The impact of an ageing population Ralph Lattimore (Productivity Commission)

1. The impact of an ageing population Ralph Lattimore (Productivity Commission) VET Planning and Research Network Melbourne, Victoria 22 April 2005

2. Today’s presentation • Is demography destiny? • The face of the labour market • Productivity: doldrums or vitality? • How much will ageing slow economic growth? • Future consumption: hospital beds, wheelchairs and coffins • Minding the fiscal ‘gap’ • Policies for a happy future

3. Projections not forecasts • Projections based on current expenditure trends and government policy • Not forecasts because we do not factor in a response to ageing

4. 2045 80 Males Females 70 60 50 40 30 20 10 0 -2.5% 0% 2.5% per cent of population coffin? Demographics: from pyramid to … Age structure 1945 Age 80 Males Females 70 60 50 40 30 20 10 0 -3% 0% 3% per cent of population

5. Is ageing a transitional phenomenon? • Often said that ageing transition is like a ‘pig passing through a python’ • Connotes ageing as a generational and fertility issue, with ephemeral social costs • Which generation is the ‘pig’ in this story? • Me and some of you! : the baby boomers!

6. Say there was no baby boom? 4.0 80 1944-2051 1944-2051 70 Total fertility rate Total dependency 3.5 60 3.0 50 TFR Dependency ratios (%) 40 Youth dependency 2.5 30 2.0 Aged dependency 20 1.5 10 2034 2049 1944 1959 1989 1974 2019 2004 2004 1944 1959 1974 1989 2034 2019 2049 With baby boom Without baby boom We would have an older society without the post-WWII fertility bulge

7. Fertility much misunderstood • Total fertility rate – the usually cited measure – is highly artificial • the number of children that a hypothetical women would have if she were to conform to the age-specific fertility rates of a given year

8. The total and completed fertility rate 3.3 Actual Projected 3.1 2.9 Completed 2.7 fertility rate 2.5 fertility rates 2.3 2.1 1.9 Tempo effects are at work 1.7 Total fertility rate 1.5 1975 1985 1995 2005 2015 2025 2035 2045 Calendar years

9. Longevity is the main source of ageing • This seems preferable to the alternative • Ageing is therefore a symptom of success : not a intrinsic problem • How long will you live? • Males aged 40 today to around 84, females aged 40 to around 88 years (cohort life expectancies)

10. Ageing about to escalate 0.500 0.400 Accelerating phase 0.300 0.200 Change in share aged 65+ (% points) Historical average 1922 - 2000 0.100 0.000 - 0.100 1922 1932 1942 1952 1962 1972 1982 1992 2002 2012 2022 2032 2042

11. Ageing doesn’t stop in 2045 The 50 year horizon 100 Total dependency ratio 90 80 70 Aged dependency ratio 60 % 50 40 Youth dependency ratio 30 20 10 0 2004 2029 2054 2079 2104 2129 2154 2179 2204 2229 Assumes underlying longevity of Males 78.4 in 2004, 83.7 in 2045, 92.3 in 2150; Females 83.6 in 2004, 87.4 in 2045 and 95 in 2150. Zero change after 2150.

12. Potential workforce will slow Annual growth rate in people aged 15-64 years 3 2003-04 2.5 2 Per cent 1.5 1 0.5 0 1944-45 1964-65 1984-85 2004-05 2024-25 2044-45

13. 1886-1900 1906-1910 1916-1920 1926-1930 1936-1940 1946-1950 1956-1960 1966-1970 Cohort data: females 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69

14. 1896-1900 1906-1910 1916-1920 1926-1930 1936-1940 1946-1950 1956-1960 1966-1970 Male cohorts 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69

15. The cohort method 2014 2009 2004 B A 1 1 1999 C 1 B A participation rate 2 2 1965 - 69 cohort C 2 1960 - 64 cohort B 3 C 1955 - 59 cohort 3 Birth cohorts 30 - 34 35 - 39 40 - 44 45 - 49 Age group

16. Participation rates 66 66 Participation rate Participation rate without ageing without ageing 64 64 62 62 Ageing Ageing Participation rate (%) Participation rate (%) effect effect 60 60 Participation rate Participation rate 58 58 with ageing with ageing 56 56 2004 2004 2009 2009 2014 2014 2019 2019 2024 2024 2029 2029 2034 2034 2039 2039 2044 2044

