Sustainable Population Australia (SPA) has released an excellent new report, entitled “Silver tsunami or silver lining? Why we should not fear an ageing population”, written by Queensland academic Dr Jane O’Sullivan.
The report expertly debunks the notion that an Ageing population poses a material risk to the Australian economy, alongside self-defeating arguments that Australia needs to run a high immigration program to counter population ageing.
In doing so, the paper answers three main questions:
- Will an ageing population blow government budgets?
- Will ageing cause a shortage of workers?
- Is high immigration and more population growth the answer?
A thorough analysis of the evidence finds that each of these concerns is unfounded. Far from being an economic calamity, our demographic maturity offers many advantages for improving social and environmental outcomes.
Below are the report’s key points and summary:
- With people living longer than ever and the baby-boomer generation reaching retirement age, some people worry that we will run short of workers and taxpayers. But demographic ageing will stop well before that occurs. Retirees will never outnumber younger adults.
- In the countries that have aged the most, there has been no shortage of workers. Instead of less employment, they have less unemployment and underemployment. Economic models that predict less economic activity as populations age are based on false assumptions.
- The rise in the proportion of older citizens accounts for only a small fraction of the rise in health costs. The major increase in costs is due to new, improved and more services per person.
- Longevity has deferred, rather than extended, the period in which the elderly need more health care and aged care.
- High levels of immigration can slow, but not prevent, population ageing. But the cost of extra infrastructure and education to sustain population growth is greater than the avoided costs of pensions, health care and aged care.
- Those with vested interests in population growth have overstated ageing concerns, to make high immigration seem essential. The resulting negative social and environmental impacts continue to accumulate for no net economic gain.
A great triumph of modern civilisation is that most people born are able to live long and healthy lives. But this unquestionable good has become clouded by anxiety about its inevitable consequence: there are more old people about.
Media reports and political discourse on our ageing population often adopt a tone of panic. This discussion paper untangles the facts from the myths, so that Australians can look afresh at the population ageing issue – less from a perspective of panic than one of potential.
Ageing is inevitable but self-limiting
The “demographic transition” describes the shift from pre-modern conditions in which high birth rates were roughly matched by high mortality (particularly of children), to modern conditions where low mortality and long life expectancy is balanced by small families. This
demographic transition process is occurring in all societies, although countries differ in how far and how fast they have progressed.
Australia is reaching the final stages of the demographic transition, where the proportion of older citizens rises steadily, but this is only a transition to a new stable level. If population growth ends, the proportion of people aged 65 and over will settle around 30 to 33%.
The proportion of people aged 15-64 years (traditionally referred to as “working age”) is temporarily elevated in the middle of the demographic transition but falls back to normal levels (around 55%) as the proportion of over-65s rises. At no point would people over-65 outnumber younger adults, even if the population were shrinking steadily.
It has been claimed that, without high immigration into Australia, “by 2050 roughly half of us would be over the age of 65 and we’d essentially be one gigantic floating nursing home somewhere in the Pacific”. Scurrilous exaggerations such as this are designed to sway public opinion through ill-founded fear.
The “dependency” fallacy
Much of the conversation around ageing focuses on the ratio of people over-65 to those of “working age”. This “dependency ratio” assumes that those over-65 depend economically on people aged 15-64, and that there will not be enough people of “working age” to perform all the required work. Both these assumptions are false and misleading.
The workforce responds dynamically to the demand for labour
Despite several countries already experiencing a declining proportion of working-age people for more than two decades, none has seen a related decline in workforce. Compared with Australia, Japan has almost twice the proportion of older citizens but roughly the same proportion of people who have jobs. With the same demand for workers but fewer working-age people competing for jobs, there is less unemployment and underemployment.
Improved wages and conditions attract more people into the workforce. This is what economic theory expects the labour market to do. But the economic models which predict that ageing will constrain the workforce have ignored these feedbacks.
