Analysing Australia s Ageing Population: A Demographic Picture

Transcription

1 National Centre for Social and Economic Modelling University of Canberra Analysing Australia s Ageing Population: A Demographic Picture Ann Harding Paper presented to Australia s Ageing Population Summit 2005, Financial Review Conferences, Sydney 27 September 2005

2 About NATSEM The National Centre for Social and Economic Modelling was established on 1 January 1993, and supports its activities through research grants, commissioned research and longer term contracts for model maintenance and development with the federal departments of Family and Community Services, Employment and Workplace Relations, Treasury, and Education, Science and Training. NATSEM aims to be a key contributor to social and economic policy debate and analysis by developing models of the highest quality, undertaking independent and impartial research, and supplying valued consultancy services. Policy changes often have to be made without sufficient information about either the current environment or the consequences of change. NATSEM specialises in analysing data and producing models so that decision makers have the best possible quantitative information on which to base their decisions. NATSEM has an international reputation as a centre of excellence for analysing microdata and constructing microsimulation models. Such data and models commence with the records of real (but unidentifiable) Australians. Analysis typically begins by looking at either the characteristics or the impact of a policy change on an individual household, building up to the bigger picture by looking at many individual cases through the use of large datasets. It must be emphasised that NATSEM does not have views on policy. All opinions are the authors own and are not necessarily shared by NATSEM. Director: Ann Harding NATSEM, University of Canberra 2005 National Centre for Social and Economic Modelling University of Canberra ACT 2601 Australia 170 Haydon Drive Bruce ACT 2617 Phone Fax natsem@natsem.canberra.edu.au Website

3 Analysing Australia s Ageing Population: A Demographic Picture iii Abstract The decline in fertility allied with longer lifespan is creating population ageing, where a growing proportion of the population is aged 65 years and over. Population ageing is creating fiscal pressures for governments, due to forecast slower economic growth rates and projected higher expenditures (particularly on health and aged care). Current research suggests that many of tomorrow s baby boomer retirees have not yet saved sufficient to finance a comfortable retirement during the decades of retirement that lie ahead of them. Many will need to work somewhat longer than they currently intend and save somewhat harder. At the same time, government is encouraging employers to look more favourably upon employing mature age workers, with the forthcoming labour force shortages providing an additional incentive for employers to revise their approaches. Author note Ann Harding is Professor of Applied Economics and Social Policy at the University of Canberra and Director of the University s National Centre for Social and Economic Modelling (NATSEM). General caveat NATSEM research findings are generally based on estimated characteristics of the population. Such estimates are usually derived from the application of microsimulation modelling techniques to microdata based on sample surveys. These estimates may be different from the actual characteristics of the population because of sampling and nonsampling errors in the microdata and because of the assumptions underlying the modelling techniques. The microdata do not contain any information that enables identification of the individuals or families to which they refer.

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5 Analysing Australia s Ageing Population: A Demographic Picture 1 Population ageing is a phenomenon that is about to have a major impact on all of our lives. A huge baby boom followed the rigours of World War 2, with fertility rising to 3.5 births per woman in the early 1960s. This was then followed by the baby bust, with fertility falling rapidly to reach just under two children per woman in the early 1980s. Since then the fertility decline has been much more gradual, but has still inched down to about 1.8 children for women today. The outcome of this rapid rise and then fall in the birth rate in Australia was the baby boom generation the large slice of the population born between about 1945 and The oldest baby boomers are now starting to near the official retirement age of 65 years, raising issues about funding their retirement years. At the same time as the baby bust has been occurring, life expectancy has been increasing. Someone born at the beginning of the last century could expect to live less than 60 years on average. From a social policy perspective, the problem of funding decades of retirement on the age pension did not really exist as, on average, Australians died before they reached age pension age! The picture is very different today. An Australian woman born today can expect to live about 83 years, representing almost two decades on average on the age pension (with men living about five years less on average). And these figures may even be understated, with some demographers predicting more rapid increases in lifespan than current ABS projections. Not surprisingly, the baby bust combined with increasing longevity has been ringing alarm bells within government. In 1960 there were about 7.3 working age Australians to help support each retiree aged 65 years and over. By 2040 there are forecast to be only about 2.4 working age Australians for each retiree aged 65 and over. The Commonwealth Government s initial assessment of the issues was contained in the 2002 Intergenerational Report. This Report suggested that under current projections of fertility rates, labour force participation rates and so on and assuming that current policy settings remained unchanged there would be a shortfall between Commonwealth government revenue and outlays of five per cent of Gross Domestic Product by In today s dollars, this would translate into a budget deficit of about $40 billion. The Treasurer recently gave a stark warning about the size of the potential budgetary problems the Commonwealth faced, pointing out that eliminating a budget deficit of this size was equivalent to slashing current government outlays on health to zero (2004). Treasury concluded in the InterGenerational Report that resolving this budget shortfall would require either higher taxes upon future generations or reductions in spending programs (or some combination of these) (2002, p. 6). Since then, the Productivity Commission has published its study on the productivity, labour supply and fiscal implications of likely demographic trends over the next 40 years for all levels of government (2005).

