; and over 25% of those living in Sydney, Perth, the ACT or the NT.

Wealth Inequality

During the period 2003-04 to 2015-16, household wealth shifted from younger to older age groups. The average holdings of owner-occupied housing among the under-35 age group declined, while it increased in households with older people, reflecting the growing difficulties for younger people in purchasing their own home.

Wealth inequality increased most strongly between people under 35 years during the same period – that is, the gap between wealthier and less wealthy younger people grew in this period. This was due mainly to growth in the average value of shares, financial and business assets and investment property held by younger households.

How has inequality changed?

After steady increases between 1980-81 and 1999-00, between 1999-00 and 2007-08, income inequality reached a peak during the Global Financial Crisis (GFC) , and has since plateaued (to 2007-08).

This means that, although inequality is no higher now than in 2007-08, it is still higher than in any year between 1999-00 and 2007-08, and almost certainly than in any year between 1980 and 1999.

Average household wealth rose strongly during the period 2003-04 to 2008-09, from $644,000 to $836,000; fell during and after the GFC to $802,000 in 2010-11, then rose again to $936,000 in 2015-16.

The fastest growing assets were superannuation and investment property, reflecting changes to the superannuation system and a property boom. Because these two assets were more concentrated in the highest wealth groups, these represent the main contributors to growing wealth inequality over the period.

How does inequality in Australia compare with other countries?

Income inequality in Australia was higher than the Organisation for Economic Co-operation and Development (OECD) average in 2015 (the latest year for which data is available). In the OECD rankings, Australia is between other English speaking countries – above Canada, but below the United States and the United Kingdom; and alongside some countries with lower income levels, such as Greece and Portugal. Most European countries had substantially lower inequality than Australia.

Comparing wealth distributions in different countries is difficult because of different methods of calculating household wealth. A recent OECD report found that in 2010, Australia’s wealth distribution was more equal than the OECD average, but the average in that report was skewed significantly upwards by the United States, which had very high wealth inequality.

More recent OECD estimates find that the share of household wealth held by the highest 10% and lowest 60% of households in 2014 in Australia was more equal than the OECD average. The high share of Australian household wealth held in owner-occupied household is one likely reason for this.

Inequality in the media

October 20, 2022

Why are millions of Australians still living in poverty? Experts say its solvable

April 27, 2022

Low-income tenants hardest hit as Australian rent rises outstrip assistance payments

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February 21, 2020

Rate of child poverty increases in Australia

July 31, 2019

Luke Henriques-Gomes

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Essays on inequality and economic growth: The rate of return, the rate of growth and the wage/profit share

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• UWA Business School

Research output : Thesis › Doctoral Thesis

This output contributes to the following UN Sustainable Development Goals (SDGs)

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• Economic Growth Social Sciences 100%
• Income Distribution Economics, Econometrics and Finance 100%
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T1 - Essays on inequality and economic growth: The rate of return, the rate of growth and the wage/profit share

AU - Trinh, Jill

N2 - This dissertation investigates aspects of the relationship between inequality and economic growth. The first two essays identify largely unknown historical antecedents to Thomas Piketty's fundamental laws. Specifically, it is demonstrated that both Vilfredo Pareto's 1890s empirical investigation of income distribution, culminated in `Pareto's law', and Nicholas Kaldor's 1950s theoretical model of distribution and growth, constrained by Kaldor's `stylised facts', anticipated significant features of Piketty's laws. The third essay employs the extended Kaleckian model on profit/wage-led growth and establishes empirically that growth in Australia is wage-led. Consequently, inequality in Australia may be reduced without necessarily reducing economic growth.

AB - This dissertation investigates aspects of the relationship between inequality and economic growth. The first two essays identify largely unknown historical antecedents to Thomas Piketty's fundamental laws. Specifically, it is demonstrated that both Vilfredo Pareto's 1890s empirical investigation of income distribution, culminated in `Pareto's law', and Nicholas Kaldor's 1950s theoretical model of distribution and growth, constrained by Kaldor's `stylised facts', anticipated significant features of Piketty's laws. The third essay employs the extended Kaleckian model on profit/wage-led growth and establishes empirically that growth in Australia is wage-led. Consequently, inequality in Australia may be reduced without necessarily reducing economic growth.

KW - inequality

KW - Michal Kalecki

KW - economic growth

KW - Pareto’s Law

KW - Vilfredo Pareto

KW - Kaldor's stylised facts

KW - Nicholas Kaldor

KW - capacity utilisation

U2 - 10.26182/pck5-mx66

DO - 10.26182/pck5-mx66

M3 - Doctoral Thesis

Economic Inequality

By Joe Hasell, Pablo Arriagada, Esteban Ortiz-Ospina and Max Roser

How are incomes and wealth distributed between people? Both within countries and across the world as a whole?

On this page, you can find all our data, visualizations, and writing relating to economic inequality.

This evidence shows us that inequality in many countries is very high and, in many cases, has been on the rise. Global economic inequality is vast and compounded by overlapping inequalities in health, education, and many other dimensions.

But economic inequality is not rising everywhere. Within many countries, it has fallen or remained stable. And global inequality – after two centuries of increase – is now falling too.

The large differences we see across countries and over time are crucial. They show us that high and rising inequality is not inevitable, and that the extent of inequality today is something that we can change.

Explore Data on Economic Inequality

About this data.

This data explorer provides a range of inequality indicators measured according to two different definitions of income obtained from different sources.

• Data from the World Inequality Database relates to inequality before taxes and benefits.
• Data from the World Bank relates to either income after taxes and benefits or consumption, depending on the country and year.

Further information about the definitions and methods behind this data can be found in the article below, where you can also explore and compare a much broader range of indicators from different sources:

OWID Data Collection: Inequality and Poverty

Explore a wide range of indicators on inequality and poverty and compare sources.

Research & Writing

How has income inequality within countries evolved over the past century?

While the steep rise of inequality in the United States is well-known, long-run data on the incomes of the richest shows countries have followed a variety of trajectories.

Income inequality before and after taxes: How much do countries redistribute income?

The redistribution of income achieved by governments through taxes and benefits varies hugely.

Income Inequality Over the Long-run

How has inequality in the United Kingdom changed over the long run?

How unequal were pre-industrial societies?

Global inequality.

The history of global economic inequality

Global Inequality of Opportunity

Global economic inequality: what matters most for your living conditions is not who you are, but where you are

How is inequality defined and measured.

Joe Hasell and Pablo Arriagada

Measuring inequality: what is the Gini coefficient?

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Opinion pieces, speeches & transcripts

Essay: tax settings and inequality, june 05, 2017.

Co-authored with Terri Butler, Member for Griffith. 

It is time to recognise that taxes are more than simply the price of civilisation: they profoundly shape our economy and society.

As the dust begins to settle around what’s left of the Turnbull government’s “Enterprise Tax Plan”, our nation needs a completely different conversation about taxation policy. The decisions to be made about taxation – such as how much is to be raised, and by what means – affect much more than just finding the revenue to secure the provision of necessary services. They are decisions about, and determined by, how we see ourselves, and one another. Decisions about taxation are decisions about the sort of future we, as Australians, see for our nation, and for ourselves.

Today, Australians are experiencing record levels of inequality. Unchecked, this will get worse, separating the experiences and opportunities of Australians, dampening all of our prospects. We are on course for a future which promises a new Gilded Age for a lucky few, at the expense of confined and insecure lives for the many.

To reverse this trend to inequality we need more than a set of policies: we need a consistent argument for the changes needed to deliver growth that is inclusive and sustainable. This has to be anchored by a new approach to tax.

In this essay, we argue that increasing inequality is a problem, and that it is not inevitable. In that context we argue that a good society – a more prosperous and more equal one – rests upon, among other things, tax settings that are genuinely progressive, and which are seen to be both fair and efficient. These are questions of political choice, not necessary products of technocratic determinism. We say that past experience shows us the ways in which tax choices have exacerbated inequality on the one hand, and helped reduce it on the other. More recent developments and understandings, especially around how inequality can adversely affect economic growth, lend weight to taking a broad view of tax policy. By a broad view, we mean an understanding that taxes aren’t just devices through which revenue is raised, they also shape economic behaviour and influence social and political behaviour, too. And they can affect economic growth, as we’ve just observed.

We aren’t arguing here for particular policies – that’s the work of Labor’s national policy forum, shadow ministers and national conference. Our concern is to change the way in which our nation approaches tax, as we make our wider argument to renew Australian social democracy, and our contributions to the work of a Shorten Labor Government. We are determined to help shape a more equal Australia, and we are convinced we will not achieve this unless we take a different approach to taxation.

As we write, Australia has enjoyed more than 25 consecutive years of economic growth. But have all Australians shared the joy?

At the moment, Australian workers are experiencing the lowest wages growth recorded. This is compounding a wider income inequality: over our lifetimes, the gap in earnings between the richest and the poorest Australians has increased dramatically. That this gap has been widening has a lot to do with tax settings. The research of our colleague Andrew Leigh, with the late Anthony Atkinson, has shown that in Australia reductions in personal tax rates were responsible for nearly half the increase in the income share of the top 1%. Others have noted similar circumstances: for example, the US Congressional Research Service found, in 2012, that reductions in top marginal rates and in capital gains tax increased income inequality.

This increasing inequality when it comes to earnings is exacerbating inequality of wealth. Higher net incomes, especially decoupled from productivity, present their recipients with much greater capacity than the rest of us to become owners of capital.

