Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 424

Reality may be worse than the Intergenerational Report expects

We’ve had five Intergenerational Reports, the first (IGR02) in 2002, and the most recent (IGR21) in June 2021.

Each has presented a startling picture of a widening gap between the revenue collected from a declining share of predominantly younger taxpayers and the spending needed on an increasingly older population.

In all but the latest, the financial challenge has got 'less worse' over time.

It has worsened this last time because the temporary halt to immigration has for the moment removed one of the tools we have used to slow population ageing and because the COVID crisis meant less economic growth, less growth in tax revenue, and more government spending than we had been expecting.

What’s sobering

Over the next 40 years, the economy and incomes are expected to grow more slowly than in the past, leaving the budget in continual deficit.

This is in part because while needed spending on ageing and health will increase as previously projected, income from taxes will increase only up to a self-imposed cap, reaching it in the 2030s.

But the reality may be worse. The report is optimistic about the rebound to migration, about increases in labour force participation, and about average productivity growth.

If any one of these generous assumptions doesn’t come to pass it will be more difficult than projected to balance the budget as the population ages.

What’s probable

While the demographic fallout from the pandemic is expected to exacerbate population ageing trends, over successive Intergenerational Reports until now, projections for the proportion of the population aged over 65 have become less pronounced.

Even now, projections for the proportion of the population aged over 65 are tracking those in the 2010 report, but haven’t taken us as far back as the first.

Much will depend on net migration. It is assumed to rebound to 235,000 people per year by 2025, with a revamped focus on skilled migrants. If it gets and stays that high, or climbs, our population will age slowly.

Proportion of population over 65, actual (black) and projected

Author’s analysis of ABS and Treasury data

What’s possible

In each Intergenerational Report so far, a greater proportion of the population has been making itself available for paid work than previously expected.

Since 2002, the labour force has grown by 41%. Nearly half of that increase was workers over the age of 50.

There are now a million more women over 50 in the labour force than at the time of the first intergenerational report, and the participation rate of women aged 60-64 had doubled.

But increases in older-age participation are slowing even though each new cohort of older Australians is healthier, more educated, and more employable.

Research shows if older people are to thrive and prosper in the labour market as the treasury’s figures suggest, Australia will need to dismantle barriers related to health, training, discrimination, and work conditions and scale up strategies to help employers recruit and retain older workers.

Proportion of people aged 15+ in the labour force, actual and projected

Author’s analysis of ABS and Treasury data

What looks over-optimistic

At the launch of the Report, Treasurer Josh Frydenberg quoted economist Paul Krugman that “Productivity isn’t everything, but in the long run, it’s almost everything.”

With greater labour productivity (GDP per hour worked) we earn more with the same or less effort, potentially offsetting the economic and fiscal impacts of ageing.

The report’s productivity growth assumption for the next 40 years is based on the average of the last 30 years: 1.5% per year. Yet recent rates have been much less, and have been declining over time.

Labour productivity annual growth and decade averages, actual and projected

Change in average GDP per hour worked. Author’s analysis of ABS and Treasury data.

Average annual productivity growth over the last decade, including the pandemic recession, has been 1%. Treasury’s sensitivity modelling shows that lower than projected productivity growth of 1.2% would see the economy and incomes 9% to 10% lower by 2060-61 and the budget deficit 2.2 percentage points wider. Australia isn’t alone in experiencing a slowdown in productivity growth and it isn’t clear how much Australia by itself can do about it.

The Report points to a suite of microeconomic reforms related to competition, digital technologies, patents, research and development, and skills, some of which were recommended in a landmark review by the Productivity Commission in 2017. But as the Treasurer pointed out, many of the big reforms have already been done. As he put it: “You can’t float the dollar twice.

What’s unmodelled

And a key set of figures are missing from the report - those relating to the impact of climate change. There is a chapter on the environment describing risks, but it doesn’t feed them into formal projections in the way this month’s NSW Intergenerational Report did.

Frydenberg’s Report is commendable. It presents an opportunity to talk about ways to achieve a better future – not just the one it outlines.The Conversation

 

Rafal Chomik is a Senior Research Fellow at ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW and responsible for the Centre’s research translation program. This article is republished from The Conversation

 

4 Comments
Trevor
September 14, 2021

"While the demographic fallout from the pandemic is expected to exacerbate population ageing trends, over successive Intergenerational Reports until now, projections for the proportion of the population aged over 65 have become less pronounced." There were around 900 deaths from COVID-19 in Australia in 2020 (909 notified through surveillance systems and 866 registered and compiled by the ABS)......89% of deaths were in Victoria and 7% in NSW. The majority of deaths were in the older age groups: 24% in the 85–89 year age group and 34% in those aged 90 and over. [ That is about 68% of fatalities in "old folk" ! ] By 20 June 2021, there were just over 30,000 confirmed cases of COVID-19 and 910 deaths in Australia." "During 2020, 7% of all COVID-19 cases in Australia and 75% of all deaths were in people living in residential aged care facilities." So.....Covid is basically killing old people already ill or with compromised health.

Stephen
September 11, 2021

Rafal Chomik points out that the federal budget is in deficit and is getting worse. He says it is expected that the budget will be in deficit for the next 40 years. This is disturbing. The government is already in a net debt position, so it will only grow bigger with budget deficits for the next 40 years. But the really disturbing thing is that nobody seems to care. Government debt is out of sight, out of mind. The modern generation has been brought up on credit. It is okay to buy things with credit cards and simply hang out for the next weekly pay. It takes a really courageous federal treasurer to have surplus budgets and pay off the government debt. Peter Costello is the only treasurer in recent times to have done so. He reduced the federal government to zero and even moved the government to a net cash position.

But if we shift the picture to a family situation, most people would be shocked to see their neighbour living beyond the means of the family so that the debt is increasing every year with no prospect of ever paying if off. They certainly wouldn't want to be in that situation themselves. So there are two standards. What we are doing as a country is loading up the next generation with a huge debt, and not caring about it. The next generation don't even care about it themselves, maybe because nobody has pointed it out to them. It is all about fiscal responsibility. Financial planners are acutely aware of fiscal responsibility and planning for the future. It is our job every day. Unfortunately when it comes to public finances it seems there is no such thing.

Karun
September 10, 2021

IG reports are political in nature. They have to be, otherwise the govt. will not allow it to be published without changes. So, expecting an independent report is wishful thinking. If what is to be investigated and the parameters used are made clear before the research is done for the IG report is started, then it is likely a more independent report will be published. It is likely, the pollies and/or their yes men will try and get it shaped to their way of thinking.

Daniel
September 09, 2021

Well that is the trouble with the government subsidizing housing to the moon.

For many, their house earns more than their income in a year. Why work?

 

Leave a Comment:

     

RELATED ARTICLES

Demographic destiny: a snapshot of Australia in 40 years

What should the next generation's Australia look like?

Are older Australians re-assessing the job market?

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.