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Demographic destiny: a snapshot of Australia in 40 years

The 2021 Intergenerational Report, or IGR, is Treasury’s educated guess at what Australia will look like in 2060. It should guide big policy decisions, laying a path to better outcomes in our future.

The latest IGR is notable on two fronts:

First, it comes at a time of major demographic change, with baby boomers retiring as they are now aged between 57 to 75. As recently as 1982, there were 6.6 people of working age for each person over 65. It is now 4 and in 2060 will fall to 2.7, as shown below (and someone should have a word with Treasury about labelling over 65 as ‘old-age dependency’). There will be profound implications for health, pensions, taxes and aged care.

Second, the outlook for the economy and the Federal Budget over the next 40 years has been affected by COVID-19. The main impact is the smaller population due to lower migration during the pandemic. The IGR forecasts a population of 38.8 million by 2060, down from 40 million by 2055 forecast in 2015. This is the first downward population revision since IGRs started in 2002.

Treasurer Josh Frydenberg summarised the changed in this release speech, offering three key insights:

  • The population is growing slower and ageing faster than expected. This impacts economic growth and workforce participation.
  • The Australian economy will continue to grow but slower than previously thought. Growth will depend on productivity gains.
  • While Australia's debt is sustainable and low by international standards, the ageing of our population will put significant pressures on both revenue and expenditure.

Let’s break down the 200-page IGR into population, life expectancy, budgets and debt, age pensions, government revenues and spending, superannuation and health.

1. Population

Australia has always relied on immigration to drive population growth, with fertility rates at 1.6 well below the replacement rate around 2. Low fertility and fewer young migrant arrivals will also contribute to an ageing population.

As Chart 2.3 from the IGR shows, the 2021 population projections for 2021 are below both 2015 and 2010. While migration has its impact, Treasury also highlights:

“The most significant of these trends is the fertility rate being further below the rate required to sustain the size of the population than previously projected.”

Net overseas migration accounted for about 60% of population growth in the last decade, and with lower fertility, migration is expected to contribute around 74% of growth by 2060. This depends primarily on government policy, but it shows the impact on the economy of a sustained annual intake of migrants. A strong post-pandemic recovery is forecast.

Treasury favours migration as a major factor in economic growth and recovery, although recognising the rise in health and pension costs. There is little allowance, however, for the infrastructure cost of adding 13 million people to the population. While many of these costs fall to individuals and state governments, the bulk of the financing needs to come from the Federal Budget.

2. Life expectancy and an ageing population

Treasury calls the ageing of the population “Australia’s greatest demographic challenge”. In fact, the life tables always underestimate actual outcomes due to faster advances in medical science than expected, and it’s more likely that most Australians born today will live beyond 90 years-of-age.

Treasury estimates that from 2020 to 2060, the number of people aged 65 and older will double to about 9 million, or 23% of the population, up from only 16% in 2020. As dramatic, the number of people aged 85 and older will more than triple to almost 2 million, representing a rise from 2% to 6% of the population. The number of centenarians will rise from the current 6,500 to over 40,900.

The old-age dependency ratio, forecast to fall to 2.7, presents economic growth and fiscal challenges as most taxes are paid by working-age people. 

3. Budget and debt

Remember the ‘Back in Black’ budget of a couple of years ago? The green line in the chart from 2015 showed a healthy budget outlook for decades ahead. However, the pandemic’s impact leaves the underlying cash balance in deficit for the next 40 years, reaching 2.3% of GDP by 2060.

Gross debt is projected at 41% of GDP and net debt 34% of GDP in 2060. As shown in Chart 6.5 below, in the most recent 2019-20 MYEFO, gross debt was expected to fall to only 15% of GDP but is now forecast to peak at over 50% of GDP by 2030. Although the new numbers are high, the net debt is less than half the average of G20 advanced economies.

The prediction that debt will remain high for 40 years under current policy settings may at some stage lead to the fiscal repair the Treasurer is promising. He said on release of the IGR:

“But once our economic recovery is secure, we have a responsibility to again do the work necessary to restore our finances and rebuild our fiscal buffers.”

Expect to hear this message and arguments about which party is best to handle it many times during the upcoming election.