Earnings from capital significantly outpace wage growth. The wage share of national income has been falling continuously and dramatically since the late 1970s.

Today, disparities of wealth are even greater than disparities of income. Wealth is concentrated at the top, with the bottom 40% of Australians owning only 5% of all our nation’s wealth.

So, thanks in part to our tax arrangements, we’re on a pathway to an extremely unequal society. To us, this is bad in and of itself.

But it’s worse than this. This isn’t simply a matter of perspective, or values (though these matter, too). Excessive levels of inequality impact negatively on our prospects of economic growth. That the poor are getting poorer is only part of our inequality story.

It’s also the case that there is no clear evidence of a positive impact on economic growth from tax reductions. Nor in respect of job creation. Witness the modesty of the claimed growth dividend of the Turnbull Enterprise Tax Plan (even in its original version). This is why business leaders like to speak of the relationship between tax cuts (individual and corporate) and growth (of the economy, of jobs) as ‘instinctive’. That’s polite boardroomspeak for ‘not supported by evidence’. Australia’s Treasurer, Scott Morrison, isn’t an instinctive kind of guy: instead he asks Australians to check out opinions in the pub, rather than have regard to economic modelling, in assessing his company tax cuts. He would say that though, wouldn’t he?

We aren’t saying that there’s no relationship between tax and growth. There is, but it’s less direct than conservatives and business lobbyists would have us believe: how taxes are set and raised affects inequality, which in turn can present a substantial handbrake on growth. This may be why Christine Lagarde, head of the IMF, has lately been warning of the risks of a race to the bottom on tax (as well as on regulation, and trade).

We’re concerned that, in seeking to combat the notion that lower taxes somehow magically drive growth, a reductionist view can emerge which can constrain our recourse to tax policy to secure a fairer Australia. That is, taxes are about revenue and economic behaviour, only. This misses two points: that it’s not only economic behaviour that tax settings affect, but social and, crucially, political decision-making too, and the more subtle argument around driving, or reducing, inequality. These run together. At this time of populism and pessimism, we must recognise that tax settings shape the scope of political action: economic inequality isn’t divorced from its political counterpart.

It’s this relationship between taxation and inequality that we are interested in exploring, so that we can make the case to get us off this pathway to deeper inequality and lower growth.

Neither extreme inequality nor the conditions that create it are natural. They are results of human decisions and actions. That being the case, further increased inequality is not inevitable. It is possible to be optimistic about Australia’s ability to address the problem of increasing inequality, even while being realistic about the difficulties to be faced. History and politics tell us that rising inequality is a problem to which there can be a solution. That, notwithstanding the impact of technological change and increasing globalisation, countries can take steps to turn around the trend to increased inequality.

Those seeking to take action should also remember that technological change and increasingly open economic borders aren’t new. This story has been told before – the nature and organisation of work, capital and economic activity have never been static. We can appreciate how people have previously come together to respond. From the growth of trade unionism to the creation of the post-WW2 welfare state, political action has reshaped social and economic circumstances to the benefit of the many rather than the few. Robots and bilateral trade agreements, of themselves, can’t take this away from us.

We believe that government should promote egalitarianism and prosperity – our nation’s values, and our sense of purpose. These concepts are closely linked: we believe that more equal societies are capable of greater prosperity. As we’ve said earlier, we are convinced that high levels of inequality represent a handbrake on economic growth. Without prosperity, there’s nothing to redistribute.

Our nation cannot simply tax its way to equality, and governments must have recourse to other levers if they are to drive growth that is inclusive. It is particularly important that government remain undeterred by neoliberal instincts to ‘get out of the way’ and instead bring renewed vigour to investing in education and skills, in productive infrastructure, supporting workplace rights and trade unionism, having more regard for the concerns of consumers, and recognising the costs to growth of discrimination and exclusion.

Tax policies are especially important political choices. They can show the strength of the relationship between economic and political inequality, and they expose the myth of inevitability about increased inequality – enabling us to demonstrate to frustrated citizens that their political actions can make a difference to their lives. This is why the ‘Buffett rule’ has galvanised many: it is a readily understandable symbol of what’s wrong with the present arrangements. At a time when it is possible for Australian millionaires to claim so many tax concessions – including the cost of managing tax affairs – that they pay no income tax, the Buffett rule’s appeal rests on an appreciation that today’s tax settings are boosting inequality and unfairness, and that something should be done about it. The Buffett rule is not the only means by which to respond to the tendency of some high-income earners to reduce their taxable income to, or near, zero. Like all seeminglysimple measures it requires consideration. Nonetheless policy-makers should not underestimate its appeal to those who are concerned about inequality and unfairness.

It’s simply not the case that Australia is ‘over-taxed’ (whatever that means). Though conservatives and those with the the most to gain in reducing taxes – those at the top end of the income and wealth distributions – are prone to giving the contrary impression, Australia is in fact a low-tax nation, the fifth lowest in the OECD when comparing the ratios of tax to GDP.

The suggestion that Australians are somehow weighed down by an excessive tax burden isn’t just a furphy, it is a major barrier in the way of the tax conversation we need to have. It implicitly blames too-high taxes for the real stresses on individuals and households – rather than more plausible, and inter-related, culprits like low wages growth, job insecurity, high asset price inflation and the high levels of private debt that households are bearing.

When then-Treasurer Joe Hockey launched his tax discussion paper, Re:Think, his summary materials deliberately sought to give the impression that Australia had very high income taxes. We’ve seen something similar in the arguments about the impact of our company tax rates on international competitiveness, lately.

On income taxes specifically, it’s just wrong, and deeply misleading, to pretend that Australians are highly taxed compared with their overseas cousins.

OECD figures show that when you compare income taxes and employee social security contributions paid, minus transfers (like Family Tax Benefit) received, Australians contribute less compared with people in other nations.

In 2016, the take-home pay of an average single Australian worker, after tax and benefits, was 75.9% of their gross wage, compared with the OECD average of 74.5%. For the average married Australian worker with two children, take-home pay, after tax and family benefits, was 87.1% of their gross wage (compared to 85.4% for the OECD average).

Australians pay no income taxes if they earn under $18,201. We pay 19 c for each dollar over $18,200, 32.5 c in each dollar over $37,000, 37 c for each dollar over $87,000 and 45 cents in each dollar over $180,000. There’s a 2% Medicare levy, and there’s a 2% “deficit levy” for people who earn over $180,000.

And it is important to remember that these figures apply only to taxable, not gross, income. Some people are very good at making sure their taxable income is much, much less than their gross income – like some of the 60,000 or so Australians each year who are both owners of negatively geared property and recipients of no taxable income at all. We’ll come back to this, later. Effective tax rates are of course what really matters to both individuals and to the economy. The capacity of many to minimise, or simply avoid, their obligations when many others cannot is a critical element of a tax debate.

Our income tax system is highly progressive, which is a good thing. This has been one of our most effective means of stemming the flow of inequality in this country.

Yes, the very rich still are more likely to own income-generating assets. The growth in returns on their investments is likely to outpace growth in wages and growth in the economy as a whole. The very rich remain likely to see their incomes and wealth grow more quickly than those in the middle will see their own incomes and wealth, if any, grow. But without our income tax system’s progressivity, the gaps would be even greater. The US income tax system is much less progressive than ours, and this shows.

Conservatives argue that high marginal rates for high income earners are bad for the economy. They claim that because people – as we’ve acknowledged above – will always engage in tax planning to avoid paying their taxes, that leads to waste, which could be avoided by lowering taxes. Despite a dearth of empirical evidence, they claim that the smartest Australians will leave, and go to jurisdictions with lower income taxes. And they claim – most implausibly of all – that progressive taxation disincentivises work. Neither of us has ever met someone who turned down a payrise because they didn’t want to pay 37 cents in each dollar earned over and above the first $80,000 earned, and they preferred to continue earning less than $80,000 instead.

It’s too often implicit in this nation’s economic debate that lowering corporate tax rates is a self-evident economic good. Good for who, though?

When the Business Council of Australia say that it’s in the interests of ordinary Australians to lower the company tax rate, let’s remember to check people’s interests when considering their arguments; tax policy should reflect the national interest not private interests.

Many countries that have lowered their corporate tax rates over the years have not had better growth outcomes over the years than Australia. While it is asserted that a lower company tax rate is necessary to attract investment, this flies in the face of the inconvenient truth that most of our capital from overseas today comes from jurisdictions with lower rates than Australia’s.

Thomas Piketty contends that there simply isn’t empirical evidence to support the ideological argument that lowering this rate boosts growth. As we’ve observed, he’s far from alone in this.

Research by the Australia Institute demonstrates that, since we last lowered the rate in Australia, the wage share of the economy has in fact fallen, and also makes clear there is no relationship between lower corporate income tax rates and economic growth. Nor is there a clear relationship between lower taxes and investment.

For us, it seems that placing more money in the hands of senior managers and shareholders should not of itself result in expenditure on capital deepening, and developing human or social capital, thereby increasing productivity and/or creating more jobs.

“Trickle down” is no sounder now than it was thirty years ago – unless the problem we are trying to solve is how to give more to those who already have more than enough. So that they can hold onto it.

And, as we think about company tax arrangements, we should bear in mind that Australia’s effective rate (ie, the one that really matters) before recent changes passed by the Senate was less than 25% for public companies and around 19% for private companies. Also that, today, one third of Australia’s largest businesses are paying no tax.

