Economic Implications of an Ageing Australia

Australia faces a pronounced ageing of its population over the next forty years. One quarter of Australians will be aged 65 years or more by 2044–45, roughly double the present proportion. The proportion of the ‘oldest old’ will increase even more.

• In itself, population ageing should not be seen as a problem, but it will give rise to economic and fiscal impacts that pose significant policy challenges.

People aged over 55 years have significantly lower labour force participation rates than younger people. As more people move into older age groups, overall participation rates are projected to drop from around 63.5 per cent in 2003 04 to 56.3 per cent by 2044–45.

• Hours worked per capita will be about 10 per cent lower than without ageing.

Assuming the average labour productivity performance of the past 30 years, per capita GDP growth will slump to 1.25 per cent per year by the mid 2020s, half its rate in 2003–04.

While taxation revenue will largely track GDP growth, government expenditure is likely to rise more rapidly, placing budgets under considerable pressure.

• Although education and some welfare payments are projected to increase more slowly than GDP, government spending on health, aged care and pensions will grow at a faster rate.
• The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2044–45, with ageing accounting for nearly one-half of this.

In the absence of policy responses, the aggregate fiscal gap will be around 6.4 percentage points of GDP by 2044–45, with an accumulated value over the forty years of around $2200 billion in 2002–03 prices.

• On past trends, much of this could be expected to be borne by the Australian Government, but there are significant potential burdens faced by State and Territory Governments.

A range of policy measures will be needed to reduce the fiscal pressure from ageing and/or to finance the fiscal gap.

• Plausible increases in fertility and net migration would have little impact on ageing trends.
• Measures to raise productivity and participation would enhance income growth and the capacity to ‘pay’ for the costs of ageing, including through taxation. However their ability to alleviate fiscal pressure directly depends on the extent to which service demands and costs continue to rise with growth.
• More cost-effective service provision, especially in health care, would alleviate a major source of fiscal pressure at its source.

Timely action would avoid a need for costly or inequitable ‘big bang’ interventions later. Population ageing can only be conceived as a crisis if we let it become one.