Ageing is a small contributor to rising health costs
While older citizens incur health expenses more frequently than others, the rise in proportion of older citizens accounts for only a small fraction of the rise in health costs. Population growth and increasing provision of health services per person are the main reasons for Australia’s sharp rise in health spending. Internationally, there is little relationship between the extent of population ageing and the national expenditure on health. Older people are getting healthier over time, with high-care needs deferred as longevity increases.
Boosting population growth does not solve ageing
The Australian government’s main response to demographic ageing has been to boost population growth through incentives to have more children (particularly the “baby bonus”) and elevated immigration levels. Neither strategy prevents population ageing in the long run.
As immigration levels are increased, each additional migrant has less and less effect on the population age structure. Boosting births increases the proportion of children rather than working-age people. There is no evidence that boosting the working-age proportion has increased employment per capita. Instead, Australia’s labour market has been oversupplied, with high immigration contributing to youth underemployment, wage stagnation and rising inequality.
The cost of population growth exceeds the cost of ageing
The Parliamentary Budget Office (PBO) estimated that ageing will cost the Federal budget “around $36 billion by 2028-29”. This estimate is based on two false assumptions: (1) that a smaller working-age proportion means less economic activity, and (2) that health and aged care costs rise in proportion to the over-65 population.
Even if the latter were true, the cost of extra infrastructure to support population growth outweighs the small extent to which that population growth could lessen pension, health-care and aged-care burdens. Most of this infrastructure cost falls to State and local governments, and private individuals, rather than the Federal government.
The national interest should not be narrowly defined as merely achieving a balanced Federal budget. The rate of population growth is at the discretion of the Federal government. Changing policies on immigration and pronatalism could quickly ease congestion and improve State government finances, and would allow infrastructure to catch up with our recent growth.
Retirement incomes are threatened by high-growth strategies
The rise of part-time and insecure work, combined with greatly elevated housing costs, means that young adults today are likely to find it more difficult to save for their retirement than their parents’ generation did. These trends have been exacerbated by Australia’s accelerated population growth since 2005. Australia’s current pension system is designed to provide adequate income for retirees who own their own home and are debt-free. As the current youth generation ages, more and more pensioners will be paying rent or mortgages and government will need to supplement the pension to ensure housing security.
Although Australia’s aged-pension outlays are modest by OECD standards, the retirement income system is costly due to very generous tax concessions for superannuation contributions which mostly benefit the richest Australians. Options are available to improve the efficiency and equity of retirement funding.
We need a mature intergenerational conversation
Federal Treasury’s periodic Intergenerational Reports paint a gloomy picture of ageing stifling economic growth and blowing out government budgets. Their solution is the “3 Ps” mantra: population, participation and productivity. We find, however, due to increasing wellness of older Australians and natural feedbacks in the labour force, the negative economic effects of ageing are likely to be much lower than estimated in Intergenerational Reports.
On the other hand, rapid population growth directly undermines both workforce participation (through crowded labour markets) and productivity (through low wages, crowded infrastructure and costly real estate).
To date, the Intergenerational Reports have entirely omitted the costs of population growth, including infrastructure and environmental damage. Inclusion of these costs reveals that the rapid population growth “cure” is worse than the “disease” of ageing that it purports
No need for panic
Vested interests in population growth, including property developers and large retailers, have used ageing myths to persuade both government and the public that high immigration is necessary. This panic rhetoric has been used to misdirect and stifle debate about the real costs of continuing population growth. Often it is combined with unfounded assertions that any opposition to high immigration numbers is motivated by racism and xenophobia. Yet concern about population growth rate does not reflect at all on ethnic identity: at any scale,
the immigration program can be nondiscriminatory.
In order for rational policy debate to resume, legitimate concerns about migrant numbers need to be disentangled from issues of multiculturalism, racism and treatment of refugees.
Silver tsunami or silver lining?
An older, numerically stable or decreasing population offers many benefits for quality of life, environmental sustainability and economic stability. Depopulation dividends could make us richer, smarter, safer, fairer, greener, healthier and happier.
It’s an excellent and incredibly detailed report than can be downloaded here.