We appreciate that there are international constraints on Australia’s capacity to reduce inequality through our tax system, that we need more international cooperation to avoid the tax burden falling unduly on the less mobile income-earners. But we can’t hide behind this complexity as an excuse for inaction.

It is interesting, and revealing, that today expectations of redistribution seem to be most readily found amongst the ‘haves’, for their further benefit. Hence calls for company tax cuts at a time of record profits.

The ‘haves’ have had good reason for their optimism. Their interests have been enthusiastically supported by a political narrative that presumes the main barrier to our collective interests is the supposed disincentives preventing them from realising their true potential. This ideological view sits uncomfortably with the evidence, of course.

Australians should not let conservatives get away with pretending that individuals carry a huge personal tax burden, or that our taxes are too high more generally, compared with other countries. They simply aren’t. And nor should we accept that progressivity – high marginal tax rates for those on incomes that are double (or more) average earnings – is a problem.

Unless and until we can overcome these powerful falsehoods, it will be next to impossible to successfully mount a political campaign to make more effective use of the tax system to challenge inequality. Which is what we are determined to do.

Tax policy isn’t only concerned with ‘how much, and where from’. We must have regard to wider economic consequences of tax decisions, and, noting the powerful signalling effects of taxation, the democratic and societal consequences too.

Tax can be the key to reducing political as well as economic inequality, by responding to the real sense of grievance that people are shut out from decision making. As many people feel that politics can’t solve the problems in their lives, the haves continue to ask for more.

Nearly twenty years ago Peter Mandelson, that architect of British New Labour, famously said that he was “intensely relaxed about people getting filthy rich as long as they pay their taxes”.

But, too often, they haven’t been. The social contract between globalisation’s biggest winners and the rest of us has been torn up: by those winners. Revelations in the ‘Panama Papers’ show a shocking, worldwide epidemic of tax evasion by significant political figures. These follow the Luxembourg Leaks, which demonstrated the lengths many multinationals went to in order to avoid taxation obligations.

This problem goes to the very legitimacy of taxation systems, here and abroad, as well as to governments’ capacity to ensure that everyone pays their share.

Whichever came first, it is the case that political and economic inequality are running together. At the most fundamental level, people both have less social mobility, and feel that they have less social mobility, leading to a diminished confidence that power relationships can be reshaped. Right around the developed world, there is a powerful sense that the rules of the economic game have been rigged, against the interests of ordinary people.

As we’ve touched on earlier, while imposing taxes is one thing, recovering taxes is quite another.

The big winners of globalisation in too many cases aren’t paying their taxes. Those individuals on very high incomes (especially if their earnings aren’t principally derived from wages), and for whom indirect imposts like the GST aren’t a major concern, have a great capacity to step around their obligations to revenue and to society. Large corporations – especially those operating across national borders – and their owners are similarly nimble.

This capacity to minimise tax is being used, effectively, at the expense of everyone else. The revenue flowing into public hands, for public benefit, declines at the same time that dozens of multimillionaires and a third of the biggest companies doing business in Australia are paying no tax. Research conducted by Oxfam suggests that the use of tax havens cost Australia $4.8 billion in foregone revenue in 2014.

The consequences: the inherent unfairness in some people not paying their share, and the reduction in public revenue, making services and infrastructure less affordable.

Those consequences are why the domestic and international movements to reduce tax evasion matter so much. Labor has led the way – in promoting measures to improve compliance, engagement with the international community, and seeking to increase the extent to which people can find out what’s going on inside corporations.

Those with the means to do so will naturally be inclined to seek to minimise tax. Many will deploy some of the fruits of that activity for charitable purposes. But, even leaving aside our concern at the rich being able to individually choose how they contribute to society whilst others cannot, does anyone seriously believe that even the most altruistic and philanthropic of these people is reinvesting one hundred percent of their windfall in the betterment of our society? It is more plausible to expect that monies kept in private hands by way of tax minimisation are largely being used to generate yet more income and wealth for the direct beneficiaries of tax minimisation, and their descendants. This in turn is creating – as Thomas Piketty has pointed out – an increasing concentration of wealth in the hands of a relatively small number of people, as returns on assets exceed economic growth (and real wages growth for working class and middle class families).

We have already considered the first conservative falsehood that has shaped Australia’s tax debate – the proposition that we are a high-tax nation. There’s a second, equally powerful, untruth that has also been a major influence: that our government spending is ‘unsustainable’.

First, some context: in low-tax Australia, former Treasury Secretary Ken Henry has reminded us, revenue fell from 26% to 23% of GDP in the decade following 2003. One of the lowest tax to GDP ratios in the OECD. Maybe, just maybe, it could be the personal income tax cuts and middle class cash transfers that are unsustainable?

While we believe that tax policies have much wider ramifications than simply enabling a balancing of revenue and expenditure, attitudes to these questions are revealing.

When conservatives assert that Australia’s fiscal challenge is all about constraining spending, and not concerned with revenue sustainability this is an ideological proposition. It’s a direct attack on our social compact, on those policies which have constrained inequality.

There’s no formula for the perfect tax-to-GDP ratio. But there are features of a good society, many of which are derived, directly or indirectly, from tax policies.

We observe that, in Denmark and the other Nordic countries, there are income distributions that are considerably less unequal than here.

In these countries the size of the state is considerably larger than it is in Australia. In part these countries generate more tax revenue due to having more direct taxpayers with more people in work (also by having settings designed to boost workforce participation), who earn higher wages.

And economic growth there has been comparable to, indeed greater than, growth in many other OECD economies. At the very least, these examples warrant consideration and should spur us to be skeptical at claims that current levels of Australian government social spending are ‘unsustainable’.

(It’s almost as if adequate public funding for government services and infrastructure actively promotes growth in both potential and real GDP, and enables people to have the opportunity to share in the benefits of that growth. But that’s enough facetiousness from us.)

Arguments for change need to be made consistently and constantly, if Australians are to reduce inequality. Something more than a series of well-designed policies is needed. This is why are are calling for a wider look at tax – at how the present settings have contributed to today’s challenges, and how a different approach can establish a more equal, prosperous Australia.

In recent years Federal Labor has laid the foundations for a different agenda when it comes to tax and to its relationship to expenditure. Despite commentary to the contrary, in government and opposition we have demonstrated a willingness to take a wide look at the tax and transfer system, and to look to hypothecation to help fund and build support for the National Disability Insurance Scheme.

Labor has undertaken detailed policy work to combat multinational tax avoidance; reviewed the consequences of superannuation concessions for our budget and society; and, perhaps most importantly, proposed changes to negative gearing and capital gains tax arrangements to make these regimes fit for purpose – in their own terms, and as we look to restrain the growth of wealth inequality, given the effect of housing investment in that regard.

As a nation, our progress in responding to the causes of growing inequality has been uneven, and constrained by political decisions and political pressures, both of which warrant reflection and discussion. But as a nation we should not concern ourselves with rewriting history or content ourselves with merely attributing blame; rather, we should seek to shape the future.

The key lessons of the recent past are that the need to respond to growing inequality does not go without saying, and that good policy is of itself insufficient. There is an urgent need to articulate, clearly, consistently and constantly, a framework for approaching the tax debate, in order to build and sustain support for, and a commitment to, those reforms which would found a more equal and more prosperous nation. It cannot be assumed that this goal is shared by all Australians, even though it is in Australia’s interests.

Those seeking to respond to growing inequality should be making the case for measures which:

• support our social compact with one another;

• promote sustainable and inclusive economic growth; and

• ensure fairness in the distribution of wealth, income and life opportunities.

The challenge is to locate proposed tax changes within a wider agenda for a fairer and more prosperous Australia. When the economist Anthony Atkinson asked what could be done to reduce inequality, he found the maths – for the UK – were such that tax changes alone can’t do the trick, as there’s simply too much ground to be made up. While there are significant differences between our two societies, and their tax and transfer systems, which leave Australia today more equal than Britain, we take the point. Questions of the distribution of market incomes also need to be addressed, alongside and working with fiscal measures. We agree that reducing inequality isn’t all about tax settings and changes, but these measures are fundamentally important to making progress: they can set the agenda and send powerful messages about what sort of nation and society we want.

Through such a lens, those who are alarmed at rising inequality should be bold in exploring new ideas (and making the case for the application of old ideas to changing circumstances, like a genuinely progressive approach to taxing income, however derived, against the current changes in the nature of, and methods of organising, work).

Generational inequality has been a feature of the debate in Australia for some years, though it is highly contested and ideas of what constitutes inequity between generations can vary widely according to your point of view. Gender inequities are well-documented yet progress on measures such as the workforce participation rate and pay gaps has been slow. Here the intrinsic and instrumental can come together, increasing productive economic activity through both direct incentives (or, removing disincentives) and also by signalling an end to informal exclusions.

As a nation we should do more thinking about changing arrangements to support a wider distribution of wealth, beyond superannuation, say through settings that promote employee share schemes. Subject to considering how to avoid unintended anti-growth consequences (like the perverse incentives that could arise from paying dividends to owner-workers instead of reinvesting profits back into the business to increase productivity), this could be a critical response to the growing disparity in asset ownership at the heart of Piketty’s concerns.

Those of us who want to contest neoliberal ideas that the collection of tax is somehow inherently illegitimate should also consider the importance of language. The way that tax revenue is used, and the way that the use of tax revenue is described, matters.

