The Commonwealth Government's Intergenerational Report 2002-03 claims that Australia's ageing population poses a serious challenge for responsible fiscal policy in the longer term, a claim repeated in subsequent official pronouncements. We reject this claim, pointing to its rhetorical nature and to the lack of systematic sensitivity analysis of many of the critical variables. We conclude that the ageing 'crisis' is largely mythical.
The definitive document setting out the official position on the 'ageing crisis' is the Intergenerational Report 2002-03, (1) circulated by the Commonwealth Treasury as 2002-03 Budget Paper No. 5. We shall draw heavily on it in this article, supplemented by a May 2004 address by the Secretary to the Treasury, Ken Henry, to a meeting of Australian Business Economists. (2) In March 2005 the Productivity Commission weighed in with a 403-page report plus appendices. (3) Soon after, the 2005-06 Commonwealth Budget (4) reiterated the ageing crisis theme, picked up on the Productivity Commission's report, and inaugurated the 'Future Fund'.
The Intergenerational Report claims that: 'a steadily ageing population is likely to continue to place significant pressure on Commonwealth Government finances ... The projections in this report suggest that, if policies are not adjusted, the current generation of taxpayers is likely to impose a higher tax burden on the next generation', amounting to five per cent of GDP by 2041-2. The Report emphasises that 'Governments will need to exercise sound policy management to minimise the tax burden transferred to the next generation, particularly if Australia is to keep its position as a lower taxing and spending country'. (5)
Evidence to support these claims is presented in the form of population projections, (6) which reveal a rapid increase in the 65-84 and 85 plus age-groups between 2002 and 2042, while the 15-64 age-group will grow only slowly and the 0-14 age-group will decline slightly in numbers. This will increase the 'children and aged to working-age ratio', as shown in Chart 14 of the Report. (7) 'With projected lower growth in the labour force and falling participation rates, annual employment growth could be significantly lower over coming decades', (8) reducing the growth in real GDP per person from an assumed 2.2 per cent per annum in the 2000s to 1.4 per cent or 1.5 per cent in the 2010s, 2020s and 2030s. (9) At the same time as output per person is decelerating, spending per person will rise more rapidly: 'Over half of Commonwealth Government expenditure is directed to health and aged care, the social safety net (payments to individuals and education). All of this spending is sensitive to demographic changes'. (10) Hence the looming fiscal crisis.
Not surprisingly, the Intergenerational Report has been cited in support of a number of contentious policy changes. These include: active discouragement of early retirement, which will almost inevitably culminate (as it already has in several European countries) in an increase in the age at which people become eligible for a state Age Pension; continued, and probably even tighter, means- and asset-testing of the...
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