Commend this report, not just for giving context to the economic challenges wrought by an ageing population, but also for a lucid analysis of Australia’s economic circumstances.
“As our population grows older, fewer people as a proportion of the total workforce are willing or able to work. This is beginning to happen now as the eldest of the baby boomer generation reach retirement age, and will speed up in the years ahead. This reduced workforce participation means lower growth in the economy overall and lower per-person incomes.”
“there are a number of reasons to believe that there are risks to continued growth in per-person incomes or government budgets.” A key one according to PricewaterhouseCoopers is: “As our population grows older, fewer people as a proportion of the total workforce are willing or able to work. This is beginning to happen now as the eldest of the baby boomer generation reach retirement age, and will speed up in the years ahead. This reduced workforce participation means lower growth in the economy overall and lower per-person incomes.”
These factors, combined with low (or declining) productivity performance, reductions in workforce participation associated with an aging population, and the absence of productivity- enhancing reform measures, mean that per-person incomes may fall for the first time in nearly a quarter of a century. Accordingly, in line with forecast lower terms of trade, any future growth in living standards is expected to be driven by productivity growth.
The population and participation story *
The population is aging, and birth rates, while they rebounded in the first decade of the 21st century, are now stable. These factors affect workforce participation rates and therefore affect economic growth.
Over the past few decades, labour participation rates have been increasing and actually peaked around 2010. This was partly due to a higher proportion of the population in the prime working years of life, along with higher labour force participation by women. It also reflected increased participation by older people, partly as a result of decisions to defer retirement following the GFC, and in part because of improving health among older Australians. The combination of increased workforce participation by women and older workers in the short-term effectively reduced the impact of the aging of the population on per- person income levels.
Estimates of economic growth and per-person incomes are quite sensitive to small changes in workforce participation rates. In the years ahead, the impact of population aging on workforce participation is expected to accelerate if there are no changes to the timing of access to pension entitlements and superannuation. Already, the participation rates of older workers (aged over 55) and women might have reached a plateau.
However, a finer disaggregation of age- specific participation rates might tell a more optimistic story of the prospect of a larger proportion of older people continuing to work into their later 60s and early 70s.
While there is some uncertainty regarding movements in participation rates, it is expected that demographic change will, in the absence of interventions, be a drag on economic growth, growth in per-person incomes and government revenues at all levels. Moreover, it will simultaneously increase demands for pension, aged care and health expenditure.
*page 19 of the report
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