17. Not everyone agrees!

18. Commentators suggested labour participation rates could be higher than the PC base case • Healthier workers (ABARE) • More educated older cohorts (ABARE) • The ‘encouraged worker effect’ (DEWR) • Retirement income policy (DEWR) • DSP policies (DEWR) • Labour shortages (Tim Colebatch)

19. Rising education may be one reason 0.4 females 65 years 0.35 0.3 females 25 years 0.25 males 65 years Share 0.2 males 25 years 0.15 0.1 0.05 0 1981 1987 1993 1999 2005 2011 2017 2023 2029 2035 2041

20. But these may not change future trends • Educational attainment and health technologies improved in the past, but participation rates still fell for men • Encouraged worker effect usually a short run phenomenon • Retirement policy helps in some areas, but hurts in others • DSP changes may be worthwhile, but effects likely to be small

21. Labour supply: will there be shortages? • Clearly some shortages in specific occupations • For example, already some evident occupational shortages in nursing

22. But will shortages invite automatic big supply responses? • Some people claim feedbacks from labour shortages to increased participation • First, there will not be negative growth in labour inputs, just slower growth • Second, even if incipient labour shortages, it is like an economy overheating (ie like now) • Macro responses to overheating reduce scope for participation responses

23. But uncertainty means … • Long run participation rates could diverge from the Commission’s base case • We did sensitivity analysis • Does not change implications much

24. An example: getting DSP beneficiaries into work Met voluntarily with Job Network provider 1130 Did not engage 342 (30%) Selected for Pilot 788 (70%) Exited before Pending Ineligible (127) assistance 43 Found unsuitable (74) 74 Client declined (141) Commenced Intensive Support 671 Exited 88 Stayers 583 Education outcome 19 Still unemployed 344 Job outcome 220 Full time Part time Casual 53 75 92

25. Implications of resurgence in older male participation rates • Say by 2044‑45, male workers aged 55 years and over could achieve a participation rate 10 percentage points higher than under the base case • average productivity levels were 70 percent of existing workers • new participants under 65 had employment rates 90% of the current average for their age & sex • new participants had 0.5 the average propensity to work full time • they worked 80 percent of the average hours per week of existing part time or full time employees

26. Impacts of higher older male participation 4 3.7% 3.5 3 2.5 2% 2 1.4% 1.5 0.8% 1 0.5 0 Aggregate participation rate 2044-45 Total hours worked 2044-45 GDP per capita 2044-45 Sum of GDP 2004-05 to 2044-45

27. Placing the ‘problem’ in perspective 0.500 0.80 Employment to 0.475 Population ratio 0.75 (LHS) 0.450 0.70 0.425 Participation rate Employment to population ratio 0.400 0.65 0.375 0.60 0.350 Participation 0.55 0.325 rate (RHS) 0.300 0.50 1856 1874 1892 1910 1928 1946 1964 1982 2000 2018 2036

28. Effect on productivity growth 1.75 1.74 1.73 1.72 % 1.71 1.70 1.69 1.68 2005 2014 2023 2032 2041 Productivity & ageing: small effects? Even with inverted u shape 1.1 1.1 males 1 1 0.9 0.9 females females relative productivity index 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.5 64 69 34 39 49 54 44 59 19 29 24 70+ - - - - - - - - - - - 60 65 30 30 45 50 15 40 55 25 20

29. Economic growth slump ahead 1.9 1.8 Without ageing 1.7 1.6 Ageing effect Growth (%) 1.5 With ageing 1.4 1.3 1.2 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045

30. Different scenarios for economic growth Scenario Per capita labour supply growth to 2044‑45 Per capita GDP growth to 2044‑45 Real GDP per capita in 2044‑45 Per person GDP ‘dividend’ cf base % % $ $ Base case -0.235 1.511 72 708 0 Older male participation rate up 10 pts -0.187 1.545 73 731 17 500 Participation rises to 80% OECD -0.097 1.617 75 885 58 344 Older female PR converge on males -0.205 1.541 73 610 15 697 High life expectancy -0.293 1.451 70 987 -14 282 Low life expectancy -0.200 1.546 73 761 17 060 High migration -0.220 1.527 73 178 13 269 Low migration -0.252 1.493 72 198 -13 779 0.57% fixed migration rate -0.215 1.531 73 310 14 126 High fertility -0.268 1.478 71 746 -28 504 Low fertility -0.204 1.542 73 638 29 382 Most ageing -0.287 1.458 71 167 -226 Least ageing -0.221 1.525 73 124 290

