Health and ageing costs set to double

I have noted previously how the Australian economy, like most other developed economies, is facing stiff demographic headwinds as declining birth rates meet longer life expectancies, which will affect many areas of the economy, from consumption and growth to asset valuations and government finances.

Over the past 25 years, the Australian economy has benefited from a demographic ‘sweet spot’, whereby there has been a high proportion of working age people supporting a relatively 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.

This fall in the dependency ratio – loosely defined as the ratio of the non-working population (i.e. those aged under 20 and over 65) to the working age population (i.e. those aged between 20 and 65) – is clearly evident by the below chart:

2011 marked the year when the oldest members of the baby boomer generation – those born in 1946 – turned 65 and reached official retirement age. From now on, every year that passes will witness a rise in the number of retirees and an increase in the old aged dependency ratio (shown above by the increasing slope of the blue line). Accordingly, the proportion of workers in the economy will fall, as will the employment-to-population ratio (see below charts).

At the same time as the working aged population shrinks, it will have to wear the burden of increased taxes in order to cover the health care, pension, and other costs relating to an ageing society. A new report from the Business Council of Australia (BCA) has shed some light on these costs, predicting that health and ageing expenditure will double by 2050. From the AFR:

The cost of health and aged care across federal and state governments is expected to almost double over the next four decades, according to economic modelling commissioned by the Business Council of Australia (BCA)…

Based on current rates of population growth and ageing, the cost to Australian governments of care will surge to 14.5 per cent of gross domestic product by 2049-50 from 8 per cent in 2009-10…

Deloitte’s modelling suggests spending on health and aged care will by 2049-50 consume 45.8 per cent of total Commonwealth spending, up from 27.9 per cent in 2009-10, and 41 per cent of state and territory governments outlays, from the current 25.9 per cent…

Mr Rohan said the expected surge will be driven by demographic factors, such as the ageing population, as well as improvements in the quality and frequency of health care used by citizens.

While increased longevity is an unambiguously good thing, it will need to be paid for via a higher tax burden. I’m not sure that Australians have grasped this reality.

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