In a society of targeted social spending, hypothecation can be used to build social and political support both for making contributions and for social investments. In this regard, let’s look to the attitudes of citizens over the theoretic concerns of central agencies.

Just as communication about tax and its use deserves consideration, so does the power of tax settings as a means of communicating. Taxes have power as signalling devices, as well as revenue sources. From building a fundamental social solidarity across all Australians, to, together with regulatory instruments, driving particular behaviour changes, progressives should pit our evidence-base and concern for people against the prejudice of those who privilege their own selfishness and cry ‘nanny state’ all too readily. The successes of increased tobacco imposts, combined with plain packaging laws, should be celebrated, not simply defended. Another possibility: this type of approach could introduce a little more sharing into the so-called sharing economy. And whether or not we actually tax robots, let’s not rush to rule out recourse to taxation levers as we consider the consequences of increasing automation.

It is true that Australia’s federation presents challenges. But none should be insuperable, and none should be allowed to get in the way of setting out a progressive reform agenda in which states and territories can be partners and not rivals of the Commonwealth.

Similarly, it is clear that well-resourced individuals and multinational corporations pose difficulties for nation states. But this need not mean acceding to a race to the bottom, pending a global settlement, and nor does it require presuming that every threat of jurisdictional flight will be carried out, particularly against a low-corruption nation with a presently strong middle class, like ours. Australia should be a leader, and an exemplar to the rest of the world.

All of this must sit alongside an approach that is concerned to make the tax system work better for ordinary Australians, not lawyers and accountants (and those able to afford the services of those professions). There’s much work to be done in reducing complexity, building understanding and with that increased understanding, creating confidence that Australia has a system that works for all of us, not just those in on the rules of the game.

Talking about tax, is actually talking about how we see ourselves: our priorities, the things we value, the things we’d like to change, and, fundamentally, whether it’s ‘them and us’, or just one big ‘us’.

It must be the latter. We are all in this together. Rising inequality is causing our social compact to fray. That compact needs to be rebuilt, and reinforced.

In this essay we have argued that rising inequality is a serious problem. That should, but doesn’t, go without saying. We have also argued that rising inequality is neither natural nor inevitable but is a product of people’s and government’s choices, decisions and actions. We have argued that any serious consideration of how to respond to the problem of rising inequality necessitates a serious discussion about tax: how it works, how it is described, and how it is used, as a means of raising revenue, of communicating and influencing, and of engendering fairness.

As a nation we can join together and overwhelm the forces that create inequality – inequality of income, wealth, and power – by taking action. Our nation has pioneered monetary policy that can have some impact even when prevailing inflation is low. Australia can have a government budget that is aimed at increasing our nation’s economic potential and helps to keep our economy fulfilling that potential. To do that our nation can invest in infrastructure that will make our economy more productive and thus contribute to economic growth. We can and should do that when circumstances demand it, even if that investment means the government’s budget is in deficit over the cycle, if the likely economic return on the investment justifies the deficit.

As a country, we can invest in the capacity of Australians – which means funding education and skills training. That should start in early childhood. By taking seriously early childhood development and by investing in education we can increase our nation’s economic potential and we can increase working class and middle class Australians’ capacity to enjoy, and likelihood of enjoying, the fruits of economic growth. We can increase women’s workforce participation, more fairly distribute responsibility for caring for those who cannot wholly care for themselves, restore security through making it less catastrophic to have unexpected time out of the paid workforce, restore power at work through greater collectivism, break the correlation between wealth and health, and protect, defend and democratise natural capital.

All of these things matter, if we want a fairer future. None are possible unless we tackle, head on, the interests and ideologies which have dominated tax policy, and the way we talk about tax.

Originally published by the Australian Fabians.

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Economic Inequity in Australia

Economic inequity is the unequal distribution of income and economic opportunities between different people and groups in a society. Economic inequality is a concern for all nations all over the world. Considering the world wealth distribution, the majority of wealth is held by a few nations or individuals, with a good number of the majority in the tail and poverty (Roser, 2013).

It is evident that the living conditions are considerably different from each other from one country or part of the country to another. For the past twenty years, there have been changes in the economic waves, and the division of wealth has unfairly been claimed by the rich; that is, the rich have gotten richer while the poor are also getting poorer every day (Roser, 2013).

Inequality can be viewed from a different direction, borrowing from the definition of economic inequality; we could either see inequality through the lives of others. The inequality in our daily lives is visible through the difference in the living standard and the quality of life. On the other hand, inequality can be viewed as an opportunity to achieve a good outcome. It is important to note that these two concepts of inequality are not separable from the lack of opportunity to achieve the good life (Van de Werfhorst & Salverda, 2012).

Statistics show that a child born in a country with a poor health care system, like most African nations, is 60 times more likely to die before reaching the age of 5 than a child born in countries with better health care life in Europe. Reports show that in such countries, only a single child out of 250 will likely die before reaching the age of 5. Inequality has affected not only the right to live but the access to education and all the basic needs. Today’s global inequality in opportunity is attributed to the global inequality in health, wealth, and education (Roser, 2013).

Just like any other nation in the world, Australia has reported high levels of inequality in wealth distribution among its citizens. From an economic perspective, inequality can be measured with varying indicators, but the most apparent indicators are wealth distribution, household expenditure, and income. Kaplan et al. (2018) reported that wealth inequality has grown in Australia over the past two decades to a point where the wealth of the top 20 % has grown ten times faster than that of those in the bottom 20 %. This growth is mainly attributed to the growth in the value of assets such as investments, properties and shares. Data has also shown that the wealthiest 1 % in Australia currently owns the same amount of wealth as the bottom 60 %, and the wealthiest person in Australia owns as much wealth as 2.27 million people, which represents the 10% of the bottom population in wealth hierarchy (Roser, 2013).

The primary indicators of economic inequalities in a nation are; household or individual income, household consumption, and wealth status. The rise in the price of houses has made the homeowner even richer in Australia; this has contributed significantly to the increase in the gap between the rich and the poor. A report by UNSW MEDIA (2022) indicated that 69 % of the overall increase in household wealth during the corona period was in residential property; this saw the value of real estate properties rise by up to 22% by the end of 2021.

Currently, Australia has 130 billionaires whose wealth rose by 12 % over the past year, giving them an accumulative wealth value of almost as much as the lowest 30 % of the Australian population. Measuring wealth inequality is quite challenging since it is not subjected to tax, and therefore, the data being used by researchers is merely an extrapolation from income and capital gain (UNSW MEDIA, 2022).

Income inequality in Australia has been rising, although labor income inequality has been declining. Randolph & Tice (2016) reported Australia’s economic growth to have been sustained for more than 20 years. This kind of growth has seen the country ranked the second highest in average income growth in the 2000s. The rise and fall of income inequality cannot be categorically placed as either good or bad; for example, in the mid-1990s, Australia had increasing income inequality rates, coinciding with sustainable growth.

Over time, households are in a position to accumulate income and assets through ownership and superannuation. This is in addition to life savings, a saving scheme for people to save all through their working ages till old age. All these accumulate to create household wealth inadequately distributed throughout the nation through the economic class. Any household with more money or wealth is inclined to save more and is patient when using cash. In addition, households with higher returns/wealth are generally more willing to take risky investments with higher rewards. For these reasons, wealth has concentrated at the top of the with reports stating that the top 1% holds almost 20 % of the entire wealth in the nation. This makes wealth inequality worse than income inequality (Shorrocks et al., 2021).

Finally, consumption can also be used as an indicator of inequality more accurately than wealth and income. Consumption is a better measure since households can use wealth acquired through borrowing or even their savings to compensate for their income throughout their lifetime. Economists argue that income can be an overrepresentation of inequality since when one loses their job, the income will fall. However, that household could still survive on borrowings and savings (Kaplan et al., 2018). Research from the reproductive commission has also confirmed that consumption inequality is generally lower than income inequality.

Role of the government

Economic inequality remains a significant problem for the people of Australia, despite the improving living standards and the improving income. The government can minimize the effect of economic inequality by finding and equalizing dominators using their economic power to boost the bottom section, thereby improving or encouraging the poor to invest and improve their economic status.

Property tax

The government can use property tax to reduce economic inequality. Australian real estate is one of the country’s most improving sectors and can constantly improve throughout the year (Gaffney, 2019). Through a reduction in property tax, the government will be able to boost the access of middle-class citizens to buy houses, thereby increasing their wealth accumulation. The rapid growth of the real estate industry will result in the property’s increased value and, by extension, bridge the gap between the rich and the poor. Reports have shown that the number of young people who own houses has dropped between 2003 and 2021, but at the same time, the amount of income used to pay for house rent rose rapidly. When these houses have high prices, only the wealthy can afford them, and they will be renting them out to the middle class and the poor at very high rates increasing the inequity in income and wealth. The property tax reduction might be a long shot, but it will allow the tenants to think of buying their haws without worrying about the enormous taxes.

Residential property prices continue to rise in Australia; the rise is attributed to the transparent regulatory system and capital operation. By improving the income of the low-income people in the country, the government is in a position to improve the purchasing power of the low-income earner, who will, in turn, accumulate wealth through residential properties and with reduced taxation on the same. They will be able to improve their wealth status and bridge the gap between them and the top wealth holders.

Low-income groups in Australia struggle to maintain their lives when they lose their jobs or are unable to find jobs. In comparison to other wealthier countries, Australian household take more debt. This is attributed to the ease at which they can access loans (Tomal, 2022). Fortis reason, the income adjustment policy should be reviewed in order to redistribute wealth. This will guarantee the low-income group a steady increase in their income, which will promote wealth accumulation and reduce income and wealth inequality.

