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Economic Implications of an Ageing Australia

Research report

This research report was released on 12 April 2005. The report presents the findings of the commissioned study which examined the productivity, labour supply and fiscal implications of likely demographic trends over the next 40 years, to further improve understanding of the challenges and opportunities resulting from an ageing Australia.

A number of minor errors have been detected in the report since it was printed. These principally relate to the treatment of future education costs. The errors have been corrected in the PDF and RTF files on this website, but remain in the printed copies. They make no qualitative difference to the conclusions reached.

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  • Key points
  • Media release
  • Contents

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.

Background information

Ralph Lattimore (Assistant Commissioner) 02 6240 3242

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.'

Background information

Ralph Lattimore (Assistant Commissioner) 02 6240 3242

Leonora Nicol (Media, Publications and Web) 02 6240 3239 / 0417 665 443

Preliminaries
Cover, Copyright, Foreword, Terms of reference, Abbreviations and explanations, Contents, Overview

1 Introduction
1.1 Scope of the study
1.2 Participation in the study
1.3 Structure of the report

2 Ageing of the Australian population
2.1 Introduction
2.2 The extent of the demographic transition
2.3 Mortality rates have been falling
2.4 Fertility has been falling
2.5 The role of migration in population ageing
2.6 Putting the jigsaw of effects together

3 Ageing and labour markets
3.1 Why ageing matter for the labour market?
3.2 The determinants of economic growth
3.3 Labour supply trends: the view backwards
3.4 Projections of Australia's labour supply
3.5 Volunteering

4 Productivity and ageing
4.1 Introduction
4.2 Labour productivity assumptions used in previous studies
4.3 Past and future productivity growth
4.4 Relative productivity of current workers
4.5 Capital deepening, technical progress and ageing
4.6 Convergence or divergence in State and Territory productivity growth?

5 Economic growth implications
5.1 Economic growth over the next forty years
5.2 The role of ageing
5.3 Exploring other scenarios for Australia's economic future
5.4 Placing these projections in context

6 Health expenditure
6.1 Government expenditure on health
6.2 Influences on health care expenditure: what role for ageing?
6.3 Projecting government health expenditure

7 Aged care expenditure and carer payments
7.1 Expenditure on aged care
7.2 Payments to carers

8 Personal benefit payments
8.1 Nature and magnitude of payments
8.2 Benefits are strongly age-related
8.3 Method for projections
8.4 The projected growth in payments

9 Education expenditure and ageing
9.1 Structure of education and funding
9.2 Method for projecting government expenditure
9.3 Projected education expenditures

10 Other expenditure
10.1 Housing assistance trends
10.2 Spending on transport services
10.3 Law and order
10.4 State and Territory government concessions
10.5 Superannuation expenditure

11 Revenue
11.1 Relevant features of the tax system
11.2 Whither Australian Government taxes?
11.3 What about State taxation revenues?
11.4 Summing up

12 Local government and regional impacts
12.1 Demographic change at the regional level
12.2 Economic implications of ageing for local government
12.3 Other regional impacts

13 Implications of population ageing
13.1 Introduction
13.2 Ageing and fiscal pressures
13.3 Uncertainties surrounding the projections
13.4 The ageing 'problem' in perspective
13.5 Implications of financing the fiscal gap
13.6 Addressing the fiscal drivers
13.7 Summing up

A Submissions and consultations
A.1 Submissions received
A.2 Consultations

B Education and labour force participation

C Health expenditure projection methods and sensitivity analysis
C.1 Method
C.2 Alternative projection methods

D Non - demographic growth in health expenditure

E Voluntary work
E.1 Volunteers
E.2 Volunteering in an ageing population

F Fiscal risks for governments
F.1 The vertical fiscal imbalance and fiscal pressure
F.2 What payments are at risk?
F.3 Fiscal pressures for the 'Combined States' compared with the Australian Government
F.4 Relative fiscal risks for individual States compared with each other

References

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