With one exception, the Intergenerational Report is far less scary than you've heard
- Written by Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
What if nearly everything that’s been written about this month’s Intergenerational Report is wrong?
I’ll explain. But first, here’s a sample of the headlines: “Young Australians at risk of a poorer future”, “Fewer workers to shoulder soaring income tax”, “Ageing population driving $140 billion blowout in spending”, and so on.
On radio it was worse. One ABC presenter referred to a “ticking tax bomb”.
The picture painted is one of a future in which (old) dependants have far fewer people of working age to care for them, in which tax climbs dramatically to pay for the care of the elderly, and in which the next generation is poorer than this one is.
And to be fair to the people who’ve said these things, some of the language in the Intergenerational Report is like that, but not the numbers.
Each report less scary than the one before
Let’s start with the most fundamental problem identified in the report: that in 40 years’ time (each Intergenerational Report looks forward 40 years) there will be many fewer Australians of traditional working age for each Australian aged 65 and over – what the report calls the “old-age dependency ratio”.
Back in 2002 the government’s first intergenerational report found that whereas there were 5.3 Australians of working age for each Australian aged 65 and over at the time, by 2042 there would be only half as many – just 2.5.
This latest report finds that whereas there are now 3.7 Australians of such age for each of us aged 65 and over, by 2063 there will be 2.6. While not quite as dramatic as the fall projected in first report, and happening two decades later, this is still a big stepdown.
Except that ratio is not a useful guide to the ratio of people of working age to the people they’ll need to support. That’s because young people need support too.
Australia will be older, but also less young
Whereas old people need aged care workers, young people need child care workers; and they both need workers to make the goods and services they use. What matters is the total dependency ratio: old and young combined.
Examining only half the ratio (the half that look worse as the population ages) without also examining the other half (the half that looks better as the population ages) is hard to justify – unless the argument is that the Commonwealth is responsible for aged care and the states for schools.
But that ought not be relevant when talking about the supply of workers.
Australia will need more aged care workers as a proportion of the population in 40 years’ time, but it is also going to need fewer teachers.
What will matter is the ratio of potential workers to all people aged (say) under 15 as well as aged 65 and older, both old and young.
That total dependency ratio also told a dramatic story in the first report. The number of Australians of traditional working age to those aged either under 15 or 65 and older was set to slide from 2 to 1.55.
But the slide isn’t big as this time. The ratio is set to slip from 1.82 (which we are finding manageable) to 1.57, but over 40 years.
Old people will find it easier to find jobs
One of the reasons why the “fewer workers to dependents” story has much less sting than it was going to is we have had many more migrants than we were going to, and the migrants and students we have let in are nearly all aged 15 to 64.
Another, and this would have happened regardless of migration, is that as people of traditional working age become more scarce, people of non-traditional age (65 and over) are taking up and staying in paid work. Back at the time of the first report, only 5% of Australians aged 65 and older were employed. Now it’s 11.5%.
Partly this is because of a rule change (the pension age is now 67), partly it is because work is less physically demanding (an awful lot of us have office jobs) and partly it is because employers are no longer as prejudiced – they’ve had to accept applications from older workers and have discovered they are not too bad.
Read more: Slower ageing, slower growth: the Intergenerational Report in 7 charts
On present projections we will be much, much richer
As for the idea that young Australians face a poorer future, that’s unlikely to be the case if we do indeed run short of workers (and have to pay them more) and it certainly isn’t what’s projected in the Intergenerational Report.
The report has living standards, as measured by real GDP per person, an extraordinary 57% higher in 2042, even with lower-than-previously-assumed productivity growth.
That’s right, although things won’t be the same for everyone, on average the report has future generations better off materially than present generations, just as they are better off materially than generations 40 years earlier.
It ought to be noted that the first intergenerational report in 2002 predicted an even bigger growth in living standards, and this one says climate change could trim its projections, although the numbers in the report are woolly and the Treasury is still building up the capacity to properly model climate change.
But 57% – or even 50% or 40% – is still an enormous increase in living standards.
On the numbers in the report, intergenerational inequity will be the opposite of what’s usually claimed: the next generation will be so much better off financially it will be easily able to stump up a few more dollars in tax.
We will easily be able to stump up extra tax
And the extra tax the next generation is asked to stump up won’t be “soaring”, despite what the headlines say.
The projections in the report suggest we might have to pay an extra 3.9% of GDP in tax to fund the things we will need, but not all at once, and not the full amount until 2063. By that time (as mentioned) GDP per person will be much higher.
Most of the extra projected government spending (60%) is unrelated to ageing. A lot of it is to fund the cost of new and better health treatments, of the kind we’re pretty certain to want given our higher living standards.
I’ve read the 300-odd pages of the report pretty carefully, and (with the exception of the section on climate change) I’m yet to find anything particularly alarming.
Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University