In conclusion, it is essential to ensure that every taxpayer gets an equal opportunity and that the wage distribution and wealth distribution are fair. Economic equality in a country will result in people willing to put in the work, which improves the nation’s productivity.

Kaplan, G., La Cava, G., & Stone, T. (2018). Household Economic Inequality in Australia.  Economic Record ,  94 (305), 117–134. https://doi.org/10.1111/1475-4932.12399

Randolph, B., & Tice, A. (2016). Relocating Disadvantage in Five Australian Cities: Socio-spatial Polarisation under Neo-liberalism.  Urban Policy and Research ,  35 (2), 103–121. https://doi.org/10.1080/08111146.2016.1221337

Roser, M. (2013). Global Economic Inequality.  Our World in Data . https://ourworldindata.org/global-economic-inequality?source=post_page—–66f35a0b66c3———————-

UNSW MEDIA. (2022, July 22).  New report: Wealth inequality in Australia and the rapid rise in house prices . UNSW Newsroom. https://newsroom.unsw.edu.au/news/social-affairs/new-report-wealth-inequality-australia-and-rapid-rise-house-prices#:~:text=Household%20wealth%20inequality

Van de Werfhorst, H. G., & Salverda, W. (2012). Consequences of economic inequality: Introduction to a special issue.  Research in Social Stratification and Mobility ,  30 (4), 377–387. https://doi.org/10.1016/j.rssm.2012.08.001

Shorrocks, A., Davies, J. & Lluberas, R. (2021).  Global wealth report 2021,  s.l.: Credit Suisse.

Kaplan, G., La Cava, G. & Stone, T., (2018). Household Economic Inequality in Australia. Economic Record,  94(305), pp. 117-134.

Gaffney, M., (2019). Rising inequality and falling property tax rates. In  Land Ownership and Taxation in American Agriculture  (pp. 119-137). Routledge.

Tomal, M., (2022). Identification of house price bubbles using robust methodology: evidence from Polish provincial capitals.  Journal of Housing and the Built Environment ,  37 (3), pp.1461-1488.

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The federal budget shows Australia's net migration intake will fall sharply — but some say it's outside the government's control

The federal government says Australia's intake of migrants will fall sharply — halving in two years — as it overhauls the migration system and moves to reduce pressures caused by population growth.

But experts say some of this expected drop in migration numbers is outside the government's control, and that it remains unclear whether its efforts to tighten temporary migration will impact numbers.

Budget papers showed net migration will more than halve from 528,000 to 260,000 between 2022-23 and 2024-25.

The government also announced measures aiming to draw highly skilled migrants to Australia, as it moves to overhaul the migration system.

Treasurer Jim Chalmers has linked the fall in the migration intake to measures aiming to contain inflation, saying population growth must be managed to moderate cost of living increases.

Some of the sharp drop in intake has been attributed to government policies.

"Government actions are estimated to reduce net overseas migration by 110,000 people over the forward estimates," the budget papers said.

The government said the permanent migration intake would also decrease from 190,000 this financial year to 185,000 in 2024-25.

More than 130,000 of those places will be allocated to the skill stream to "help address Australia's long-term skill needs" while the government will invest more than $18 million to "further reform" Australia's immigration system to "restore its integrity".

The government is also introducing a new ballot for the work and holiday visa program for applicants from China, Vietnam and India — at a cost of $25 for applicants — as it tries to manage demand.

A new National Innovation visa will also be established to replace the current Global Talent visa from later this year, and will target "exceptionally talented migrants who would drive growth in sectors of national importance".

'Managing the pressures'

In a post-budget address on Wednesday, Mr Chalmers framed government efforts to manage population growth as a measure against inflation.

He said there was "a fairly substantial moderation in migration built into the budget" after a post-COVID spike driven by students and "long-term tourists".

"That meant the numbers were a bit higher and now they're moderating to more normal levels," Dr Chalmers said.

"I think most people would recognise that migration has got an important role to play in our economy but it needs to be well-managed and we need to make sure that we can manage the pressures."

Mr Chalmers said measures to increase housing and infrastructure, the end of the COVID-19 Pandemic event visa, and a reduction in international student numbers would reduce pressures caused by population growth.

"We're seeing a substantial moderation in inflation in the forecasts and in the last couple of years as well, and that is largely because of how we're managing the budget, but it will also be increasingly about how we're managing the population," he said.

Migration overhaul

The budget revealed a drop in Australia's migration intake after the government announced it would reform the migration system, including changes tightening rules for international students. 

However, some say that much of the expected fall in net migration is a result of factors outside the government's control.

Australian National University demographer Liz Allen said the government was using "smoke and mirrors" to claim credit for the expected decline.

She said the numbers reflected a rebound in the outflow of international students from Australia, balancing the inflow of new students, after the pandemic.

"We've seen a raft of changes that have increased the integrity of the migration scheme, with particular focus on international students," she said.

"But that has not and will not result in a decline of net overseas migration in real terms."

ANU migration expert Alan Gamlen said the recent surge in net overseas migration had been a result of fewer temporary migrants departing Australia.

"Arrivals are only a bit above their long-term trend, not even enough to change the long-term average," he said.

"Specifically, fewer student migrants have been departing. But that is a temporary effect of the pandemic."

Some were still in the country on COVID-19 Pandemic event visas, and as these expired, the outflow of students would increase, Dr Gamlen said.

University of Sydney global migration expert Anna Boucher said the budget showed the government wanted to reduce the migration intake.

The government was moving to reduce migration numbers by extending controls in permanent migration programs to parts of temporary migration including student migration, and working and holiday visas.

Other factors, including court delays and backlogs in court cases, can influence net overseas migration, she said.

"That's the question, whether they'll be able to achieve it, because there's a lot of variables that can influence net overseas migration."

Dr Boucher said the fall in migration would also influence how the country achieves economic growth.

"It's clear from the budget that as the net overseas migration figures drop, so too will gross domestic product.

"So it's going to put more pressure on seeking increases in gross domestic product through other mechanisms, than merely population growth, which could be very beneficial in the long term for Australia.

"But it's going to be challenging because we've relied on high population growth for a long time, including under the Coalition."

Call for more support

The Settlement Council of Australia (SCOA), which represents organisations that support new migrants and refugees, is calling for more help for skilled migrants to establish themselves in Australia.

SCOA chief executive Sandra Elhelw said migration was "more than just a number" and the quality of the settlement experience was "often overlooked" in the migration system.

She said migrants would contribute economically to Australia only if there was enough support for them.

"The more welcoming and supportive we are of migrants when they arrive, the quicker they will start filling critical shortages, paying tax, and increasing our shared quality of life," Ms Elhelw said.

"Australia lags behind countries such as Canada who have much more comprehensive services available to all permanent residents. This includes employment-related services, language training, and support to adjust to Canadian life and systems."

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Was the 401(k) a Mistake?

How an obscure, 45-year-old tax change transformed retirement and left so many Americans out in the cold.

Credit... Illustration by Tim Enthoven

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By Michael Steinberger

Michael Steinberger is a contributing writer for the magazine. He writes periodically about the economy and the markets.

• May 8, 2024

Jen Forbus turned 50 this year. She is in good health and says her life has only gotten better as she has grown older. Forbus resides in Lorain, Ohio, not far from Cleveland; she is single and has no children, but her parents and sisters are nearby. She works, remotely, as an editorial supervisor for an educational publishing company, a job that she loves. She is on track to pay off her mortgage in the next 10 years, and having recently made her last car payment, she is otherwise debt-free. By almost any measure, Forbus is middle class.

Listen to this article, read by Malcolm Hillgartner

Still, she worries about her future. Forbus would like to stop working when she is 65. She has no big retirement dreams — she is not planning to move to Florida or to take extravagant vacations. She hopes to spend her later years enjoying family and friends and pursuing different hobbies. But she knows that she hasn’t set aside enough money to ensure that she can realize even this modest ambition.

A former high school teacher, Forbus says she has around $200,000 in total savings. She earns a high five-figure salary and contributes 9 percent of it to the 401(k) plan that she has through her employer. The company also makes a matching contribution that is equivalent to 5 percent of her salary. A widely accepted rule of thumb among personal-finance experts is that your retirement income needs to be close to 80 percent of what you earned before retiring if you hope to maintain your lifestyle. Forbus figures that she can retire comfortably on around $1 million, although if her house is paid off, she might be able to get by with a bit less. She is not factoring Social Security benefits into her calculations. “I feel like it’s too uncertain and not something I can depend on,” she says.

But even if the stock market delivers blockbuster returns over the next 15 years, her goal is going to be difficult to reach — and this assumes that she doesn’t have a catastrophic setback, like losing her job or suffering a debilitating illness.

She also knows that markets don’t always go up. During the 2008 global financial crisis, her 401(k) lost a third of its value, which was a scarring experience. From the extensive research that she has done, Forbus has become a fairly savvy investor; she’s familiar with all of the major funds and has 60 percent of her money in stocks and the rest in fixed income, which is generally the recommended ratio for people who are some years away from retiring. Still, Forbus would prefer that her retirement prospects weren’t so dependent on her own investing acumen. “It makes me very nervous,” she concedes. She and her friends speak with envy of the pensions that their parents and grandparents had. “I wish that were an option for us,” she says.

