The political dilemma of an ageing population

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Thursday, 28 January 2010 20:27 by Ad astra

We all accept that Australia’s population is ageing.  Demographic evidence shows that life expectancy at birth is now 78.9 years for males and 83.6 years for females.  These figures are from the CIA World Factbook 2009 and from the 2006 revision of the United Nations World Population Prospects report for 2005-2010.  Although there is a suggestion that with the growing epidemic of obesity, type II diabetes and cardiovascular disease, future generations may be the first to not enjoy the same longevity as their predecessors, we will have an ageing population for the foreseeable future.

This piece begins to address the ageing issue.  No doubt much will be written about it, although to date the MSM has not given it much attention.  Much of what appears below is drawn from Government documents heralding the Third Intergenerational Report: Australia to 2050: Future Challenges that will soon be released by Wayne Swan.  This post is offered to furnish some facts and figures, to offer some opinions, to encourage debate, and to kindle ideas about how this country should address the ageing challenge.

The First Intergenerational Report 2002-03 was released by Peter Costello in May 2002 with the 2002-03 federal budget.  The Second was released in April 2007.  The Third Report will describe the challenges facing Australia over the next 40 years, the result of the demographic changes resulting from the ageing of our population.  It is hereby acknowledged that much of the following is extracted from an advance notice of that report:

The bare essentials

Today there are 22 million Australians; by 2050 it is estimated there will be 36 million – reflecting natural population growth and a continuation of migration trends of the past forty years.

Today, 14 per cent of Australians - one in seven - are over the age of 65; by 2050, 23 per cent – almost one in four - will be over 65.

The ageing of the population is expected to reduce the workforce participation rate from around 65 per cent now to around 60 per cent by 2050.  This will lead to changes in the ratio of the number of people of working age (and paying taxes) to those aged 65 and over: Forty years ago, in 1970, the ratio was 7.5 people of working age to every person 65 and over. In 2010, the ratio is 5 to 1, and in 40 years' time, in 2050, it is projected to fall to just 2.7 people of working age for each person aged 65 and over.

Thus Australia faces higher costs in catering for the aged, yet slower economic growth as there will be fewer workers.

The report projects that average annual growth in real GDP per person will fall to 1.5 per cent over the next 40 years, in contrast to an average increase in GDP per capita of 1.9 per cent per year over the past 40 years.  Therefore average family incomes will grow at a slower rate than in recent years.

The Government believes it must act now to counter the projected decline in economic growth in the years ahead by enhancing productivity growth and workforce participation.  By lifting productivity and participation, a higher rate of economic growth could be achieved.  A Treasury analysis shows that if average productivity growth was lifted back towards the 1990s mark of an average 2 per cent per year - up from the 1.4 per cent to which it declined in the decade just passed - this would produce enormous benefits: Australia’s economy would be $570 billion bigger in 2050 and on average, every man, woman and child would be $16,000 better off a year in 2050.

The advance report, used by Kevin Rudd in announcing its advent, asserts that: “It is productivity growth that must play the central role in building Australia's future economic growth. Productivity is about how we use labour, capital and technology across the economy. It's about working smarter - rather than working harder, or working longer.  Productivity depends on all of us - workers, businesses and the Government - but the Government plays a vital role in facilitating long-term productivity growth.”

Productivity – the crucial element

The report continues – “To lift productivity we need broad economic reforms” , as follows:

First, Treasury projections suggest we can increase productivity by building 21st century infrastructure.  An increase in the public infrastructure stock by 1 per cent would lead to an increase in output by around 0.2 per cent, and improving the efficiency of our energy and transport infrastructure could increase GDP by nearly 2 per cent, the equivalent of around $75 billion or $2,000 per person in today's dollars.

Second, we can increase productivity by building a highly skilled, highly trained workforce.  Improvements related to education and training - early learning, higher education attainment and increases in numeracy and literacy - could raise aggregate labour productivity by up to 1.2 per cent.  If we could boost GDP in 2050 by 1.2 per cent, that would amount to around $45 billion in today's dollars - or the equivalent of around $1,200 for each Australian.

Third, we can increase productivity through microeconomic reforms - such as the reforms the Government is prosecuting to build a seamless national economy.  National Competition Policy and related reforms during the 1990s increased Australia's GDP by 2.5 per cent.  Further microeconomic reforms can build on this achievement and continue to lift GDP and productivity.  Tackling social exclusion can also contribute to increasing workforce participation and productivity growth by removing barriers to work and improving skills among the most disadvantaged, such as Indigenous Australians, unemployed youth and the homeless. These measures would also help the 2.6 per cent of Australians - around 570,000 - who were left out while the nation reaped the benefits of the mining boom in the past decade.

