Bloxo calls for bigger population ponzi

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

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.

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.

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.

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.

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:

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.
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.
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):

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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