The sentiment is understandable. With pensions, otherwise known as defined-benefit plans, your employer invests on your behalf, and you are promised a fixed monthly income upon retirement. With 401(k)s, which are named after a section of the tax code, you choose from investment options that your company gives you, and there is no guarantee of what you will get back, only limits on what you can put in. This is why they are known as defined-contribution plans. Pensions still exist but mainly for unionized jobs. In the private sector, they have largely been replaced by 401(k)s, which came along in the early 1980s. Generally, contributions to 401(k)s are pretax dollars — you pay income tax when you withdraw the money — and these savings vehicles have been a bonanza for a lot of Americans.

Not all companies offer 401(k)s, however, and millions of private-sector employees lack access to workplace retirement plans. Availability is just one problem; contributing is another. Many people who have 401(k)s put little if any money into their accounts. With Americans now aging out of the work force in record numbers — according to the Alliance for Lifetime Income, a nonprofit founded by a group of financial-services companies, 4.1 million people will turn 65 this year, part of what the AARP and others have called the “silver tsunami” — the holes in the retirement system are becoming starkly apparent. U.S. Census Bureau data indicates that in 2017 49 percent of Americans ages 55 to 66 had “no personal retirement savings.”

The savings shortfall is no surprise to Teresa Ghilarducci, an economist at the New School in New York. She has long predicted that the shift to 401(k)s would leave vast numbers of Americans without enough money to retire on, reducing many of them to poverty or forcing them to continue working into their late 60s and beyond. That so many people still do not have 401(k)s or find themselves, like Jen Forbus, in such tenuous circumstances when they do, is proof that what she refers to as this “40-year experiment with do-it-yourself pensions” has been “an utter failure.”

It certainly appears to be failing a large segment of the working population, and while Ghilarducci has been making that case for years, more and more people are now coming around to her view. Her latest book, “Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy,” which was published in March, is drawing a lot of attention: She has been interviewed on NPR and C-SPAN and has testified on Capitol Hill.

It is no longer just fellow progressives who are receptive to her message. Ghilarducci used to be an object of scorn on the right, once drawing the megaphonic wrath of Rush Limbaugh. Today, though, even some conservatives admit that her assessment of the retirement system is basically correct. Indeed, Kevin Hassett, who was a senior economic adviser to President Trump, teamed up with Ghilarducci not long ago to devise a plan that would help low- and middle-income Americans save more for retirement. Their proposal is the basis for legislation currently before Congress.

And Ghilarducci recently found her critique being echoed by one of the most powerful figures on Wall Street. In his annual letter to investors, Larry Fink , the chairman and chief executive of BlackRock, one of the world’s largest asset-management companies, wrote that the United States was facing a retirement crisis due in no small part to self-directed retirement financing. Fink said that for most Americans, replacing defined-benefit plans with defined-contribution plans had been “a shift from financial certainty to financial uncertainty” and suggested that it was time to abandon the “you’re on your own” approach.

While that isn’t likely to happen anytime soon, it seems fair to ask whether the country as a whole has been well served by the 401(k) revolution. The main beneficiaries have been higher-income workers; instead of making an economically secure retirement possible for more people, 401(k)s have arguably become another driver of the inequality that is a defining feature of American life.

When it comes to generating wealth, 401(k)s have been an extraordinary success. The Investment Company Institute, a financial-industry trade group, calculates that the roughly 700,000 401(k) plans now in existence hold more than $7 trillion in assets. But the gains have gone primarily to those who were already at or near the top. According to the Federal Reserve, the value of the median retirement-saving account for households in the 90th to 100th income percentile has more than quintupled during the last 30 years and is currently more than $500,000. In one sense, it is not surprising that the affluent have profited to this degree from 401(k)s: The more money you can invest, the more money you stand to make.

In 2024, annual pretax contributions for employees are capped at $23,000, but with an employer match and possibly also an after-tax contribution (which is permitted under some plans), the maximum can reach $69,000. Workers 50 and over are also allowed to kick in an additional $7,500, potentially pushing the total to $76,500. Needless to say, only a sliver of the U.S. work force can contribute anything like that to their 401(k)s.

The withdrawal rules have evolved in a way that also favors high earners. You are generally not supposed to begin taking money from a 401(k) before you are 59½; doing so could incur a 10 percent penalty (on top of the income-tax hit). What’s more, you can now put off withdrawing money until age 73; previously, you had to begin drawing down 401(k)s by 70½. Those extra years are an added tax benefit for retirees who are in no rush to tap their 401(k)s.

People in lower-income brackets may have also made money from 401(k)s but hardly enough to retire on with Social Security. In 2022, the median retirement account for households in the 20th through 39th percentile held just $20,000. For this segment of the working population, 401(k)s sometimes end up serving a very different purpose. They become a source of emergency funds, not retirement income. But then, for many of these people, retirement seems like an impossibility.

Laura Gendreau directs a program called Stand by Me, a joint venture between the United Way of Delaware and the state government that provides free financial counseling. She says that when she asks clients if they are putting aside any money for retirement, they often look at her in disbelief: “They say, ‘How do you expect me to save for retirement when I’m living paycheck to paycheck?’” She and her colleagues try to identify expenditures that can be eliminated or reduced so that people can start saving at least a small portion of what they earn. But she says that some clients are having such a hard time just getting by that they can’t fathom being able to retire. Sometimes it does not even occur to them to look into whether their employers offer 401(k)s. “They have no idea,” Gendreau says.

Ghilarducci has been hearing this sort of thing for years. Her career in academia began around the time that 401(k)s first emerged, and from the start, she regarded these savings plans with skepticism. For one thing, she feared that a lot of people would never have access to them. But she also felt that 401(k)s were unsuitable for lower-income Americans, who often struggled to save money or who might not have either the time or the knowledge to manage their own investments. In her judgment, the offloading of retirement risk onto workers was worse than just an economic misstep — it represented a betrayal of the social contract.

Ghilarducci, who is 66, has the unusual distinction of being a high school dropout with a Ph.D. in economics. She also has firsthand experience of economic hardship, and her working-class roots have shaped her worldview. She was raised by a single mother in Roseville, Calif., and money was always tight. Despite a turbulent home life, she excelled academically and was able to take advantage of a program that allowed California students with strong grades and test scores to attend schools within the California university system without charge.

After being accepted at the University of California, San Diego, she stopped going to high school — it bored her — and never graduated. A year later, she transferred to the University of California, Berkeley. Neither university knew that she had not completed high school. “They didn’t ask, and I didn’t tell,” she says with a laugh. She majored in economics at Berkeley and also obtained her doctorate there. She then taught at the University of Notre Dame for 25 years (she joined the faculty of the New School in 2008). During that time, she acquired a national reputation for her expertise on retirement.

In 2008, Ghilarducci proposed replacing 401(k)s with “guaranteed retirement accounts,” a program that would combine mandatory individual and employer contributions with tax credits and that would guarantee at least a 3 percent annual return, adjusted for inflation. Her plan drew the wrath of voices on the right — the conservative pundit James Pethokoukis called her “the most dangerous woman in America.”

But her timing proved to be apt: That year, the global financial crisis imperiled the retirement plans of millions of Americans. Ghilarducci suggested that if the government was going to bail out the banks, it also had an obligation to help people whose 401(k)s had tanked. Her idea inflamed the right: Rush Limbaugh attacked her during his daily radio show, which brought her a wave of hate mail.

Her hostility to 401(k)s is partly anchored in a belief that when it comes to retirement, the country was on a better path in the past. In the 1950s and 1960s, many Americans could count on pensions and Social Security to provide them with a decent retirement. It was a different era, of course — back then, men (and it was almost always men) often spent their entire careers with the same companies. And even at their peak, pensions were not available to everyone; only around half of all employees ever had one. Still, in Ghilarducci’s view, it was a time when the United States put more emphasis on the interests of working-class Americans, including ensuring that they could retire with some degree of economic security.

She portrays the move to defined contribution retirement plans as part of the sharp rightward turn that the United States took under President Ronald Reagan, when the notion of individual responsibility became economic dogma — what the Yale University political scientist Jacob Hacker has called “the great risk shift.” The downside of this shift was laid bare by the great recession. Many older Americans lost their savings and were forced to scavenge for work.

This was the subject of the journalist Jessica Bruder’s book “Nomadland,” for which Ghilarducci was interviewed and that was the basis for the Oscar-winning film of the same title. To Ghilarducci, the portraits in “Nomadland” — of lives upended, of the indignity of being old and having to scramble for food and shelter — presaged the insecure future that awaited millions of other older Americans. And Ghilarducci believes that with record numbers of people now reaching retirement age, that grim future is arriving.

Her new book makes a powerful case for why all working people deserve a comfortable, dignified retirement and why, for so many Americans, the current retirement system is incapable of providing that. Her nationwide book tour has had the feel of a victory lap, although the vindication she can plausibly claim is no cause for celebration. “It’s the pinnacle of my career because what I told people would happen is happening,” she says. “So it’s a big told-you-so, and that told-you-so is on the backs of around 40 million middle-class workers who will be poor or near-poor elders.”

Ghilarducci finds it outrageous that Americans who don’t have enough money set aside for retirement are now being told that the solution to their financial woes is to just keep working. Forcing senior citizens to stay on the job is cruel, she says, and especially so if it involves physically demanding labor. She has observed that older workers often have “a shame hunch” — their body language suggests embarrassment. They are spending their last years in quiet humiliation.

