Long Term Ageing is Today's Policy Challenge

The Productivity Commission has highlighted the immediate challenges for governments posed by demographic trends, in its final report on the Economic Implications of an Ageing Australia.

The study found that ageing pressures are about to accelerate as the baby boomer generation retires. Ageing will reduce economic growth at the same time that it intensifies demands for public services, such as health, aged care and the age pension. With present policy settings, age-related spending will exceed the growth of tax revenue. This will open a fiscal gap equal to around 6½ per cent of GDP by 2044–45.

With the workforce shrinking as a proportion of the population, per capita GDP growth will fall to as low as 1.25 per cent per year in the 2020s, about half the rate in 2003–04.

The Commission’s Chairman, Gary Banks said “The ageing of our population is a long-term phenomenon. But its effects will be felt sooner than many imagine. The actions of governments today will determine how well Australia copes with ageing pressures in the future.”

The Commission demonstrates that, in the absence of other policy actions to reduce fiscal pressure, taxation levels would need to rise by 21 per cent by 2044–45, or the debt burden of ageing would become twice as large as Australia’s GDP.

The Commission said that policy responses would have to be on a broad front and at all levels of government. Coordinated reforms would be needed in key human service areas like health and aged care. The Commission shows that raising labour force participation can partly offset ageing’s impacts and highlights the importance of productivity growth to future prosperity.

However, the Commission finds limited scope for population policies to offset the demographic trends. Increased migration was not a realistic solution, though greater emphasis on skilled migration could play a useful role. The Commission projects fertility rates to rise slightly over the next decade, but the effects are greatly outweighed by improvements in life expectancy.

Gary Banks said, “The very fact that ageing brings us longer, healthier lives shows why we shouldn’t just see it as a problem. Talk of intergenerational conflict also seems overplayed when you factor in the potential for higher incomes from continuing productivity growth. That said, the economic and fiscal challenges are real. The earlier governments act, the less risk of crisis measures in the future.”