Friday, March 06, 2015

Intergenerational report. Why the future will be nothing like as bleak as it suggests

The biggest economic challenge facing Australia in 40 years' time will be a shortage of workers. The finances aren't nearly as challenging.

It's true that we will probably have to pay more of our income in tax, but we'll earn a lot more. Adjusted for inflation we'll earn will earn three times as much as we do today. We'll be able to find whatever extra tax is needed.

What we won't be able to find - as easily - is more workers. The intergenerational report says instead of the present 4.5 people of traditional working age for each older Australian we'll have 2.7. It's a dramatic slide, but it overstates the problem.

As we getting older, we will also get less young. That means that as well as having more Australians over 65 to support we'll also have fewer Australians under 16. Putting the two together, the figures in the intergenerational report suggest that whereas at the moment there are two Australians of traditional working age available to support each Australian of traditional dependent age, by 2055 there will be just 1.7.

It isn't a problem we can wish away. But the report overstates it by assuming that the automatic mechanisms for solving it work badly.

As we run short of workers we'll want to import more of them. Yet the report assumes that our immigration intake will remain stuck at 215,000 each year for 40 years without climbing. The implicit assumption is that this government and each of its successors will resist what by then would become a deafening call from employers and consumers of services such as home care to bring in more workers.

It's hard to escape the conclusion the assumption was added either to make the Australian population look less alarmingly big than it will be in 2055 (the report says it will be about 40 million) or to make the budget problem look worse. Migrants pay tax and the more migrants we have the better the budget looks.

The other automatic mechanism that will call forth more workers is higher wages. Whenever there's a shortage of anything its price goes up and more people start supplying it. It's how markets work. Yet the report assumes that most older Australians won't answer the call. By 2035 the pension won't be available until the age of 70 if the government gets its way. Yet the report assumes that only 52 per cent of the men aged 65 to 69 will be available for work, and only 37 per cent of the women.

The figures sound too low to me. I don't know a lot about central planning, but do I know that markets work. If there's a shortage of workers their price will go up and we'll find more of them, whether from overseas or from the ranks of Australians presently not working. The report reads as if it was written by Soviet-era bureaucrats who don't believe in markets. The future won't be as bleak as they think.

In The Age and Sydney Morning Herald

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. Intergenerational Report: How Labor was framed

. Be careful when reading the Intergenerational Report. It's meant to scare you

. 2010. The real intergenerational change