The Parliamentary Budget Office has released new analysis predicting that Australia’s ageing population will see government revenue fall by around $20 billion within the next 10 years. This is due to reduced workforce participation, which results in less people paying tax, whereas spending on the aged is tipped to rise by $16 billion over the same period. The PBO also wrongly notes that immigration can help to offset the possible impact of ageing on the budget, claiming most migrants tend to be younger than the average, while they can boost the birth rate by increasing the number of people of reproductive age:
The effects of ageing will be felt more over the coming decade than in the past due to the impact of the baby boomer generation retiring.
This change has already begun to detract from economic growth, after decades of providing a boost to growth.
Ageing will reduce tax revenue and add to spending pressures…
Since 2011 – when the first of the baby boomer generation turned 65 – the share of the population of retirement age has increased significantly and the share of the population of prime working age has begun to fall.
This flows through to the budget in the form of a reduction in revenue, due to lower labour force participation, and an increase in spending, reflecting greater demand for government programs that support older Australians.
Over the next decade, the ageing population is projected to subtract 0.4 percentage points from the annual real growth in revenue and add 0.3 percentage points to the annual real growth in spending.
In real dollar terms, this equates to an annual cost to the budget of around $36 billion by 2028–29. This is larger than the projected cost of Medicare in that same year.
…with the budget impact coming in waves.
The workforce participation and Age Pension impacts of the baby boomer generation reaching retirement age are already evident and are likely to peak during the next decade.
The impacts on health and aged care spending will increase more gradually and peak later, as baby boomers move into their 70s and 80s. Demand for health services typically starts to increase when individuals are in their 70s, and demand for aged care services when they are in their 80s.
Expectations of Australians around increases in the quality of health and aged care services could further increase these costs.
However, ageing is only one of many drivers of the future budget position.
The influence of ageing should be considered in the context of the overall budget position. Ageing is estimated to detract around $20 billion in real terms from revenue in 2028–29, but population and income growth are expected to increase revenue by around $187 billion (resulting in a net increase in 2028–29 in the order of $166 billion). Similarly, while ageing is projected to add around $16 billion in real terms to Commonwealth spending in 2028–29, broader factors such as population growth and indexation of payments are expected to increase spending by around $104 billion (resulting in a total increase in 2028–29 in the order of $119 billion).
Similarly, while ageing is projected to add around $16 billion in real terms to Commonwealth spending in 2028–29, broader factors such as population growth and indexation of payments are expected to increase spending by around $104 billion (resulting in a total increase in 2028–29 in the order of $119 billion)…
What are the drivers of population ageing?
Population ageing occurs when the proportion of older people in the population grows over time.4 Declining fertility rates and increasing life expectancy are the primary drivers of this phenomenon. In Australia, fertility rates have fallen from the ‘baby boomer’ peak of 3.5 children per woman in the early 1960s to 1.8, which is below the replacement rate. This, coupled with a considerable increase in average life expectancy from 71 to 83 years over that period, has resulted in an increased share of older people in the population.
Migration has also had a profound influence on Australia’s population structure. Indeed, Australia has maintained one of the highest net migration rates in the developed world since World War II, resulting in a significant increase in the working age population. Migrants to Australia are younger than the population on average and also serve to boost the birth rate by increasing the number of people of reproductive age. These effects mean migration can slow the pace of population ageing.
The old-age dependency ratio is a simple and commonly-used measure of population ageing. It illustrates the relative size of the retired to working-age population; that is, a ratio of those aged 65 and over to the prime working-age population (15 to 64 years of age)…
Between 2011 and 2031, the number of people of retirement age per 100 working age people is projected to increase from 21 to 29.8 The rate of increase in the old age dependency ratio is projected to slow considerably after 2031, with little change expected between then and 2051, before returning to a rate of increase more akin to that prior to 2011.
The rapid rise in the old-age dependency ratio over the next decade provides an indication that this will be a unique period of population ageing for Australia. Public understanding of the fiscal implications of that ongoing demographic change on the budget is important.
This is superficial analysis by the PBO.
First, a key driver of Australia’s current ‘baby boomer bulge’ is the mass immigration program ran in the post-war period (i.e. 1950s and 1960s):
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These migrants (which include my parents) have now grown old, thus adding to Australia’s current ageing ‘problem’. Therefore, importing more migrants to solve ageing is the equivalent of ‘can-kick economics’, because today’s migrants will also grow old, thus creating further ageing problems in 40 year’s time.
To the PBO’s credit, it did at least acknowledge the limits to migration in a footnote:
“There are limits to the benefit from migration on the age structure as these impacts do face diminishing returns as migration rates are increased. See McDonald and Kippen, 1999; McDonald, 2017”.
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But why wasn’t it stated up front that Australia’s demographic ‘problems’ today are largely the result of immigration policies in the past?
Second, the PBO has used the rigid definition of 15-64 years old for the working-aged population, which ignores the increasing labour force participation by older Australians:
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Indeed, since the mid-2000s, the labour force participation rate of over-65s has more than doubled. There is obviously further scope for increases in participation given older Australians are remaining healthier for longer.
Third, the PBO has completely ignored the costs of mass immigration and population growth on state governments; although to be fair this is not their remit.
Nevertheless, the 17.5 million extra people projected to arrive in Australia over the next 48 years – driven entirely by net overseas migration (both directly as they arrive by plane and indirectly as migrants have children) – will all require huge sums of public spending on economic and social infrastructure, such as schools, hospitals, roads, public transport, aged care, etc.
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These costs are overwhelmingly borne by state governments, not the federal budget.
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.