The downside of an ageing population

The report then sounds a more sombre note: the challenge of the ageing of our population to the sustainability of future budgets. Unless the Government can achieve higher levels of productivity growth and workforce participation, we face either generating large, unsustainable budget deficits into the second quarter of the century, or reducing government services.  The report asserts that the task has been made more difficult by the aftermath of higher budget expenditure during the past decade, which has locked in a permanently higher spending base.  During the growth period of the 2000s, the average real growth in government spending increased to 3.8 per cent compared to an average 2.5 per cent annual real growth in spending during the growth period of the 1990s.

The Government insists that it is committed to a medium-term fiscal strategy that will deliver a permanent structural improvement in Australia's public finances so that by 2049-50, the Budget outcome is projected to be around 3.5 per cent of GDP better off – that is $130 billion in today's dollar terms.

Let’s look at some of these data:

The projected population growth to 36 million is applauded by some but others are appalled and assert that Australia cannot support that number.  But to restrict population growth, natural growth would need to be discouraged, not something some religious groups would approve, or migration restricted.  Since immigration has given this country great impetus and prosperity, restricting it sharply might prove to be counterproductive.  You can see fertile grounds here for partisan conflict.

The uncomfortable truth about which little can be done is that the proportion of those over 65 will jump from one in seven to one in four by 2050, and that for everyone over 65 there will be only 2.7 wage earning tax payers in 2050, whereas now there are 5. 

Clearly the productivity of those who are working will need to rise to support the over 65s, many or most of whom will be retired and on welfare.

Improving productivity

Hoping to avoid criticism for expecting people to work harder and longer, the Government suggests instead that they work smarter.  That is good advice, and is one way of lifting productivity.  Another is to have more people participating in productive work.

Retirement age

Australia would have more people in work if we had a higher retirement age.  Can we afford to have a retirement age of 65?  Already there are moves to lift it to 67, starting in 2017 and completing the change by 2023, a very modest rise over a long period.  Since 65 was set as a retirement age a century ago when longevity was much less than it is now, would it not be reasonable to raise it to say, 70, and to raise it faster.  For those doing heavy physical work that might be a big ask, but if graded diminution in physical effort was accompanied by shorter working hours or a shorter working week towards the end of the working life, would there not be many who would welcome the opportunity of continuing to be productive and earning.  During the GFC business showed it was willing to make such flexible working arrangements to avoid sacking workers.  Those doing less arduous work might leap at the opportunity of avoiding retirement for a few more years.  Many professionals are already working well beyond the statutory retiring age and loving it.  Governments are too reluctant to address this issue; the fact that Tony Abbott has given some support to it might embolden Kevin Rudd to re-consider this matter.

Up-skilling the workforce

Productivity can also be raised by up-skilling the workforce.  This needs to begin in pre-school and continue as far as each individual wishes to, and is capable of going.  That will lead to smarter working.  The advent of super fast broadband will open up opportunities for smarter working, and possible vastly different working opportunities. Could not more opportunity be taken for working at home some or all days of the week, using fast broadband for rapid communication?  Videoconferencing is becoming commonplace; it could substitute for workplace meetings and conferences.  This would reduce wasteful travel time, unclog our roads and reduce air travel.

Workplace patterns

Although politicians will be unwilling to even mention these measures, could not work patterns be made more efficient by restricting such time-wasting habits as attending to personal email and engaging in social networking during working time, having frequent smokos that now requires workers to leave the workplace, spending too much time chatting around the coffee machine (not about work, but cricket and football), partaking in long lunches that sometimes leave employees alcohol affected, taking ‘sickies’ simply to use up sick leave, something the self-employed eschew.  This might sound rather puritanical, but can we afford to preserve such workplace ‘sacred cows’ when we’re facing the crisis of an ageing population.  Many workers really do need to work harder and longer.

Infrastructure

Infrastructure improvements in rail, roads and ports will improve efficiency and productivity by removing bottlenecks, something the Government keeps emphasizing.  This takes time to stoke up, so the faster these progress the better. 

Microeconomic reforms

The microeconomic reforms that are underway are designed to make business more efficient by removing red-tape, unnecessary restrictions, conflicting rules and interstate blocks, and streamlining business across states and regions.  COAG is already addressing this, but as is the rule with bureaucracies, progress is slow.

Health care reform

The health care system is another major area where improved efficiency is needed and where major cost saving could occur.  After sixteen months of data gathering and deliberation the Hospitals and Health Reform Commission has delivered a report with over a hundred recommendations that will be implemented starting this year.  Nicola Roxon says she has almost completed negotiations with the states.  Hopefully state bureaucrats will not obstruct progress.

Tax reform

The Henry review of taxation promises to reduce the complexity of taxation and transfer payments, and thereby reduce the cost of administering them.

The consequences of failure

Unless these measures can improve productivity, increase participation and lower costs, all those who pay tax will be faced with higher taxes, or reduction of government-provided services, neither of which anyone would applaud.  The alternative – increasingly large budget deficits, is unacceptable.

The object of this piece is to stimulate debate on the crucial issue of how to cope with Australia’s ageing population.

Please tell us what you think.  Let us have your ideas.