6 2 Analysing Australia s Ageing Population: A Demographic Picture Those who were hoping that the Treasury InterGenerational Report might have been unnecessarily gloomy have had their hopes dashed by the Productivity Commission report, which suggests that the fiscal gap for all levels of government will reach 6.4 per cent of GDP by Australians in their late 50s and early 60s are much less likely to hold or want jobs than younger Australians in their 30s and 40s. As a larger proportion of the population will be aged 55 to 65 years in the future, this will depress the overall proportion of working Australians (the labour force participation rate ). This fall in the labour force participation rate is forecast to result in much slower growth in the number of workers each year in the future, with the one million new Australians joining the labour force in the seven years from to being about the same growth that is projected to occur over the entire 21 years from to (PC, 2005, p. 11). While unemployment is expected to fall to less than five percent, average weekly hours worked will still be reduced, because older Australians are more likely to work part-time than full-time. Labour is clearly the key resource of tomorrow and employers will need to do everything they can to attract and retain workers. At the same time that forecast labour force growth will be lower than we have become accustomed to, economic growth is also expected to slow, driven by these changing demographics. Treasury Secretary Ken Henry last year forecast that economic growth in the next 40 years would average 2 ¼ per cent per year, well down on the 3 ¾ per cent growth rate that we have enjoyed during the past 40 years (2004). Both Treasury and the Productivity Commission have looked at the likely effects of population ageing and slower economic growth upon government outlays and taxes. The big driver here is health costs, because the incidence of sickness and disability rises with age. As a result, older Australians consume far more health services per person than younger Australians. Aged care needs and costs will also increase in the future. Overall, fiscal pressures are expected to intensify during the next few decades. In this environment, it is not at all surprising that governments are looking with renewed interest at the likely personal financial resources of older Australians. A recent AMP.NATSEM Report looked at the estimated wealth of 50 to 64 year olds, and found that more than half of the wealth of this group was tied up in their home (2002). This is not the ideal vehicle for funding retirement, as retirees do not find it easy to tap into their housing equity to fund their lifestyle or care needs in retirement. The same study also showed that 50 to 64 year olds had superannuation nest eggs of only $56,000 far less than would be needed to provide a financially comfortable lifestyle in retirement. Another big issue was the very unequal distribution of wealth, with the richest one-quarter of 50 to 64 year olds holding 58 per cent of this age group s total wealth (Figure 1). In essence, the poorest one-

7 Analysing Australia s Ageing Population: A Demographic Picture 3 half of 50 to 64 year olds have almost no wealth to help sustain them through the decades of retirement that lie ahead of them. In a more recent AMP.NATSEM report we focussed in more detail on early retirees, with about onequarter of men and one-half of women retiring early before they reach the age of 60 years. The picture here was very grim. Half of all 55 to 59 year old retirees had personal incomes of less than $10,000 a year (2004). Substantially less than one-fifth of this group had personal incomes of $30,000 or more a year (Figure 2). The early retirees also had very little superannuation. Two-fifths had no superannuation and about one-quarter had less than $25,000 in their accumulated superannuation nest egg (Figure 3). At the other end of the spectrum, one-quarter of those who had retired and were aged 55 to 59 years had more than $100,000 in superannuation. Figure 1 Estimated proportion of total personal wealth of 50 to 64 year olds, by quartile, January 2002 Q4 (Top 25%) 58% Q1 (poorest 25%) 5% Q2 14% Q3 23% Source: Kelly, S., Farbotko, C., and Harding, A., 2004 This raised the prospect of the two worlds of retirement. The above research suggests that there will be one group of retirees who will be holidaying in camper vans and eating out at restaurants and a larger group who will be living for some decades on the age pension with only limited personal resources to boost their living standards.

8 4 Analysing Australia s Ageing Population: A Demographic Picture These types of issues will be examined in more detail in the future, as NATSEM has recently been awarded an Australian Research Council Linkage grant to build a dynamic microsimulation model for the Commonwealth (and later Australia) to use in policy formulation. The Australian Population and Policy SIMulation Model (the APPSIM model), to be built in partnership with 13 Commonwealth government agencies, will take a large sample of Australians and age them forward year by year to about The model will simulate the labour force behaviour of the baby boomers and other generations and look at the impact upon future wealth of possible changes in baby boomer saving. Overall, it is not too late for the baby boomers to work a little longer and save a little harder for their retirement. The government has begun to give the boomers messages about saving while also conducting campaigns to get business to think more favourably about employing mature age workers. If the boomers can be persuaded to stay in the labour force a little longer than many of them intend, then that will help boost economic growth and improve their financial prospects in the long retirement that lies ahead of many of them. Figure 2 Distribution of personal income of young retirees, Proportion (%) , , , ,000 50,001+ Income ($p.a.) Note: All of these individuals have retired. Source: Kelly, S., and Harding, A., 2002

9 Analysing Australia s Ageing Population: A Demographic Picture 5 Figure 3 Distribution of personal superannuation balances of young retirees, Proportion (%) Zero 1-10, , , , ,000+ Superannuation Balance ($) Source: Kelly, S., Farbotko, C., and Harding, A., 2004 References Henry, K, 2004, Address to Australian Industry Group s National Industry Forum, 9 August Kelly, S. and Harding, A., 2002, 'Live Long and Prosper? The Income and Wealth of Those About to Retire', AMP.NATSEM Income and Wealth Report, Issue No 2, May. (available from Kelly, S., Farbotko, C., and Harding, A., 2004, The Lump Sum: Here Today, Gone Tomorrow, AMP. NATSEM Income and Wealth Report, Issue No 7, March. (available from Productivity Commission, 2005, Economic Implications of an Ageing Australia, Overview. (available from Treasurer, 2004, Australia s Demographic Challenges (available from Treasury, 2002, Budget Paper No. 5, Intergenerational Report , May.