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Finance - Ageing nation |
People who try to forecast the future have a patchy success record – even economists. But in one area long term forecasts are more accurate than most. This area is demographics.
Barring wars, pandemics, miracle scientific breakthroughs or compulsory euthanasia, trends can be forecast with some accuracy well into the future. Amongst the Federal Government budget papers released recently, one paper - called the Intergenerational Report (IGR) - dealt with this issue.
It discusses the long-term effects of an ageing population on the Federal Budget. In particular it looked at the likely increase in health, aged care and income support costs over the next 40 years. It doesn’t look too good - but it’s far too early to panic.
It is one thing to say the population is ageing but quite another to try and predict what this might mean financially. Over 40 years, particularly with the rate of change we are experiencing, just about anything could happen.
Now of course we have all known for decades that the population, thanks to the baby-boomers, has been ageing and that this was likely to cause financial problems for governments in the future. Even Gough Whitlam in the early 1970s recognised that there would be a crunch and proposed a national superannuation scheme.
Unfortunately he was thrown out of office before he could act on his ideas and they were not picked up again until 20 years later, much too late to be of much assistance to the baby-boomers. It takes a long time for most people to save enough to become independent retirees. A nine per cent of salary contribution to super, the current compulsory level, takes about 40 years to generate enough retirement income.
As we know the baby boomers have already started to retire. As the IGR paper says, the big problems emerge because that proportion of the population aged 65 and over will have doubled within 40 years. The proportion of people aged 85 and over will have tripled. Meanwhile the proportion of the population of workforce age (15 to 65 years) will fall.
Even upping the intake of migrants or refugees will not make a great deal of difference to this simply because even younger migrants will age over time.
To summarise the IGR conclusions, if we had the same population structure now as we are likely to have in 40 years time, then we would have to find an extra $87 billion in tax revenue to maintain current standards. That’s an extra five per cent of gross domestic product.
So where would this money be spent? There are four main areas – aged pensions, aged care facilities, health care and education. More than half of current Commonwealth government spending is directed to these areas and all are sensitive to demographic change.
The good news is that because of the decline in fertility rates, there will be a little less spending (as a proportion of gross domestic product) on education in the future.
As expected the proportion of GDP that will go to paying age pensions will increase, although as time goes on this will be alleviated somewhat as superannuation savings start to have some effect.
Overall income support payments will rise from 2.9 per cent to GDP to 4.6 per cent – about a 60 per cent increase. This is not as bad as other OECD countries where the ageing problem is worse. In many European countries for example, pensions are related to income received while working.
The big problems according to Treasury will occur in the health area – particularly the Pharmaceutical Benefits Scheme. While demographic trends affect health spending, over recent years these population trends account for only one third of the increase in health costs. Two thirds are due to new technology and treatments.
The cost of the PBS as a proportion of GDP is expected to grow from 0.6 per cent to 3.4 per cent – a fivefold increase. And this is after the changes made in the last Federal Budget. The spending on aged care is expected to grow from 0.7 to 1.8 per cent of GDP.
So what is the solution? Treasury suggests we either have to increase taxes, decrease benefits, or both. But there is another way to look at the problem.
In 40 years time, no matter what the level of taxes or savings, we as a nation will only be able to consume what we produce. Take an extreme example. If everyone stopped working and tried to live on their savings, nothing would be produced yet demand would be the same. Prices would go through the roof and savings would become worthless.
This means that the average standard of living of Australians in the future will depend upon what is produced by the then working population. The best way to solve the problem then is to make this future workforce as productive as possible. There may be relatively less of them but if they produce more they will be able to pay higher taxes to support those not working.
How do you increase productivity or output per worker? You increase investment in infrastructure and technology and most importantly, education and training.
If we do not do this then the pie we have to divide in 40 years time will be that much smaller. Attempts to transfer wealth between generations could become difficult and bitter. David Tomlinson
David Tomlinson is a freelance finance journalist based on the Northern Rivers of NSW.
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