Bloxo calls for bigger population ponzi

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By Leith van Onselen

HSBC Australia’s chief economist, Paul Bloxham (“Bloxo”), has produced an interesting note today outlining Australia’s demographic headwinds, and arguing for an expansion of the immigration intake to counter ageing’s impact on the economy:

As the ‘baby boomers’ are starting to retire, Australia faces similar demographic challenges to other countries

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An aging population is expected to lower the potential growth rate and put extra pressure on government finances

Australia’s openness to migrants could help with demographic challenges, given it has a history of attracting large numbers of skilled migrants, particularly from Asia

Migration could help deal with the challenge of aging

An ageing population presents a policy challenge for Australia in coming years. Because the ‘baby boomers’ are now starting to retire, growth in the working age population is already starting to slow. This is expected to act as a drag on Australia’s potential growth rate, adding to the problem of Australia’s recent weak productivity performance.

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To some degree, Australia’s compulsory superannuation system has helped to deal with this issue, leaving it better placed than many developed nations. The introduction of this scheme in the late 1980’s, means Australia now has a pool of superannuation funds to rival the size of the world’s largest sovereign wealth funds. Australia has the world’s 4th largest pool of superannuation funds.

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Nonetheless, an older population still presents a challenge, particularly for government budgets, as it means greater spending on healthcare and less revenue from the income tax system. With the government’s budget currently in deficit (-3.0% of GDP in 2013/14), the ageing population adds to the case for a credible medium-term plan to return to a budget surplus. Cuts to government-funded healthcare are a policy option available to the government. Another option is a shift in the tax base to consumption or wealth-oriented taxes, rather than the current system, which relies heavily on income taxes.

Still another policy option is stronger inward migration flows. Migrants are typically younger than the extant population. They also bring with them much needed skills and have strong ties to their former home countries, which can strengthen financial and trade ties. Australia’s already has a targeted immigration scheme, which allows the government to control the types of skills of individual migrants.

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Strong migration flows, particularly from fast-growing Asian nations, could help Australia deal with its demographic challenges and also strengthen its links with the fastest growing economies.

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While I obviously agree that population ageing presents stiff headwinds for Australia, and have written on the topic extensively over the past three years, I disagree that increasing the immigration intake provides a sustainable solution.

Late last year, the Australian Bureau of Statistics (ABS) released its long-term population projections, which provide population projections under three scenarios:

  1. High growth scenario (Series A), which assumes Australia’s future total fertility rates will reach 2.0 babies per woman by 2026 and then remain constant, life expectancy at birth will continue to increase until 2061 (reaching 92.1 years for males and 93.6 years for females), and NOM will reach 280,000 by 2021 and then remain constant.
  2. Medium growth scenario (Series B), which assumes Australia’s future total fertility rates will decrease to 1.8 babies per woman by 2026 and then remain constant, life expectancy at birth will continue to increase each year until 2061, though at a declining rate (reaching 85.2 years for males and 88.3 years for females), and NOM will remain constant at 240,000 per year throughout the projection period.
  3. Low growth scenario (Series C), which assumes Australia’s future total fertility rates will decrease to 1.6 babies per woman by 2026 and then remain constant, life expectancy at birth will continue to increase each year until 2061, though at a declining rate (reaching 85.2 years for males and 88.3 years for females), and NOM will reach 200,000 per year by 2021 and then remain constant.

According to these projections, Australia’s total dependency ratio – defined as the ratio of the non-working population, both children (<20 years old) and the elderly (over 65 years old), to the working age population – is worst under the ABS’ “high growth” (Panel A) scenario, thereby placing a question mark over Bloxo’s claim that high immigration is required to mitigate the impacts of population ageing (see below charts):

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The ABS’ projections are also supported by the Productivity Commission, which in its submission to the former Minister for Population argued that higher immigration is largely ineffective in alleviating the effects of an ageing population, and that any improvement is likely to be only temporary:

…several studies, including some undertaken by the Commission, indicate that policy-induced changes to Australia’s population are unlikely to significantly affect the ageing trends.

Improvements in longevity are the major cause of population ageing over the long run. In recent projections, Commission researchers estimated that an increase in the long-run total fertility rate from 1.85 to 2.10 births per woman — even if it could be achieved — would be associated with only a 1.1 percentage point reduction in the proportion of people aged over 65 by 2051.

Similarly, substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age. The Commission has estimated that an increase in annual net migration from 150 000 to 300 000 would lower the proportion of those aged 65 or over by less than 3 percentage points by 2044-45. As an illustration of the challenge, the Commission showed that delaying an increase in the dependency ratio by 40 years would require a net migration-to-population ratio of 3 per cent per year, leading to a population of around 85 million by 2044-45.

It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts.

As noted previously, the only way to sustainably mitigate the effects of population ageing on the economy and/or Budget is through: (1) greater productivity growth; (2) higher workforce participation; (3) tightening eligibility requirements for entitlements, such as the aged pension, aged care, and subsidised health care; and (4) reducing superannuation concessions for higher income earners.

