Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 58

The ‘new normal’ and demographic change

From day to day, we are barely conscious of our own ageing, never mind the long term trends in Australia or the world. You might receive a sudden jolt when you see an old friend after a 30 year absence, all wrinkles and paunch, and wonder if you have also changed as much. Or you look back and realise you’ve had the same job for 30 years, or lived in the same house for 20.

The one time we all consider the passing and future decades is when we approach retirement, and think about how long our money needs to last. However, we cannot plan our own financial outlook without considering an economic or global context. For example, if we retired at a time when the number of retirees was small in proportion to workers (the so-called ‘dependency ratio’), then we could be more confident that rising tax revenues and economic growth would support age pensions, health systems and public transport. Notwithstanding the introduction of compulsory superannuation over 20 years ago, the majority of Australians will continue to access at least part of the age pension, and this reassurance about future services is crucial for their retirement plans.

But what if that low dependency ratio is in the past? In recent weeks, Treasurer Joe Hockey and other Federal Government ministers have made it clear that the budget deficit cannot be allowed to blow out to sustain the levels of support traditionally provided. We have a pension system which exempts the family home, and a couple sitting in a multimillion dollar house with $1 million in other assets and annual income of $60,000 can draw a part pension with all the associated health benefits (hearing aid cost $5,000, supplied for free, come back for another next year). The current debate on increasing the pension age from 65 to 70 is scratching the surface on likely changes.

Consider the following table, showing the proportion of the Australian population in each age group: the younger people up to 19 years of age; the large bulk of the working population from 20 to 64; and the older people (currently pension age) of 65 years and older.

Source: Journal of Indexes, September/October 2013, ‘A New ‘New Normal’ In Demography and Economic Growth’, by Robert Arnott and Denis Chaves, page 25.

In 1950, only 8.2% of the population was over 65, but by 2050, it is expected to reach 23%. At the moment, two-thirds of people aged 65 to 69 are retired. For a person aged 65 expecting to live at least another 20 years, the majority of their remaining years will involve some level of disability or dependency. The costs of such services in Australia are a massive drain on public resources, as well as the age pension. There’s no doubt future entitlements will reduce, and we need to focus on the demographic changes that are coming, and not think as 2030 or 2040 as the never-never.

The Californian research and investment strategy company, Research Affiliates, has produced interactive maps which show the likely effect of demographic change on GDP for major countries around the world, including Australia. In addition, Robert Arnott and Denis Chaves have written extensively on the economic and social implications of these changes, as shown in the following article.

The first ‘infographic’, linked here, allows the user to select the year by moving the tab in the top right corner, and see the effect on GDP growth of demographic change in that country. For example, the figure below shows the year 2020.

The second ‘infographic’, linked here, shows population distribution by country, with Australia shown below. The most notable increase is in the 70+ age group, accompanied by a rapidly rising median age.

Introduction to the Arnott and Chaves paper

This is background to the following paper by Rob Arnott and Denis Chaves of Research Affiliates. They argue there is a disconnect between what we take for granted given our recent experiences and what we should anticipate given simple arithmetic. We are not automatically entitled to fast-growing prosperity and ongoing high growth.

In recent decades, we have been blessed by the favourable demographics of a younger, more productive workforce which provided a growth tailwind. The reversal towards an older population will create more of a headwind, and our policies cannot simply spend our way out of trouble for as long as it takes. How we manage the transition will determine the quality of retirement for the majority of Australians.

(Note that the infographic reflects changes between demographics and GDP per capita growth based on the percentage size of each age group. This method results in more extreme forecasts as the size of each age group, especially retirees, continues to grow, while the following article uses an average of two methods that results in a smoother result).

 

3 Comments
V Clifton
April 21, 2014

Bruce Moon. I can't see how longevity will decrease over time. Drugs are continually being tailored to meet the percentage of the population who don't intend to help themselves. Mortality is the cessation of the economic boom for drug companies.

Bruce Moon
April 17, 2014

I am becoming quite peeved at the lack of 'crap detection' on this topic.

The desire by the neo-conservatives to lower tax rates for the upper end remains their holy grail. To that end, they have a knack of misleading by misconstruing facts.

Yes, it is true that the 'boomers' are a tabular aberration. And, as this cohort passes the retirement age, they will add to the federal budgetary outlays.

No, it is not true that politicians should use past stats as a guide to the future.

POINT 1 -

as a cohort, boomers are far more wealthy than previous generations. While their Super contributions will not negate access to Age pension, it WILL limit federal outlays.

POINT 2 -

as a cohort, boomers are less fit then previous generations. The levels of obesity - caused in part by sedentary behaviour - will impact on mortality rates. While coffin sizes may need to increase, longevity will decrease over time.


When our ideologically driven pollies bandy out numbers to frighten, I wish researchers would focus on these two points to question the validity of the claims.

Cheers

Geoff Walker
April 17, 2014

I'm somewhat more sanguine than many about society's ability to cope with demographic change.

Ultimately, the generation of rising standards of living comes from the human race's ability to become more productive through the invention of new and better ways of doing things. And there is no way that our ability to innovate is going to be muzzled by demographic change.

Rising standards of living can manifest in a number of ways beyond the simple real pay rise. Historically we have seen reductions in the length of the working week and increases in the proportion of workers who have accumulated the financial wherewithal to retire early voluntarily.

It's not a big leap to see that increased productivity arising from human ingenuity can be used to finance longer retirements arising from increased longevity.

 

Leave a Comment:

RELATED ARTICLES

Mind the (expectations) gap: demographic trends and GDP

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.