By Bekzod Abdullaev, research assistant in economics at La Trobe University
“Productivity could be the answer to Australia’s economic challenges arising from population ageing…However, several additional steps need to be taken if Australia is to meet its population challenges.“
Australia is at the verge of demographic change. Its population is ageing because people are living longer and the birth rate in the country is declining.
Governments must therefore do more to overcome budget pressures of rising pension and health care costs.
According to Australian Institute of Health and Welfare, life expectancy at birth was about 55 years for males and 59 years for females during 1901-1910.
Yet, over the past 110 years, life expectancy at birth increased by 23.5 years for males and 24.7 years for females.
There were only 150,000 elderly people in 1901. Today, there are 3.2 million elderly. And, by 2050, this figure is expected to soar over 7.5 million.
The ratio of the dependent population to that of the working population will almost double resulting in only 2.7 people of working age for every person aged 65 years or older.
These demographic changes will not only dampen economic growth but will also increase budget pressures in the long-term.
Australian Treasury projections show that, as a proportion to national output, age-related pensions and aged care are likely to rise from 3.5 per cent to 5.7 per cent and spending on health from 4.0 per cent to around 7 per cent by 2050.
If adequate measures are not taken, the share of total spending in national output will rise by four, per cent and result in permanent government budget deficits.
In my view, these estimates are optimistic and represent the best possible scenario.
A four-step solution
Productivity could be the answer to Australia’s economic challenges arising from population ageing.
Federal and state governments should keep investing in infrastructure building and education.
A shrinking working age population should be able to produce more than the current working age generation to mitigate wage tax hikes needed to finance ageing expenditures.
However, several additional steps need to be taken if Australia is to meet its population challenges.
- Firstly, pension eligibility age should be increased beyond 67.
The government has announced a gradual increase in the pension eligibility age between 2017 and 2023 that would lift the pension eligibility age to 67 for females and males alike.
There is room for the government to go further but still keep the gap between pension eligibility age and life expectancy between 15 and 17 years in accordance with the projected longevity of population.
- Secondly, access to superannuation should be brought in line with the pension eligibility age.
At the same time, incentives for retirees should be provided to withdraw the funds as an income stream rather than a lump sum withdrawal.
This will ensure that retirees do not use all their savings in early stages of the retirement and rely on the government pensions afterwards.
- Thirdly, broader programs should be adopted to allow workers to stay in the workforce after retirement.
It is not a secret that there is a stigma in the society against employing older workers with unfounded prejudices such as they are weak, ill, inflexible and unproductive.
Business incentives to employ older people would contribute to stronger economic growth and better economic security for the elderly.
- Fourthly, the government needs to reconsider the current consumption tax system.
There is a general consensus that consumption taxes are less harmful than income based taxes.
Consumption taxes will be crucial because elderly people will start consuming their savings and this might help to reduce budget pressures in the long-term.
The demographic bomb is ticking and its speed will accelerate in the near future. Renewed efforts need to be taken to maintain continued economic growth and ensure economic security for millions of elderly in Australia.
Bekzod Abdullaev is a research assistant in Economics at La Trobe University. He received his PhD in Economics from La Trobe University in 2011. His research interests are in the fields of public economics, demographic economics and development economics. He is a member of the Economic Society of Australia.