Seeking to simply ramp-up immigration is short-sighted, particularly in light of the increased costs of congestion, higher infrastructure costs, lower environmental amenity, dilution of the nation’s mineral wealth, and overall minimal uplift in material economic well-being.

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www.twitter.com/Leithvo

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. johnathonbbbrown

    Look at where immigration is coming from. 70% from Asia. Soon the Asians (Chinese & Indians) will predominate. Then the current floodtide will seem like a ripple. Our country, the driest continent on Earth, will be destroyed by a massive population explosion. And the white man, he won’t complain (just like in England) , we wouldn’t want to upset anybody as we get overrun, would we?

    • we wouldn’t want to upset anybody as we get overrun, would we?

      Lest we all get branded as racist…

      • This is the high immigration proponents scare campaign and it is a lie but they are relentless and don’t care a fig about this nation and her people.

        You don’t need to (undemocratically) change the ethnic makeup of this country in order to forge trade links.

        And what the hell is the deal with the graph titled “Immigrants are generally younger and better educated”? This is more propaganda. Yesterday I heard of an immigrant who brought 13 family members here as soon as he was able to, mostly elderly – Net benefit to Australia?

        C’mon Australians don’t buy this propaganda and think about the future you are leaving to your children.

        http://www.theglobalist.com/is-population-growth-a-ponzi-scheme/
        Among its primary tactics, Ponzi demography exploits the fear of population decline and aging. Without a young and growing population, we are forewarned of becoming a nation facing financial ruin and a loss of national power.

    • “Look at where immigration is coming from.”

      I don’t care where it’s coming from (and I’ll ignore the idiotic rest of your comment).

      I want it massively reduced until our governments can prove to us that they are willing and capable to build the infrastructure we need.

      We can’t even build enough for our current population, let along a much larger future one.

      • You don’t hey. Is that because you work in a job that has little to no non whites?

        Funny how the lefties, who usually do some sort of artsy type thing, want all these immigrants, but they never seem to hang around them themselves? Maybe you lefties are actually true racists yourselves and like to call people racist a lot in order to assuage some massive guilt? A bit like how some rednecks turn out to be gay.

        Go hang with a group of Asians and your opinion might be worth a pinch of shit.

        Where’s all the non white journos and presenters on the ABC? Hardly any, in fact I’d say the mainstream channels have more.

      • Funny how the lefties, who usually do some sort of artsy type thing, want all these immigrants, but they never seem to hang around them themselves?”

        Did you actually read my comment? The one where I say that I want immigration massively reduced regardless of where it comes from?

        Maybe you lefties are actually true racists yourselves and like to call people racist a lot in order to assuage some massive guilt? A bit like how some rednecks turn out to be gay.

        You’ve got me there – I can’t argue with that airtight logic.

        Go hang with a group of Asians and your opinion might be worth a pinch of shit.

        What if I was Asian? Would I still have to hang with other Asians or would my opinion be worth a pinch of shit anyway?

      • @AB Just don’t say you want immigration drastically reduced if you’re going to refuse to actually vote for it. It’s disgusting.

      • “Just don’t say you want immigration drastically reduced if you’re going to refuse to actually vote for it.”

        Why not?

        I’m certainly not going to vote for a party whose only public policy is to reduce immigration and wants to decide the others after they’re elected.

        I’m not a single issue voter and I’m well aware that my other views are probably not ones shared by those who do vote solely on this issue.

      • “Anyway they’ve got more policies now.”

        Thanks for pointing that out – I’ll have another read now.

  2. I’d be interested to see the demographics (in terms of age) of current immigration and foreign investment in property. One of the big hidden problems that I worry about is that, even with the flawed premise that immigration will solve the ageing problem, as it’s currently structured it’s not even doing that.

    Policies such as Family Reunion- which allow migrants to bring in elderly family members- act to increase the migrant age profile. Furthermore, the participants in the foreign investment scheme are likely to be biased towards older demographics.

    I realise anecdote does not equal data, but one of the most fascinating aspects of the foreign investment issue is not that most of the people I’ve seen bidding at auctions in the last few years appear to be Chinese, but that most of them are the wrong side of 40 to provide any demographic benefit.

    So I would argue that our current policy settings do not even support the flawed premise that justifies them.

  3. How many spot the Aussie suburbs do we have these days. To find out I take a look at the local high school web site.

    Thankfully in Sydney there are still plenty that are either predominantly white or with a good mix. But very expensive.

    This mass immigration would be a lot more palatable if we not only had sufficient transportation infrastructure(which Lib/Lab clearly have nothing but contempt for), but also decent export industries like silicon valley.

    If we go bust we’re going to have a lot of mouths to feed on the dole and it could cripple us. This grow and hope seems flat out dangerous too.

    • Anyone else think Bluebird is actually a population-boosting Big Australia plant, employed to spew this racist rubbish, muddy the waters and derail any sensible analysis of the dangerously high pop growth rate?

      • @Patrician – Perhaps. I did get roundly attacked above by Bluebird where I said that I wanted to massively reduce immigration which is the sole policy of the party that he/she claims to support.