To Ghilarducci, all of this represents a retreat from the ideals that fueled America’s prosperity and made the United States a beacon of opportunity. As she writes in her book, “A signature achievement of the postwar period — the democratization of who has control over the pace and content of their time after a lifetime of work — is being reversed.”

Back in the 1960s and 1970s, many companies, in addition to providing their employees with pensions, offered tax-deferred profit-sharing programs, which were available mostly to executives. But there was a lot of murkiness surrounding these defined-contribution plans — and a lot of concern that the I.R.S. might eventually ban them. When Congress passed the Revenue Act of 1978, it included an addition to the Internal Revenue Code that was intended to provide greater clarity about how these plans were to be structured and who could participate. The provision, which took effect in 1980, was called Section 401(k). According to a 2014 Bloomberg article, the staff members who drafted it thought it was a minor regulatory tweak, of no particular consequence. One former senior congressional aide was quoted as saying it was “an insignificant provision in a very large bill. It took on a life of its own afterwards.”

That’s because Ted Benna saw something in that new section of the Internal Revenue Code that had eluded the people who wrote it. Benna, a retirement-benefits consultant, was in his suburban Philadelphia office on a Saturday afternoon in 1979, trying to figure out how to devise a deferred-compensation plan for one of his firm’s clients, a local bank. At the time, the top marginal tax rate was 70 percent, and the bank wanted to see if there was a way to award bonuses to its executives that could limit their tax bill.

As Benna read the provisions of section 401(k), a solution dawned on him: The language seemed to indicate that he could create a plan in which the bonuses were put in a tax-deferred retirement plan. There was a catch, though. Under the terms of 401(k), this could be done only if rank-and-file employees participated in the plan. Benna knew that getting them to agree to set aside some of their pay would not be easy, so he came up with a sweetener — he proposed that the bank would partly match the contributions of its employees.

The bank balked at Benna’s proposal; it was concerned that regulators would rule the scheme illegal. Benna’s own firm decided to implement the idea, however, and it proved wildly popular with the company’s 50 or so employees. Benna and his colleagues called the plan “cash-op,” but the name never caught on, and instead came to be known as the 401(k). The new savings vehicle eventually did run into government resistance, when the Reagan administration, concerned about the lost tax revenues, tried to eliminate 401(k)s in 1986 — this notwithstanding the fact that 401(k)s, with their promise of individual empowerment, seemed emblematic of the so-called Reagan Revolution. But by then it was too late. A number of companies were already offering 401(k)s to their employees, and the financial industry, eyeing a lucrative new revenue stream, threw its lobbying muscle behind these investment plans.

Benna is 82 now, and I recently met with him in York, Pa. (He was there visiting family; he lives near Williamsport, Pa.) He is still working. He told me that his religious faith had compelled him to put off his own retirement. “The Creator didn’t create us to spend 30 years doing nothing,” he said. A tall, unassuming man, Benna suggested that we meet at the Cracker Barrel in York. There, over iced tea and coffee, we talked about the trillion-dollar business that resulted from his close reading of section 401(k). Benna had been quoted in the past voicing some misgivings about these savings plans. He told the magazine Smart Money in 2011, for instance, that he had given rise to a “monster.”

But he explained to me that the remorse he expressed had nothing to do with 401(k)s themselves, which he said had helped convert millions of Americans from “spenders into savers.” Rather, what he regretted was the complexity of many plans — he thought a lot of employees were overwhelmed by all the investment options — and the fact that the financial-services industry profited from them to the degree that it did. Benna said that the advent of the 401(k) turned the mutual-fund industry into the colossus that it is today and that too many fund managers charged what he considers unjustifiably high fees. “Over the life of an investment, it is a real hit — it is gigantic,” he says.

Yet Benna rejects the idea that 401(k)s took the country in the wrong direction. He contends that traditional pensions were doomed with or without 401(k)s. He recalls visiting Bethlehem Steel in the 1980s to talk about 401(k)s. “I told them that they had to start helping their employees save for retirement, and their H.R. person said, ‘Our employees don’t need to do that because we take care of them for life.’ And what happened to that?” (Bethlehem Steel filed for bankruptcy in 2001, and the government had to fulfill its pension obligations.) Likewise, he doesn’t think it is true that 401(k)s have really only benefited the well-off. He mentioned his brother-in-law, who lived in York and worked as a supervisor at Caterpillar, the construction-equipment manufacturer. When Caterpillar announced in 1996 that it was relocating its York plant to Illinois, he chose to take early retirement rather than uproot his family. “He told me that was only possible because of his 401(k),” Benna said. But he conceded that too many people are being let down by the retirement system and that something needs to be done to help them save for their later years.

Benna is one of a number of experts who believe that mandates will ultimately be needed to improve retirement financing — that the voluntary approach, in which companies decide whether they want to sponsor 401(k)s and employees decide whether they wish to participate, is leaving too many gaps. He thinks all companies above a certain size should have to offer employees 401(k)s or alternative retirement-savings options. (Starting next year, employers that establish new 401(k) plans will be required to automatically enroll workers in those plans. There is still no obligation, however, to actually provide the plans themselves.)

Other countries go further. Australia’s Superannuation Guarantee requires companies to contribute the equivalent of 11 percent of an employee’s monthly pay to an investment account that is controlled by the worker, who can also put in additional money. The “Super,” as it is known, includes full-time and part-time workers and has proved to be enormously successful. With its relatively small population — just 27 million — Australia now has the world’s fourth-highest per capita contributions to a pension system, and almost 80 percent of its work force is covered. BlackRock’s Larry Fink says that “Australia’s experience with Supers could be a good model for American policymakers to study and build on.”

The desire to give less affluent Americans the chance to build a decent nest egg is one that is shared across ideological lines. That in itself is a big change from, say, the debate about health care reform, which bitterly divided liberals and conservatives. (It is worth recalling that the Affordable Care Act was enacted in 2010 without a single Republican vote.) In fact, concern about the retirement-savings shortfall has become a rare source of bipartisan cooperation in Washington, and it has also yielded some unlikely alliances.

A few years ago, Kevin Hassett, who was chairman of the White House’s Council of Economic Advisers for a portion of Donald Trump’s presidency, became familiar with Ghilarducci’s work and sent her, unsolicited, the draft of a paper he was writing about the retirement-savings gap. She replied enthusiastically, and he suggested that she write the paper with him. Their partnership eventually yielded a plan for helping lower- and middle-income Americans save for retirement.

The idea they hatched was to make the Thrift Savings Plan, a government-sponsored retirement program for federal employees and members of the uniformed services, open to all Americans. T.S.P., which in total assets is the largest defined-contribution program in the country, includes automatic enrollment and matching contributions from the government. A number of states now offer retirement-savings plans for people whose employers don’t provide 401(k)s, but none of these include matching contributions, which many experts believe are an important incentive for getting workers to set aside a portion of their own salaries.

Ghilarducci and Hassett think that only a federal program in which savings accounts of eligible workers are topped up with government money will significantly increase the participation and savings rates of low-income Americans. Their proposal is the basis for the Retirement Savings for Americans Act, a bill recently introduced by the U.S. senators John Hickenlooper and Thom Tillis and the U.S. representatives Terri Sewell and Lloyd Smucker. Two are Democrats; two are Republicans.

This past January, another bipartisan collaboration — between Alicia Munnell, who was an economist in the Clinton administration and who now serves as the director of Boston College’s Center for Retirement Research, and Andrew Biggs, a senior fellow at the American Enterprise Institute, a conservative think tank — published a paper calling for a reduction or an end to the 401(k) tax benefit.

Their research showed that it had not led to more participation in the program nor had it significantly increased the amount that Americans in the aggregate were saving for retirement. It was mostly just a giveaway to upper-income investors and a costly one at that. They estimated that it deprived the Treasury of almost $200 billion in revenue annually. They proposed reducing or even ending the tax-deferred status of 401(k)s and using the added revenue to shore up Social Security.

When I spoke to Biggs, he emphasized that he was not against 401(k)s. On balance, he thinks that they have worked well, and he also says that some of the criticism aimed at them is no longer valid. For instance, the do-it-yourself aspect is overstated: Most plans, for instance, now offer target-date funds, which automatically adjust your asset allocation depending on your age and goals, freeing you from having to continuously readjust your portfolio yourself. He acknowledges that rescinding the tax preferences could be tricky politically: The people who have chiefly benefited from them are also the people who write checks to campaigns. But he is confident that Americans can ultimately be persuaded to give up the tax advantages. “If we say to people, ‘Look, we can slash your Social Security benefits or increase your Social Security taxes, or we can reduce this useless subsidy that goes to rich people who don’t need the money’ — well, that’s a little more compelling.”

Hassett told me that his work with Ghilarducci does not represent any softening of his faith in the free market. Quite the opposite: He sees government intervention to boost retirement savings as a necessary step to preserving American capitalism. Hassett has been concerned for some time that the country is drifting toward socialism — the subject of his most recent book — and part of the reason is that too many Americans are economically marginalized and have come to feel that the system doesn’t work to their benefit.

“They feel disconnected, and they are disconnected,” Hassett says. Having the government help them save for retirement would be prudent. “It would give them more of a stake in the success of the free-enterprise system,” he says. “I think it’s important for long-run political stability that everybody gets a stake.”

