Implications of the 2015 Intergenerational Report

Peter McDonaldCrawford School of Public PolicyThe Australian National University

andARC Centre of Excellence in Population Ageing Research (CEPAR)

Rationale of the Intergenerational Reports

• As required by the Government’s Charter of Budget Honesty Act 1998:

• ‘An intergenerational report is to assess the long term sustainability of current Government policies over 40 years by taking account of the financial implications of demographic change.’

• IGR1 narrowed this to: The report provides a basis for considering the Commonwealth’s fiscal outlook over the long term, and identifying emerging issues associated with an ageing population.

2015 IGR, p.13

What causes population ageing?

• Population ageing is the product of the past, long-term history of births. Current ageing is due to the baby boom generation entering the older ages and replacing the small generation born during the depression.

• But, in addition, there are quite remarkable changes in mortality rates at older ages and this contributes greatly to the growth of the population aged 80+.

The chance of dying over the next yearAustralia, 1921-2011 (per cent)

Why is ageing a fiscal issue and whose issue is it?

Average per person

Mainly an issue for the national government

Not all bad news (1)

• The 2015 IGR projects that GDP per capita will rise by 1.5% per annum in real terms over the next 40 years (or by 82 per cent).

• On average, Australians will have a living standard that is 82% higher than it is now.

• Might we be willing to give up a little of this additional living standard to support the needs of older people?

Not all bad news (2)

Source Projected fiscal balance after 40 years as % of GDP

IGR1: 2002-03 -5.0

IGR2: 2007 -2.7

IGR3: 2010 -1.3

IGR4: 2015 0.5*

* Not comparable with earlier years because of the politicisation of the 2015 IGR.The balance shown is based on the ‘proposed policy’ model.

The outcome gets better and better with each successive IGR

Changes in the demographic assumptions of the model contribute to the improvement in

outcomes over time

Long-Term Demographic Assumptionsin the 2003 and 2015 IGRs

(Period) Average

Number of Births per Woman

Annual Net Migration

(000’s)

(Period) Expectation of Life at Birth in 2050 (years)

Males Females

IGR 2003 1.6 90 83.2 88.2

IGR 2015 1.9 215 87.5 90.1Source. IGR. 2015

% Difference in the 2051 Population Projected by ABS in its 2003 and 2013 Projections, by Age Group

0-9 25-34 35-44 65-79 80+ Total0

10

20

30

40

50

60

70

80

90

Age Group

%

Impact of migration on population ageing

Level of Net Overseas Migration

Per cent of Population

Aged 65 and Over, 2053 (%)

0 28.4100,000 25.2180,000 23.4300,000 21.2 Current level

14.0

Labour force outcomes for Australia with varying levels of net overseas migration

11000000

13000000

15000000

17000000

19000000

21000000

23000000

25000000

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2051

2054

2057

2060

0 100 180 300

Migrants assumed to have Australian labour characteristics

GDP per capita growth rateunder different levels of net overseas migration

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.92013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

2037

2039

2041

2043

2045

2047

2049

2051

2053

0 100 180 300

Assumes migrants have same productivity as other Australians: 1.6%

Australia’s Age Distribution in 2011 and 2061

Source: ABS 2013. Population Projections, Australia. ABS Catalogue No. 3222.0

Our major trading partners, in 2060:

Japan China

Source: Wittgenstein Centre for Demography and Global Human Capital

Ratio of Population Aged 15-24 in 2050 to Population Aged 15-24 in 2010, 14 countries

China

Thailan

d

Vietnam Ira

n

R. Korea

Japan

Bangla

desh

Mala

ysia

India

Singa

pore

Indonesia

Pakist

an

Philippines

Australi

a0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Source: United Nations Population Division. 2012 Revision

Australia’s relatively favourable situation in relation to population ageing is not grounds for complacency.

We still need to consider policy options that are efficient and fair.

The First of the Three Ps

Try to maintain demographic settings around those projected in the IGR.

The Second of the Three Ps

• Incentives and disincentives for working at older ages.– Increasing the age pension eligibility age– Equalise the tax-free superannuation age with the age

pension eligibility age– A higher tax threshold for those aged 60 years and over– Wage subsidies for employment of older persons– Transition to retirement arrangements (eg. part-time

work that does not affect super entitlements, part-time work and part pension arrangements.

– et al.

Labour force participation rates(%), Australia, 2000-2015, and New Zealand 2014

Males Females

55-59 60-64 65+ 55-59 60-64 65+

2000 71.6 46.5 10.1 48.0 21.7 2.9

2010 81.0 61.7 15.3 63.5 43.2 6.7

2015 81.1 64.0 15.8 66.6 47.2 8.5

NZ 2014 89.3 77.8 27.7 80.6 66.8 15.6

Australia’s rates are still way below those of New Zealand

The Third of the Three Ps

• Increase labour productivity, always the most important of all.

• Just a small increase in the growth of labour productivity would relieve the fiscal situation – so long as the benefits are redistributed.

• Easier said than done

Innumerable revenue and expenditure options

• A central issue here is the variability of experience at older ages.

• Some people are able to look after themselves to a ripe old age with little recourse to the health system.

• Others become dependent early and continue in a dependent and expensive state for many years.

• Others die relatively young suddenly.• Some have a relative who is able to care for them and

keep them out of aged care for longer.• The individual in advance does not know which of these

will apply to them.