HOW Australia copes with the policy challenges and ''possible opportunities'' of an ageing population is a question that the Productivity Commission believes has not been sufficiently discussed in recent years.
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This week the commission published a research paper entitled An ageing Australia: preparing for the future. Those who read it may recall the pessimistic forecasts contained in the Department of Treasury's three intergenerational reports - the fourth of which was due to be published this year but has been delayed until next year.
This paper, however, is decidedly more downbeat than the 2010 intergenerational report. So convinced are the authors at ''the near inevitability of significant fiscal and policy consequences [as a result of] demographic change'' that they believe government may have to contemplate new reform approaches ''not currently on the policy horizon'' - including lifting the retirement age to 70 and requiring the elderly to pay for their aged care by giving up equity in their homes.
The basis for what the commission claims is a growing (and unsustainable) fiscal gap between government revenue and spending is our aging population, our increased life expectancy, and the fact that the pool of taxpayers shouldering the national burden is becoming proportionately smaller with each passing year.
Australia's population, the paper projects, will rise to about 38 million by 2060 (by which time, says the commission, there will be 25 centenarians for every 100 babies), and the elderly (those aged 75 and over) will comprise 14.4 per cent of the population.
As a result of the extra demand for such things as healthcare, aged care and the aged pension, the paper predicts, governments will face ''additional pressures on their budgets equivalent to about 6 per cent of GDP by 2060, compared with the average 2.7 per cent annual growth over the past 20 years''. Factor in a drop in labour participation rates from about 65 per cent to 60 per cent, and a 5 per cent contraction in the overall labour supply per capita, and it would appear that meeting the budgetary cost of ageing could become ugly.
It is by no means certain, however, that the Productivity Commission's growth and productivity scenario for 2060 is pre-ordained, or that the problems arising from ageing will be as serious as it suggests. Forecasts about economic growth and productivity, and the size of the labour force in 40 years' times, will be rapidly distorted if the underlying assumptions change. Even small changes in projected birth rates and net migration, for instance, will have a significant bearing on the size of the future labour force.
Assumptions about the fiscal drag of the elderly can be exaggerated, too. To single out older Australians for making costly demands on the health system is to ignore the fact that hospitals, doctors and drugs are being accessed by more people every year, irrespective of their age. Indeed, rising healthcare costs in the future are just as likely to be a consequence of increased population (and higher expectations) as they of an older population. Having a higher proportion of aged people in the population will slow the growth of spending on childcare and family welfare benefits, and the likelihood that the still-fit elderly will undertake more volunteer work will also relieve pressure on government budgets.
The projected growth in spending that is associated with an ageing population may, in fact, prove to be quite manageable, particularly if governments initiate productivity improvement in healthcare.
Indeed, the Productivity Commission suggests ''even modest improvement in this are would reduce fiscal pressure significantly''. It always remains possible, too, for government to reduce the fiscal gap by avoiding future tax cuts, even, heaven forbid, by raising taxes.
That the Commonwealth has already legislated a gradual increase in the pension age from the present 65 to 67 years by 2023 indicates governments are not ignoring the implications of demographic change. Given their tendency to avoid hard decision-making, Treasury and the Productivity Commission are right to continue to remind politicians of the desirability of addressing problems before they become serious.
However, Australia remains much better placed than many of the developed economies to cope with the budgetary costs of ageing.