Chart 6.11 shows low interest rates are helping the affordability of the debt, at less than 1% of GDP until 2030. But from around 2040, the assumption that long-term bond rates will normalise at 5% has interest payments doubling to around 2% of GDP. Josh Frydenberg is using these numbers to justify spending to grow the economy, as the more GDP increases, the more manageable the debt seems.

4. Spending on generations

The IGR issues plenty of warnings about the demographic transition, the composition of welfare recipients and demand for services as the population ages. It highlights that spending on health and aged care will increase while payments to families and education will see a reduction in growth. Over 40 years, intergenerational tension will come to the fore.

In particular, health spending will increase from 4.6% of GDP currently to 6.2% in 2060, much of it due to the costs of new health technology. Aged care spending will rise from 1.2% of GDP now to 2.1% in 2060. However, spending on welfare such as the age and service pensions is projected to fall from around 2.7% of GDP now to 2.1% in 2060, mainly due to rising superannuation balances.

Yet, as Chart 7.4.1 shows, even by 2060, about 60% of Australians will still rely to some extent on the age pension, although full-rate pensioners will more than halve to around 25% of people. The assets test will push many onto part-pension, up about 25%, although there is no sign of inclusion of the family home in the test. Treasury emphasises that while the proportion of older Australians receiving the age pension falls by about 10%, the number of older Australians increases. There will be a doubling to 8 million by 2060 in the number of Australians of age pension age by 2060.

5. Superannuation

Superannuation assets are forecast to reach almost 250% of GDP from the current level of around 150%, with three-quarters in the accumulation phase. Annual withdrawals will move from a current 2.3% of GDP to a massive 6% in 2060. These withdrawals by retirees needing money to live on will become a major factor in the income of the nation, but balances are still expected to grow due to the size of contributions. Superannuation will remain a socially and politically divisive issue for all of our lifetimes.

Super balances will increase significantly as the system matures, with the average amount increasing from $125,000 in 2020-21 to around $460,000 in 2060, measured in current dollars. About three-quarters of Australians will retire with balances over $250,000.

This will become the most-quoted section of the IGR:

“The total projected cost of age pension expenditure and superannuation tax concessions together is expected to increase from around 4.5% of GDP in 2020-21 to 5.0% of GDP in 2060-61. As a result of the maturing of the superannuation system, government spending on the Age Pension is projected to decline as a proportion of GDP but the cost of superannuation tax concessions is projected to grow. By around 2040, the cost of superannuation tax concessions will exceed the cost of Age Pension expenditure.” (my bolding)

This final sentence will be used to illustrate the generosity of the superannuation system, especially as most of the ‘cost’ is due to high super balances for 'wealthy' people and related reduction in income tax revenues. Two points here:

  1. The cost of the retirement income system is mainly due to the ageing population and more people with higher balances who will support themselves without the age pension. This makes superannuation look more expensive and age pensions less expensive.
  2. If the superannuation tax benefits were withdrawn, wealthy people would use other methods to reduce their tax, so the budget savings would not be as great as expected.

Chart 7.4.6 below shows the increase from 4.5% of GDP to 5% in these retirement concessions.

6. Revenue

The Government has a fiscal strategy to maintain the tax-to-GDP ratio at or below 23.9%, and the IGR is developed using this ratio. It is already at the high end of the Australia’s tax-to-GDP ratio range of 20 to 25% of GDP over the past 30 years.

A major policy area over coming decades will be whether the reliance on personal tax shown in Chart 8.1 should continue, or is it a disincentive to work? This chart will be used to make the case for a higher GST.

It's better than the alternative

A growing population living longer needs good policies to accommodate it, and Australia has the capacity to manage the change, although the days of budget surpluses are long gone.

However, there are worries that Australia is reluctant to reform the economy to drive the next gains in productivity. The IGR assumes productivity growth at 1.5% a year, the average of the last 30 years, but annual growth was only 0.5% over the five years before the pandemic hit.

There are obvious strains on future budgets. One quarter of government expenditure will be on health, and as measured by Treasury, superannuation will cost more than welfare pensions. Expect concessional tax treatment for super to face further reform.

Two major shortcomings are evident reading through the IGR. For all its discussion of intergenerational tension, there is no mention of declining rates of home ownership. There is no greater contribution to a secure retirement than the ability to stay in the home you own, but what was once considered a basic right is now beyond many people.

And while climate change is regularly cited as a major long-term concern of most Australians, there is no insight into how the Government plans to manage the next 40 years.

