Implications of an Ageing Population

A new study by the Productivity Commission has highlighted the immediate challenges for governments posed by the pressures of an ageing Australian population.

The study found that Australia faces a pronounced ageing of its population over the next forty years and ageing pressures are about to accelerate as the baby boomer generation retires.

It also projects the effects on volunteering nationally.

The report says ageing will reduce economic growth at the same time that it intensifies demands for public services, such as health, aged care and the age pension.

With present policy settings, age-related spending will exceed the growth of tax revenue.

The Commission’s Chairman, Gary Banks says the ageing of our population is a long-term phenomenon. But its effects will be felt sooner than many imagine.

On the issue of Volunteering the report called Economic Implications of an Ageing Australia predicts that the number of volunteers will increase from 4.75 million in 2002-03 to 6.84 million in 2044-45, an increase of 44 per cent.

Growth in volunteering can primarily be attributed to a growing population. In the absence of population ageing, the number of volunteers would be marginally lower, growing to about 6.77 million in 2044-45.

Although Commission projections found that ageing is likely to have only a limited impact on the overall growth in the number of volunteers, it is likely to have a significant effect on the age structure of volunteers.

For example, in the absence of ageing the Commission projects that 25 per cent of volunteers would be aged 35-44 years compared with 20 per cent in an ageing population and 5 per cent of volunteers would be aged 75 years and over compared with 10 per cent in an ageing population.

The report says this is likely to have implications for organisations that rely on younger volunteers.

Some participants are concerned that shortfalls in volunteering may occur in areas, such as emergency services and sport and recreation, education, training and youth development (Volunteering Australia)

This is also consistent with the Commission’s projections, which suggest that there will be shifts in the relative importance of different types of volunteering activity.

The growth in the number of volunteers is expected to be higher in community and welfare areas, but significantly lower in sport, recreation and education

Chairman, Gary Banks says the actions of governments today will determine how well Australia copes with ageing pressures in the future.

The Commission demonstrates that, in the absence of other policy actions to reduce fiscal pressure, taxation levels would need to rise by 21 per cent by 2044–45, or the debt burden of ageing would become twice as large as Australia’s GDP.

The Commission said that policy responses would have to be on a broad front and at all levels of government. Coordinated reforms would be needed in key human service areas like health and aged care.

The Commission shows that raising labour force participation can partly offset ageing’s impacts and highlights the importance of productivity growth to future prosperity.

However, the Commission finds limited scope for population policies to offset the demographic trends saying increased migration was not a realistic solution, though greater emphasis on skilled migration could play a useful role.

The Commission projects fertility rates to rise slightly over the next decade, but the effects are greatly outweighed by improvements in life expectancy.

Other findings include:

One quarter of Australians will be aged 65 years or more by 2044–45, roughly double the present proportion. The proportion of the ‘oldest old’ will increase even more.
– In itself, population ageing should not be seen as a problem, but it will give rise to economic and fiscal impacts that pose significant policy challenges.

People aged over 55 years have significantly lower labour force participation rates than younger people. As more people move into older age groups, overall participation rates are projected to drop from around 63.5 per cent in 2003 04 to 56.3 per cent by 2044–45.
– Hours worked per capita will be about 10 per cent lower than without ageing.

Assuming the average labour productivity performance of the past 30 years, per capita GDP growth will slump to 1.25 per cent per year by the mid 2020s, half its rate in 2003–04.

While taxation revenue will largely track GDP growth, government expenditure is likely to rise more rapidly, placing budgets under considerable pressure.
– Although education and some welfare payments are projected to increase more slowly than GDP, government spending on health, aged care and pensions will grow at a faster rate.
– The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2044–45, with ageing accounting for nearly one-half of this.

In the absence of policy responses, the aggregate fiscal gap will be around 6.4 percentage points of GDP by 2044–45, with an accumulated value over the forty years of around $2200 billion in 2002–03 prices.
– On past trends, much of this could be expected to be borne by the Australian Government, but there are significant potential burdens faced by State and Territory Governments.

A range of policy measures will be needed to reduce the fiscal pressure from ageing and/or to finance the fiscal gap.
– Plausible increases in fertility and net migration would have little impact on ageing trends.
– Measures to raise productivity and participation would enhance income growth and the capacity to ‘pay’ for the costs of ageing, including through taxation. However their ability to alleviate fiscal pressure directly depends on the extent to which service demands and costs continue to rise with growth.
– More cost-effective service provision, especially in health care, would alleviate a major source of fiscal pressure at its source.

The report concludes that timely action would avoid a need for costly or inequitable ‘big bang’ interventions later.

If you would lie an electronic copy of the report (in 5 parts) it can be downloaded at http://www.pc.gov.au/study/ageing/finalreport/index.html.