Implications of the 2015 Intergenerational Report Peter McDonald Crawford School of Public Policy The Australian National University and ARC 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 year Australia, (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) SourceProjected fiscal balance after 40 years as % of GDP IGR1: IGR2: IGR3: IGR4: * * 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 Assumptions in 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) MalesFemales IGR IGR Source. IGR. 2015

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

Impact of migration on population ageing Level of Net Overseas Migration Per cent of Population Aged 65 and Over, 2053 (%) , , , Current level 14.0

Labour force outcomes for Australia with varying levels of net overseas migration Migrants assumed to have Australian labour characteristics

GDP per capita growth rate under different levels of net overseas migration Assumes migrants have same productivity as other Australians: 1.6%

Australia’s Age Distribution in 2011 and 2061 Source: ABS Population Projections, Australia. ABS Catalogue No

Our major trading partners, in 2060: Japan China Source: Wittgenstein Centre for Demography and Global Human Capital

Ratio of Population Aged in 2050 to Population Aged in 2010, 14 countries Source: United Nations Population Division 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, , and New Zealand 2014 MalesFemales NZ 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.