Overall, the IGR confirms Australia is well placed, with lower debt to GDP than other developed countries and the capacity to spend on health and welfare. And living longer is better than the alternative.


Graham Hand is Managing Editor of Firstlinks.


Gary J
July 30, 2021

All, no one seems to properly grasp this franking credit conversation. Franking credits do not belong to the government or the tax department. They belong to the dividend recipient.! You only need to answer two questions to determine the correct answer to the franking credit question: 1. Should there be double taxation? (Ie should the company pay its 30% tax and then the dividend recipient then have to pay tax on what they receive? 2. Should people in pension phase pay tax on income they receive (whether retail super fund, industry super fund or SMSF) If you’re answered NO to the above two questions then you’ve just also answered that these credits SHOULD be returned to the dividend recipient.

July 04, 2021

Is Australia the highest taxed country?
The Organisation for Economic Co-operation and Development's latest annual snapshot showed Australia was behind only Denmark, Iceland and Belgium on rankings of total income tax paid, and nearly 10 percentage points higher than the average for the group's 36 member states.30 Apr 2020.
Does Australia tax the rich?
There were 14,907 Australians who declared a total income of more than $1 million in 2017-18. Combined, they reported $37.4 billion of income — an average of just over $2.5 million each — and collectively paid $15.9 billion in tax, a total tax rate around 42.5 per cent.17 July 2020
Who pays the most tax in Australia?
The big miners, banks, Wesfarmers and Mitsubishi are the country's biggest taxpayers, paying a combined $23 billion to the Tax Office, new data shows.10 Dec 2020
Total taxation revenue collected in Australia in 2019-20 was $552.0 billion. Total taxation revenue decreased by $8.0 billion (1.4%) on the previous year. Total taxation revenue as a percentage of GDP was 27.8%.27 Apr 2021
Australia has a high tax-free threshold of $18,200 so many working age low earners pay very little income tax. In contrast, New Zealand taxes from the first dollar of income.
And many working age people pay no income tax simply because they are unable to find a job - as Australia has an adjusted 6% unemployment rate.
Share of personal income tax (%) paid by working age population (split into deciles).
1 pays 0% , 2 pays 0% , 3 pays 0% , 4 pays 0% , 5 pays 2% , 6 pays 5% , 7 pays 8% , 8 pays 13% , 9 pays 19% and
"lucky old number" 10 pays 52% OF THE TOTAL INCOME TAX RAISED.
[......So, effectively the "top 40 % " give the rest of the country a FREE RIDE !!.........Is THAT FAIR ??? ]
CONCLUSION : Australia DOES TAX THE RICH. "the top 10% (those with taxable incomes beyond $102,000 per annum) do pay around 52% of all personal income taxation."
"Other taxes are paid to state and local government. While personal income taxation is highly progressive, the incidence of these other taxes tend to be less progressive, or indeed mildly regressive. One example is the GST, which makes up around 14.4% of federal taxation receipts."
"This analysis does include a large number of people who are of a working age but not in the labour force - around 21% of this population (2.9 million persons). These people are not in the labour market for a range of reasons such as disabilities, students, young parents or through personal choice or a range of other reasons."
Nevertheless , these people are SUPPORTED BY WELFARE , again , paid for by the TAX PAYERS !
QUESTION: Just because the PROVIDENT PEOPLE have managed to "squirrel away " their SUPERANNUATION
and will lead a more comfortable retirement than those who haven't , IS NOT A VALID REASON to attack them as though they have done something immoral , so why do you even suggest by your "tone" that there is something reprehensible in their actions when really it is LAUDABLE as they will NEVER be a burden on the State or the TAX-PAYER ?.
You should be PRAISING THEIR EFFORTS , not enviously castigating them !
Sure , RAISE THE GST if you must , but again , it is the wealthier who spend more , who will pay MOST of that as well !

July 03, 2021

Re: "these costs fall to individuals and state governments, the bulk of the financing needs to come from the Federal Budget". The bulk of the federal budget financing comes from individuals anyway !! Also; I believe the effects of increasing super overall will lessen the effects of this issue more than let on in this article; despite the super tax concessions.

July 03, 2021

"Treasury favours migration as a major factor in economic growth and recovery, although recognising the rise in health and pension costs. There is little allowance, however, for the infrastructure cost of adding 13 million people to the population."

