It is no secret that Australia (and the world more generally) has an ageing population. Politicians, researchers, and the media have been talking about it for years, trying to predict the implications for Australia’s economic and social climate.
Improvements in contraception and medicine mean women are producing fewer children and people are living longer.
So, what does an ageing population really mean for the country?
The answer seems simple: more old people and fewer young people. What it really means is there will be fewer working-age citizens. This has massive consequences for the rest of Australia.
According to the 2017/18 financial year estimate, Australians will pay $188 billion in income tax. As much as we all hate seeing the “fun” amount deducted from our pay every fortnight, this tax goes towards all the wonderful elements of Australian life: health care, education, safe roads, welfare, and the like.
Income tax is paid by working-aged people – usually somewhere between 18-65 years old. In 2016, 15% of the population were aged 65 or older. In fifty years, this is expected to grow to 22%. This means that about 22% of the population won’t be contributing towards the income tax revenue but will still benefit from the Government services.
The proportion of people in the labour force drops markedly after the age of 65. (Granted, just because you are over 65, doesn’t mean you stop working, however, you are at least likely to work less.) Despite a steady increase in the percentage of people over 65 in the labour force over the past 12 years, the country’s fertility rate has continued to decrease so that Australia is not producing enough young people to replace the older people leaving the workforce.
The decreased fertility rate and better Government policy mean women are participating in the workforce more and more, increasing 6.5% in working-age women since 2006. This increases income tax revenue and bolsters the Government’s payday in the short-term (and is great for women’s rights!). In the long-run, this doesn’t increase the birth rate and therefore doesn’t help too much with our ageing population.
Fewer working citizens means less income tax revenue. Less income tax revenue leads to a lessened ability for the Government to provide much-needed services to its citizens.
As our population ages, Australia will have more people to care for. More accurately, the government will have greater expenses caring for these people by way of health care, pensions, and aged care, to name a few.
The question everyone is asking, is how does the government fund these expenses without putting an incredible burden on the working-age population?
1. Get more citizens (migration)
Simply put, more working-age citizens equal more taxpayers. Skilled migrants are valuable assets to Australia because they contribute more to tax revenue than they claim government support. Migrants are assessed based on their skill-set, and permanent skilled work visas require applicants to be under 45 years old and to be competent English speakers. These criteria ensure that migrants are still able to contribute to the workforce and economy for at least 20 years.
This is also a viable option for Australia as adding to the population means the taxpaying burden is spread among more people.
On the other hand, the ageing population problem is amplified unless migration patterns continue. That is, when the current migrants age out of the workforce, Australia will need more people to replace them. So, unless these migrants are producing enough children to increase the fertility rates, Australia will need to approve more and more migrants.
On top of this issue, The Lowy Institute found that 75% of Australians believe the current immigration rate is about right or too high. Despite 73% of Australians believing ‘overall, immigration has a positive impact on the economy’ there is still the vocal 27% who believe otherwise or believe the immigration rates should be capped (see: Dick Smith). The issue isn’t helped by memes like this floating around the internet…
For the time being, Australia’s infrastructure and housing are too congested to support high rates of population growth, so immigration needs to be managed.
And I’m sure I don’t have to tell you that immigration is a sore spot for some people (see: Pauline Hanson).
2. Shift the burden from the Government to the people
The Australian government has taken steps to reduce the burden of caring for their older citizens by introducing mandatory superannuation legislation in 1992. This has paved the way for reducing the amount of welfare paid in aged pensions to the retired.
Superannuation gives retired people a form of income that is self-funded and potentially greater than what they would receive through the pension alone.
Then again, superannuation involves great risks. Super funds invest your money and as such there are inherent risks associated with them, so a superannuation balance at retirement is not guaranteed. On top of this, superannuation contributions were only made mandatory in 1992 meaning many people will not have much or any superannuation just yet. (Of course, this will hopefully change as time progresses.)
3. Increase the retirement age
The Australian retirement age is set to increase to 67 (from 65) by 2023. This aims to lower the amount paid in aged pensions. There is, however, a limit; citizens will eventually become too old and too frail to work and if their personal retirement fund (superannuation) is not enough, the government will need to step in and give a helping hand.
Despite all the current tools in place to mitigate the effects of an ageing population, the Australian Treasury still projects the Aged pension will account for 3.8% of total Gross Domestic Product (GDP) by 2050 (increasing from 2.7% now). GDP is often used to place a monetary value on the finished goods and services within a country as an indicator of productivity.
So, where to from here? No single solution is ideal.
We can’t expect the government to fund our entire retirement (and really, we don’t want to have to rely on the tiny allowance each fortnight). We can’t leave people to their own devices because if their super fund investment fails, they’re out on their own.
The next best option to support an ageing population is a combination of the Age Pension and superannuation. And to pay for this pension? Responsible migration.
Because I sure as hell don’t want to be working until I’m 75.