      • @Patrician-Perhaps. Or maybe just an angry young man given that he attacked me yesterday for apparently not voting the way he thought I should regarding housing, even though I had not mentioned my voting preferences. Something along the lines of piss weak, cowardly, whingeing, whining, gutless wimp.

  4. These graphs assume that nothing changes in the workforce as the dependency ratio would change over time.

    But look at Doug Short’s analysis of what happened in the US after the GFC:
    http://advisorperspectives.com/dshort/commentaries/Demographic-Trends-in-Employment-Participation.php
    http://advisorperspectives.com/dshort/commentaries/Unemployment-Claims-and-the-CLF.php

    As employment opportunities for the youth and older cohorts increases, or their need increases, participation rates can rise substantially and unemployment fall substantially.

    If employers need people then they will be flexible and take older workers who only want part time work, or who want 3 months a year off for travel or to look after grandkids in school holidays.

    The big Australia has very large costs for citizens even if it is good for businesses with strong bariers to entry. It is also good for people who will get no competition like senior management and professionals but tough for unskilled workers, self employed trades with low competition barriers such as electrical licencing.

    Increased crowding of parks, libraries, sporting facilities, city footpaths and railway stations, more pollution, dilution of mineral wealth/royalties and increased traffic, travelling times, less likely to get a seat on public transport, changing neighbourhoods…

    And all this growth is just bringing forward the time of peak resources and the time of overshooting the limits to growth for the increase of wealth of the current wealthy at the cost of all our children and grandchildren.

    Therre is no perpetual growth in a finite world.

    Remember the exponential function, doubling times and that the use in one doubling time is higher than in all previous history.

  5. sydboy007MEMBER

    No mention of how we pay the massive bill for the infrastructure needed to keep the economy functioning with even higher levels of immigration.

    personally I’d like to see the immigration rate cut to around replacement level until we have a frank discussion about the pros and cons of high immigration. More expensive toll roads and chicken coup apartments are not the future Australia I am keen on.

  6. Could MacroBusiness please stop reproducing the ABS’ high / medium / low projections of population and dependents / workers without linking back to your original post AND highlight the assumptions the ABS has used?!

    http://www.macrobusiness.com.au/2013/11/australias-century-of-old-age/

    Namely the high growth assumption assumes a MASSIVE increase in the average life expectancy (to well into the 90’s) while the other two do not. This factor accounts for all of the increase in the aged dependency ratio (and then some).

    The other side of the coin in this scenario is the youth dependency ratio is much higher in this scenario (due to a higher assumed fertilitiy rate). This however is much less of an issue than an increase in the aged dependency ratio as the cost to Govt of children is a lot lower than that for the aged (e.g. childcare subsidies are $5bn a year vs $35bn+ for pensions and another $35bn for super concessions…).

    • Agree. I would like to see this broken down to isolate the effect of immigration.

      We should note that the world has already passed “peak children”, and that overall, all the population increase will happen in the older age bracket due to increased longevity.

      This documentary explains it well: http://www.youtube.com/watch?v=Mz_kn45qIvI

    • “cost to Govt of children is a lot lower than that for the aged”
      Perhaps not.
      I heard the following stats during recent discussion on radio (much hand-wringing following outcome from court case of Chloe Valentine’s mother and mother’s ex – who were jailed for their drug-addled and abysmal parenting skills).
      The comments were uttered by an interviewee who should know what’s what.

      The stats –
      30% (yes thirty percent) of children in SA – the current batch of children – have been the subject of at least one report to Families SA where the report was due to some degree of concern for the welfare of the child. Apparently average in most other states is around 22 – 25%.

      So around a quarter to a third of all our youngsters are living in somewhat compromised circumstances.
      Instead of tackling this issue at the source (such as tackling problem of drug-addicted parents) government spends approx $2,000,000 (your eyes haven’t deceived you – $2 million) per child to manage the damage done to these children.

      Factor that into your calculation and perhaps youngsters aren’t so lightweight on the public purse.

      • The child protection budget in NSW was $1.4bn for 2013. If $ per capita is equal that is $4bn for the country as a whole. Call it $5bn if you’re being pessimistic.

        Medicare is $65bn with State spending in addition to that with a very singificant % being for the aged.

        No way are kids more expensive.

  7. Leith, while I definitely agree with your overall conclusions, I would still have thought skilled immigration improves the dependency ratio in the short term, which cannot be seen on the chart.

    Are you able to provide clarification on this?

  8. The obvious thing to do is steadily increase the number of temporary workers in the economy….they can work and pay taxes, add to consumption and output, bring skills, energy and vitality, cuisines, music and fashion….and then they can leave again when we’re thru with them.

  9. If there was a referendum as to whether we want ramped-up immigration or a Big Australia I am pretty sure the answer would be a big fat NO. But we never get asked. What’s the point of even discussing this – we are all in agreement that higher immigration is worse for Australia but the government doesn’t give a flying f…k – they’ll just do whatever they want.