Immigration is important, but choosing population growth to drive economic growth is a medium term strategy. Suits perfectly if you're a politician. How do we challenge this philosophy?

July 04, 2021

Simple really - just put limits on population increases,
The Australian population ( and that of the world ) has roughly tripled in the past 70 years, doubled in the past 50 and increased by 50% in the past 30.
Anyone game for realistic forecasts / extrapolations regarding future population growths, infrastructure, global warming, resource depletion etc etc etc
"Soylent Green" anyone ???

July 03, 2021

Its a very simple process. The government costs a certain amount to run. To finance this the government taxes its people. Every argument about GST vs Personal Income Tax vs Company tax etc is ultimately a discussion about what form of taxation and who is going to pay that taxation - its all an allocation of tax burden debate, given that the total taxation needed to run the government is a given figure (assuming the government is running efficiently).
The government has only two sources of getting its revenue, either its population or somehow getting people/companies from overseas to pay it.
We should not be talking about increasing GST or personal tax or company tax etc, but rather should be asking what is the fairest way to distribute the tax burden.
Politically, the easiest way is to increase tax on overseas people (they don't vote) followed by increasing tax on the few (eg a higher tax rate on those who are the most wealthy or earn the most income). But these people have the ability to strike fear into the masses. No government is game enough to raise the taxes on those who earn (for example) over $5m pa, for fear of the headlines "Government increases taxation" in spite of the fact that for almost all of us, it means no increase at all, and indeed, the more the government can get out of the most wealthy (and from overseas people) the less the rest of us have to pay

Ian Thomson
July 03, 2021

Firstly our retirement system is too generous to the very wealthy. The amount allowed in super for a tax free pension is too high. Using the tax free threshold a couple can have after the last budget adjustment 3.4 million in super and 600 thousand outside super would allow a return of 200 thousand tax free if they could make 5% pa on average. (Anyone who can accumulate 4 million plus there home would not be using bank deposits to produce income.) The amount allowed for a tax free pension should be lower at around 1.2 million which is still very generous.
Secondly we need estate duties on inter-generational transfer of estates.( No one wants to see a widow kicked out of their home.) These next 40 years will see see most of the baby boomers pass away and therefor see the biggest inter-generational wealth transfer in history.
Thirdly we need to consider a wealth tax with a threshold of around 5 million.
Fourthly businesses headquartered in tax havens should not be allowed to operate in this country unless they pay a turnover tax of around 8%. They never disclose any significant profits in this country but make spurious charges in their accounts so the profit is all shown in the tax haven.
The trouble with the tax package Labor took to the last election was it hit the average person rather than the upper end.

Warren Bird
July 03, 2021

I don't believe that 'the amount allowed in super for a tax free pension is too high'. I argued the case for this view some time ago here:
A key element in this is to be sure that when you talk about a ''pension'' being paid out of super you realise that most of that pension payment is returning capital that's been invested. You don't tax people when they take money out of the bank, and nor should you when they take it out of super.
But I also argue that the zero tax rate on income earned on that capital up to $1.6 million is entirely fair and appropriate - even moreso now that interest rates are even lower than when I wrote the article.

We do have intergenerational transfer taxes - it's called capital gains and it's payable when someone's beneficiaries sell the assets they inherit.

Bruce Gregor
July 03, 2021

This is a very good article on the IGR highlighting the need for more work on its inadequacies and for the need for Australians to accept some unpopular changes. We cannot just sit back and watch a mountain of super match a mountain of debt without doing something about it -like making it annuitised and reinstating 30/20 minimum goverment bonds. We cannot just rely on the lazy prop of high immigration while an overpopulated Antropocene world comes to accept a net zero world. We cannot let healthy "older peoole" people (like me) spend half their time flying (in the biggest carbon emiting industry) overseas spending half their tax free super floating around rivers of Europe eating and drinking with similar other Australians when they could do it in Australia and pay (say) at least15% GST to fund our health and aged care.

Andrew Smith
June 30, 2021

Very good analysis versus what one has seen in media e.g. several 'experts' and journalists making a case to preclude immigration and trash superannuation, often based on analysis revolving round contributors to MacroBusiness, Sustainable Population Australia and appearing in Fairfax or The Conversation, while ignoring dependency ratios into the future.

