Friday, November 26, 2004

Aging Australians to Cost $2.2 Trillion

Ageing Australians will cost $2.2 trillion over 40 years: report
By David McLennan
Thursday, 25 November 2004

Australia's ageing population will cost $2.2 trillion over the next 40 years if nothing is done, a new draft Productivity Commission report warns.

The average age of Australians is steadily rising because people are living longer and having fewer babies. This means there will be fewer people in the workforce and paying tax compared to those who have retired and continue to use government services.

The draft report, to be issued today, said the expected effects of this were even worse than had been predicted in Treasurer Peter Costello's Intergenerational Report in 2002.

It said that more than one in four Australians would be 65 or older by 2044-45, double the present ratio.

"Population ageing will accelerate over the next few decades in Australia, with far-reaching economic implications. It will contract Australia's workforce and economic growth, at the same time that burgeoning demands are placed on Australia's health and aged-care systems," the report said.

The report said it was unlikely that any feasible change in the number of babies being born would do much to affect the population's ageing over the next 40 years and increasing migration would have little practical effect, either. Annual migration would need to increase about six-fold to 3.7 million people a year, giving Australia a population of about 144 million by 2044-45 instead of the projected 26.2 million, and this would only delay the effects.

Commission chairman Gary Banks said early policy intervention would avoid the need for big changes later, such as excessive tax increases or service rationing.

The report said the best ways to stop the ageing population from becoming a problem was to promote further productivity and to enhance the cost-effectiveness of health care.

If there were no changes, increasing health-care and aged-care costs would be the main drivers of an expected increase in government spending of 6.8 percentage points of GDP in 40 years. This would come at the same time as the shrinking workforce led to a drop in tax of 0.2 percentage points of GDP.

This would mean that by 2044-45, governments would be spending about 7 per cent more than they would be raising. That would lead to a fiscal gap of about $2.2 trillion in today's dollars over the 40 years, with much of the burden on the Commonwealth.

Mr Costello welcomed the report, saying the Government had been at the front edge of global policymakers in dealing with the ageing phenomenon.