The 21st century will be the century of old age, where declining birth rates meet longer life expectancies. This ageing of the population will affect many areas of the international economy, from consumption and growth to asset valuations.
The impacts from ageing will likely be most acute in Western Nations, although some developing countries, most notably China, will also be negatively affected.
Australia is not immune from these demographic headwinds. As shown by the below chart, for the past 25 years, Australia’s total dependency ratio – the ratio of the non-working population, both children and the elderly, to the working age population – has been in a demographic ‘sweet spot’. That is, there has been a high proportion of working age people supporting only a small pool of dependents. This ‘sweet spot’ has come about from two main factors:
The Baby Boomer generation – defined by the Australian Bureau of Statistics (ABS) as those born between 1946 and 1965 and comprising around 25% of Australia’s population – has been at working age; and
Declining birth rates from the mid-1970s.
However, 2011 marks the year when the oldest members of the Baby Boomer generation – those born in 1946 – turns 65 and reaches official retirement age. Accordingly, Australia’s dependency ratio is projected to worsen progressively each year from now on as the Baby Boomers gradually enter retirement.
Australia’s demographics are similar to those of other Western nations, which have also experienced similar demographic ‘sweet spots’ as well as rising dependency ratios going forward (see below chart).
To put the number of retirees in Australia into perspective, consider the number of Australians turning 65 each week between 2000 and 2030:
As you can see, the number of retirees has been on the rise since 2000. And this trend is expected to continue for another 15 years or so.
Accordingly, the proportion of Australia’s population aged 65 or above is projected to rise from around 14% currently to 24% in 2050. Similarly, Australia’s median age is expected to increase from around 38 years of age currently to 43 years in 2050 (see below chart).
An increase in the dependency ratio will, other things equal, lower Australia’s growth potential via reduced expenditure, lower asset valuations, and higher rates of taxation. These impacts are summarised below.
First, consider the below chart showing how much household income falls once retirement is reached.
As you can see, household income peaks between the ages of 45 and 54, before dropping sharply. A household in retirement earns just over a third of what a 45 to 54 year old household earns.
A similar situation applies with respect to expenditure. Household spending peaks between the ages of 45 and 54, before falling sharply. A household in retirement spends less than half of what a 45 to 54 year-old household does (see below chart).
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.