31. Fertility effects on labour supply growth per capita 0.2 0.1 0 -0.1 Low fertility case -0.2 % -0.3 -0.4 Base case -0.5 -0.6 High fertility case -0.7 2006 2011 2016 2021 2026 2031 2036 2041

32. Down 30% Up 50% The demand for coffins and prams 14 12 10 8 Births and deaths per 1000 people 6 4 2 0 2001-02 2050-51

33. Health costs rise with age 6000 1200 Public hospitals Pharmaceutical Females Benefits 5000 1000 Scheme Males 4000 800 Males $ per person 3000 $ per person 600 2000 400 1000 200 Females 0 0 0 60 75 30 45 15 0 60 75 45 15 30

34. Share of VET students by age 12 10 8 % 6 4 2 0 18 24 30 36 42 48 54 60 66 72 78 84 90 96 <=12 Age

35. Growth in VET declines 3 2.5 2 % 1.5 1 0.5 0 2003-04 2008-09 2013-14 2018-19 2023-24 2028-29 3033-34 2038-39 2043-44 Full time equivalents

36. The fiscal outcomes in education 2044-45 2002-03 State s & Aust . Govt . Total States & Aust.Govt. Total Territories Territories . % % % % % % Schools 2.60 0.78 3.38 2.24 0.76 2.99 Government 2.41 0.28 2.69 2.03 0.24 2.27 Non-government - 0.20 0.50 0.69 0.21 0.52 0.73 VET 0.35 0.16 0.52 0.36 0.16 0.52 University 0.03 0.74 0.77 0.0 3 0.87 0.89 HECS repayments - - 0.11 - 0.11 - - 0.1 7 - 0.17 Income assistance - 0.26 0.26 - 0.12 0. 12 Other education 0.30 0.09 0.38 0.27 0.08 0.34 Total 3.28 1.92 5.20 2.89 1.81 4.69

37. Overall fiscal pressure (spending) Spending category 2003-04 2044-45 Difference (fiscal pressure) Percentage points % % Health 5.7 10.3 4.5 Aged Care & carers 1.1 2.5 1.4 Aged pensions 2.9 4.6 1.7 Other social safety net 3.8 3.1 -0.6 Education 5.2 4.7 -0.5 Total 18.7 25.2 6.5

38. Things could be worse High ageing (low fertility, high LE, low migration) Spending category 2003-04 2044-45 Difference (fiscal pressure) Percentage points % % Health 5.7 10.8 5.1 Aged Care & carers 1.1 3.5 2.4 Aged pensions 2.9 5.7 2.9 Other social safety net 3.8 3.0 -0.8 Education 5.3 4.1 -0.9 Total 18.8 27.2 8.6

39. Policy responses to ageing • Ironically, population policies don’t do much and could hurt

40. Why is population policy not the remedy? • Plausible migration changes have little direct effect on ageing

41. Immigration-induced population growth needed to offset ageing Population (million) 140.0 Japan Japan 120.0 100.0 Germany 80.0 Germany UK UK 60.0 Canada 40.0 Canada 20.0 0.0 2005 2014 2023 2032 2041 2050

42. Why is population policy not the remedy? • Plausible migration changes have little direct effect on ageing • but a modest, but temporary, fiscal benefit • Skilled migration more positive • Long term fertility is insensitive to policy and hurts, not helps, over 50 years • Mortality the only really effective demographic variable for controlling ageing, but has some political drawbacks

43. Policy responses to ageing • Ironically, population policies don’t do much and could hurt • Productivity and participation make the national cake bigger – but need not reduce fiscal gap • Role for policies that raise revenue or reduce costs relative to the deficit • higher average taxation rates • user pays in some areas? • greater efficiency and ingenuity in health services and government services generally

44. Crisis? What crisis? • Ageing is not a crisis (remember the alternative)! • Ageing is not a crisis! • We will be much richer as a country (twice as rich) • Australia is ageing less than Europe • We have no pension crisis • Additional expenditure improves peoples’ lives • But we must cover the large emerging government fiscal gap

45. Implications: don’t panic! But take action!