Jen Forbus is not economically marginalized, but many in her community struggle. Lorain, a city of about 65,000 on the shore of Lake Erie, has never recovered from the loss of a Ford assembly plant and two steel plants. Around 28 percent of Lorain’s residents now live in poverty. By the grim standards of her area, Forbus is doing well. “I’m definitely privileged,” she says. Even so, she knows that despite her diligent saving and careful budgeting, there is a good chance that she will not be able to retire at 65. She dreads the prospect of having to remain in the labor market as an elderly person. “Something like waitressing — past a certain age, that’s really difficult,” she says. And she admits that she finds it jarring that even for someone like her, retirement may be an unachievable objective. “I do feel our system fails too many people,” she says.

Read by Malcolm Hillgartner

Narration produced by Tanya Pérez

Engineered by Steven Szczesniak

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To Fight Inequality, America Needs to Rethink Its Economic Model

F or decades, economic policy in most liberal democracies has been premised on two core beliefs: that free markets would maximize economic growth, and that we could address inequality through redistribution.

The recent revival of industrial policy, championed by President Biden, is a clear repudiation of the first of these beliefs. It reflects a growing recognition among economists that state intervention to shape markets and steer investment is crucial for fostering innovation, protecting strategically important sectors like semi-conductors, and tackling the climate emergency.

But we must also reassess the second belief—that taxes and transfers alone can address the vast inequalities that have brought American democracy to such a perilous juncture. Doing so will lead us towards a more fundamental rethink of our economic institutions, and the values that guide them.

This is partly a pragmatic response to economic reality. The massive increase in inequality since the 1980s in America was mostly driven not by a reduction in redistribution, but by the growing gap in earnings between low skill workers, whose wages have suffered an unprecedented period of stagnation, and college-educated professionals whose salaries have continued to soar. And while inequality has increased in most advanced economies, that it is so much higher in the U.S. compared to Europe is mostly the result of bigger gaps in earnings than lower levels of redistribution. In other words, even if America were to increase the generosity of the welfare state to European levels it would still be much more unequal.

But the need to look beyond redistribution is about more than economics, it is about resisting the narrow focus on money that dominates most debates about inequality, and the tendency to reduce our interests as citizens to those of consumers. While government transfers are essential for making sure that everyone can meet their basic needs, simply topping up people’s incomes fails to recognize the importance of work as a source of independence, identity, and community, and does nothing to address the insecurity faced by gig-economy workers, or the constant surveillance of employees in Amazon warehouses.

This is not purely a moral issue. According to a recent paper by economists at Columbia and Princeton, the Democratic Party’s shift towards a “compensate the losers ” strategy in the 1970s and 1980s—taxing high earners to fund welfare payments to the poor—played a key role in driving away less educated voters, who disproportionately support “pre-redistributive” policies like higher minimum wages and stronger unions.

Things are moving in the right direction. President Biden has put “good jobs” at the centre of his economic agenda, claiming that “a job is about [a] lot more than a pay cheque. It’s about your dignity. It’s about respect.” Leading economists such as Dani Rodrik at Harvard and Daron Acemoglu at the Massachusetts Institute of Technology’s have started to challenge the prevailing orthodoxy that such jobs are an inevitable by-product of a well-functioning market economy. This shift of focus towards the production or supply side of the economy has been variously termed “ productivism ”, “ modern supply-side economics ” and “ supply-side progressivism .”

Read More: Why Joe Biden is Running on the Economy

And yet, to grasp the full potential of these ideas we must look beyond economics to philosophy. Contemporary thinkers such as Michael Sandel and Elizabeth Anderson have done much to put questions about work back on the agenda. But for a systematic vision of a just society that recognizes the fundamental importance of work we should revisit the ideas of arguably the 20th-century’s greatest political philosopher, John Rawls—an early advocate for what we would now call “pre-distribution,” who argued that every citizen should have access to good jobs, a fair share of society’s wealth, and a say over how work is organized.

The publication of Rawls’s magnum opus A Theory of Justice in 1971 marks a watershed moment in the history of political thought, drawing favourable comparisons to the likes of John Stuart Mill, Immanuel Kant, even Plato. Rawls’s most famous idea is a thought experiment called the “original position.” If we want to know what a fair society would look like, he argued, we should imagine how we would choose to organize it if we didn’t know what our individual position would be—rich or poor, Black or white, Christian of Muslim— as if behind a “veil of ignorance.”

Our first priority would be to secure a set of “basic liberties,” such as free speech and the right to vote, that are the basis for individual freedom and civic equality.

When it comes to the economy, we would want “fair equality of opportunity,” and we would tolerate a degree of inequality so that people have incentives to work hard and innovate, making society richer overall. But rather than assuming that the benefits would trickle down to those at the bottom, Rawls argued that we would want to organize our economy so that the least well-off would be better off than under any alternative system—a concept he called the “difference principle.”

This principle has often been interpreted as justifying a fairly conventional strategy of taxing the rich and redistributing to the poor. But Rawls explicitly rejected “welfare state capitalism” in favour of what he called a “property-owning democracy.” Rather than simply topping up the incomes of the least well off, society should “put in the hands of citizens generally, and not only of a few, sufficient productive means for them to be fully cooperating members of society.”

Doing so is essential for individual dignity and self-respect, he argued, warning that “Lacking a sense of long-term security and the opportunity for meaningful work and occupation is not only destructive of citizens’ self-respect but of their sense that they are members of society and not simply caught in it. This leads to self-hatred, bitterness, and resentment” – feelings that could threaten the stability of liberal democracy itself. A focus on work is also necessary for maintaining a sense of reciprocity since every able citizen would be expected to contribute to society in return for a fair reward.

Rawls’s philosophy offers the kind of big picture vision that has been missing on the center-left for a generation—a unifying alternative to ‘identity politics’ grounded in the best of America’s political traditions. It also points towards a genuinely transformative economic programme that would address the concerns of long-neglected lower-income voters, not simply for higher incomes but for a chance to contribute to society and to be treated with respect.

At the heart of this vision is the idea that productive resources—both human capital (skills) and ownership of physical capital (like stocks and shares)—should be widely shared. People’s incomes would still depend on their individual effort and good fortune, but wages and profits would be more equal, and there would be less need for redistribution.

How might we bring this about?

First, we would need to ensure equal access to education, irrespective of family background. Sadly, the reality in America today is that children from the richest fifth of households are fivetimes more likely to get a college degree than those from the poorest fifth. Achieving true equality of opportunity is a generational challenge, but the direction should be towards universal early years education, school funding based on need rather than local wealth, and a higher education system where tuition subsidies and publicly-funded income-contingent loans guarantee access to all.

We also need to shift focus towards the more than half of the population who don’t get a four-year college degree. Our obsession with academic higher education—justified in part on the basis that this will generate growth, which in turn will benefit non-graduates—is simply the educational equivalent of trickle-down economics. At the very least, public subsidies should be made available on equal terms for those who want to follow a vocational route, as the U.K. is doing through the introduction of a Lifelong Learning Entitlement from 2025, providing every individual with financial support for four years of post-18 education, covering both long and short courses, and vocational and academic subjects.

Second, we must address the vastly unequal distribution of wealth . Thewealthiest 10 % of Americans have around 70 % of all personal wealth compared to roughly 2% the entire bottom half. Sensible policies like guaranteed minimum interest rates for small savers and tax breaks to encourage employee share ownership would encourage middle-class savings. But to shift the dial on wealth inequality we should be open to something more radical, like a universal minimum inheritance paid to each citizen at the age of eighteen, funded through progressive taxes on inheritance and wealth. If developments in AI push more income towards the owners of capital, something like this will become necessary.

Finally, we need to give workers real power to shape how companies are run. The idea that owners, or shareholders, should make these decisions is often treated as an immutable fact of economic life. But this “shareholder primacy” is neither natural nor inevitable about, and in most European countries employees have the right to elect representatives to company boards and to ‘works councils’ with a say over working conditions. This system of ‘co-management’ allows owners and worker to strike a balance between pursuing profit and all the other things we want from work – security, dignity, a sense of achievement, community – in a way that makes sense for a particular firm. The benefits of co-management appear to come at little or no cost in terms of profits or competitiveness, are popular with managers, and may even increase  business investment and productivity.

Critics will no doubt denounce these ideas as “socialism.” But as we have seen, they have impeccable liberal credentials, and are perfectly compatible with the dynamic market economy that is so vital both for individual freedom and economic prosperity. Neither are they somehow “un-American.” As Elizabeth Anderson has reminded us , America was the great hope of free market egalitarians from Adam Smith through to Abraham Lincoln, whose dreams of a society of small-scale independent producers were dashed by the industrial revolution, and would have been horrified by the hierarchy and subservience of contemporary capitalism. Rawls’s ideal of property-owning democracy can help us revive this vision for the 21 st century.

Still, even sympathetic readers might wonder whether there is any point talking about a new economic paradigm when the U.S. has failed even to raise the Federal minimum wage since 2009. But this would be to ignore the lessons of history. As the neoliberal era comes to an end, we should learn from its leading architects Milton Friedman and Friedrich Hayek, who were nothing if not bold, and saw their ideas go from heresy to orthodoxy in a single generation. As Friedman put it “Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around."

It often takes a generation or two before the ideas of truly great thinkers start to shape real politics. Now, for the first time since the publication of  A Theory of Justice  just over half a century ago, there is an urgent need and appetite for systematic political thinking on a scale that only a philosopher like Rawls can provide. In the face of widespread cynicism, even despair about the American project, his ideas offer a hopeful vision of the future whose time has come.

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