Danger sign for the superannuation sector, as the alternative analysis appears (question was asked on TC but no response) to use the inflated raw estimated resident population based upon births, deaths and the 'nebulous' NOM; the latter is 'churn over' and includes mostly temporary residents as 'net financial budget contributors' with restricted or no work rights and assume current NOM rates will be reached again (that would mean being dependent upon demand for international education, hitting peaks again and consistently into the future; unlikely).

Accordingly, an inflated working age cohort (15-64) via the NOM then makes the population pyramid chunky to support increasing numbers of retirees then conclude that (undefined) 'immigration' and super (SCG increases too) are not needed, as existing working age cohorts can support pensions for all in the future; this defies demographics and statistics, locally and globally (the world is ageing and credible non Oz research predicts peak global population within generation).

In fact Australia like elsewhere is heading to not a 'pyramid' but an upturned heavy headed arrow of retirees with a slim shaft of working age to support budgets. Further, anecdotal encouraging or enforcing employees to continue working into and past retirement is not a universal solution except maybe for some sole/SME operators, senior personnel, academics, public servants etc. but one would struggle to find anyone willing to volunteer for an extended work life (and blocking up advancement for younger generations).

In some circles this is known as the 'libertarian trap' (imported from the US) where radical right libertarian ideology endeavouring to lower taxes, government, PS delivery etc. is joined at the hip with white nativism aka antipathy towards immigration and/or population growth (although mostly temporary with froth on the top of the permanent population).

Further, while baby boomer bubble rolls into retirement, and in normal times travelling and/or living elsewhere, within five years the 'big die off' commences with the older end, i.e. mother lode of demographic change which will make superannuation more important in lieu of taxes being used to support budgets for PS delivery e.g. health care.

Philip Rix
June 30, 2021

With still such a reliance on personal income taxes is it little wonder that we are concerned about the reduction in the ratio of people of working age versus those who are over 65 (currently 4 moving down to 2.7 by 2060). Who will pay the taxes to support the growth in health and welfare expenditure? Possible answer: People of all ages (including companies) consume goods and services and it's now time we consider raising the GST from 10% (a rate that was set 21 years ago) and/or make structural changes to include more items in the GST net (with compensation support to lower income earners).
Will we ever see bipartisan political will to navigate such a narrative?

David Wilson
June 30, 2021

Well said Phillip. A more meaningful GST (as exists in other countries) would be a great start to broadening the tax base. Death duties and a tax on carbon pollution should also be part of the mix. Unfortunately, none of this is likely to occur while Australia continues to elect do-nothing conservative governments. We have definitely evolved from being the lucky country to the 'selfish' country and as things stand the younger generations are going to pay a heavy price for this.

Peter Scully
June 30, 2021

Whilst life expectancy at birth is interesting i suggest that age attained expectations and the rate of extension is far more telling and the shrinkage in costs(ex-Medical) that is voluntarily led. I am 71 working and intend to go to 85. I am an expert in Bespoke Grandchild Advancement trusts and actively promote extended work lives. More don't use their bodies to create economic value so more can follow the lead i am setting as i see my happy octogenarians still working.

Andrew Smith
June 30, 2021

That's all well and good for an individual who chooses to and can work but many employees, if not most want, to retire and enjoy their own personal pursuits; some analysts are suggesting glibly that everyone can keep on working to preclude any 'immigration'.

July 05, 2021

Retiring at 65 is outdated and a bit ridiculous. The number was introduced originally by Otto Von Bismarck in Germany in 1883 when life expectancy was well below 65. Now, life expectancy is at 85 years old and people still want to retire at 65. Move the retirement age to 75!

July 06, 2021

Exactly. Work to live, not live to work!
With enough invested your money works for you, allowing one to do those things one might've had time to do!
If you love your work by all means continue to do so, but please let's not legislate it!
Remember, life is short!

June 30, 2021

Does the IGR make projections of workforce participation rate of older people (say 65-74).

If this rate increases, this will mitigate the dependency of us old fogies on the younger people.

Many people I know did not retire at 65, and I see lots of older tradies at work?

Old saying; if you are going to forecast, forecast often

June 30, 2021

40 years, come on. We can't even plan a vaccine rollout over a few months properly, never mind agree on who can get which jab.

July 04, 2021

And here in Oz, we can't plan beyond the sitting government's 4-year forward estimates, that's way too difficult.
And mostly it leaves a few handgrenades in case they lose out at the next election.


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