How to cope with grey Australia

Published in Business Spectator (Melbourne), 24 August 2012

Australia’s population debate misses global ageing reality.

In Australia, we talk about population growth as if it is something to be feared. But across much of the developed world, population ageing is a far more worrying trend.

Populations are getting older and smaller across Europe and northeast Asia.

Japan is now the oldest society in the world. Its population is projected to shrink by a quarter by 2050.

The country’s strength once lay in its massive savings, which in 1990 were equal to 15 per cent of GDP. Now, with an ageing population selling down assets to fund their retirement, Japan’s savings rate has dropped to under 3 per cent.

Japanese baby boomers have enjoyed among the highest standards of living in the world. It remains to be seen whether their children will be able to do the same.

Japan is not alone in facing this demographic decline. Ukraine, with zero net migration, will see its population shrink by 23 per cent between 2010 and 2050. South Korea will shrink by 13 per cent; Germany by 12 per cent.

As these populations decline, they will rapidly age. The United Nations forecasts that the number of Europeans aged 14 or under will fall by 27 per cent between now and 2050. The number of Europeans aged over 80 will grow by more than 180 per cent during the same period.

Many European countries face pension liabilities they have little chance of meeting. The United Kingdom’s estimated unfunded liabilities for public sector pensions alone equal 80 per cent of Britain’s GDP.

Population ageing – not growth – is proving to be the thorn in the side of European “cradle to grave” welfare states.

So far, Australia has largely managed to avoid these difficulties thanks to a combination of high fertility rates and high levels of migration. But population ageing will nevertheless become an increasing challenge.

There are currently about 820,000 Australians aged 80 or over. By 2050, this will double – regardless of changes in fertility and migration.

If migration is halved, there will still be 1.9 million Australians over the age of 80 in 2050. If life expectancy increases (as most scientists expect it to), there will be more than 2.1 million octogenarians.

While Australia’s total population won’t double, the combination of growth plus ageing means the number of very elderly Australians will.

This will have great benefits for Australian society. We will be able to draw on the wisdom and social contributions of older Australians. But it will also present policy challenges.

We will need more hospitals, aged care facilities and support services for the elderly. An older population will require different types of housing and transport infrastructure.

In the latest Intergenerational Report published in 2010, Treasury projected that health care spending will need to increase from 4 per cent of GDP in 2009-10 to 7.1 per cent in 2049-50 due to population ageing.

Spending on aged care is projected to grow from 0.8 per cent of GDP to 1.8 per cent in the same period.

These numbers may not seem significant, but by 2050 the cost of providing pensions, aged care services and health care will be an extra $60 billion a year in today’s dollars – more than three times what we currently spend on the Family Tax Benefit.

Labour force participation and labour force growth will slow as the population ages, and the tax take will fall at exactly the same time as health care and aged care costs rise.

But thanks to our robust population growth, Australia is relatively well placed to adapt.

Population growth will not stop population ageing but in conjunction with increased workforce participation and improved productivity, it can help meet the costs as Australians grow older.

Some anti-growth campaigners suggest this is some kind of pyramid scheme, where an ever-increasing number of workers is needed to pay for the growing pension and health care costs of their predecessors.

If we have the right policies, such as a shift towards ‘user pays’ health care and pensions (a shift that has already begun via private health insurance and superannuation), it need not be.

As the Productivity Commission points out: “Population ageing can only be conceived as a crisis if we let it become one”. Dramatically cutting population growth is a sure fire way to make that crisis a reality.

Dr Oliver Marc Hartwich and Jessica Brown are authors of ‘Why vs Why: Big Australia’ published by Pantera Press.

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