Saturday, July 03, 2021

The intergenerational horizon that recedes each time we approach it

On Monday, Treasurer Josh Frydenberg homed in on the real problem identified by his government’s intergenerational report – about the only real problem expounded on in the report.

It’s that by 2061 we will have far fewer people of working age for each person of traditional retirement age. Right now, Frydenberg explained, we have four people of working age for each Australian aged over 65.

Forty years ago we had 6.6. But in 40 years’ time, we will have just 2.7.

That’s a good deal fewer people to cut our hair, fix our computers, look after our needs in nursing homes.

It belongs to that unusual class of problems that money can’t fix, despite Frydenberg saying the financial implications are “sobering”.

Collecting more tax to spend on retirees or having them squirrel away more superannuation to spend in retirement isn’t going to create more people of working age.

This demographic issue exists because the large number of Australians born in the postwar baby boom are in or approaching retirement, and aren’t dying any time soon.

Four will become 2.7 whatever we do, unless we have more babies or attract more migrants and temporary workers. The only other factor would be if this generation died sooner.

The man who set up Australia’s system of five-yearly intergenerational reports and delivered the first two, the Coalition’s then treasurer Peter Costello, was fond of saying that while demographic change is slow, “demography is destiny”.

Every five years since he left office, his successors, Wayne Swan, Joe Hockey and Josh Frydenberg, have reissued the same sort of projections and graphs, and every five years they’ve sounded surprised.

Joe Hockey said Australians would “fall off their chairs” when they discovered their government wouldn’t “get anywhere near being able to reduce spending over the medium-term to the same level that exists today”, which was hardly the point.

If Australians had been paying attention, what might have surprised them more was how much less worrying the projections had become over time.

In 2007 Peter Costello said the number of working-age Australians for each Australian over 65 would shrink from five to 2.4 in 40 years’ time.

Wayne Swan’s projection, in 2010, was for the number to shrink to a less scary 2.7, and not until five years later than Costello’s warning. Hockey’s projection was less scary still – to 2.7, but a further five years out again.

Frydenberg’s projection this week was still 2.7, but a further five years out, to 2061. The demographic event horizon has receded each time we’ve approached it.

Doing the work of holding back the transition has been massive and unexpected immigration. Costello’s first intergenerational report in 2002 assumed net overseas migration of 90,000 people a year for 40 years. By 2010, net overseas migration had more than doubled to 244,000 people a year, and the intergenerational report assumed 180,000 a year for 40 years.

The 2015 report assumed 215,000 a year, and Frydenberg’s assumes 235,000 a year after borders reopen.

Migrants are young, as are temporary workers and foreign students. Eight in 10 are aged under 35 when they arrive. Although they themselves age, most bolster the working-age population for decades. Many work in nursing homes.

Ask John Piggott, director of the Centre of Excellence in Population Ageing Research at UNSW Sydney, whether this means migration is a something of a Ponzi scheme, with a continual flow of new migrants needed each year to stop the age structure collapsing, and he’ll tell you it’s the same for births. Each newly born Australian also ages, but from the time they enter the workforce they bolster the working-age population for decades to come.

And the divide between workers under 65 and retirees over 65 is losing its meaning, in part because the Rudd Labor government lifted the pension age to 67 and the Abbott government tried to lift it to 70, an idea that will doubtless be revisited.

At the time of the first intergenerational report in 2002 only 10 per cent of men and 3.5 per cent of women aged 65 and older were in paid work or making themselves available for paid work. Twenty years on, it’s close to 20 per cent and 11 per cent, proportions that grew through the coronavirus crisis.

If we really do become short of workers of traditional working age, we are likely to become more accepting of workers in their 70s. The increases in not just lifespans, but healthy lifespans, and a shift to service-sector and part-time jobs, will mean more people in their 70s will take work.

The financial problems spelled out in Frydenberg’s report are both less severe and more severe than Frydenberg acknowledged.

It says by 2060-61 healthcare will become the largest component of government spending, eclipsing social security and taking up 26 per cent of the budget. Government spending on health per person will more than double.

Yet what it also says is that most of the increase will be non-demographic – the government will spend more on healthcare for Australians of all ages, because treatments are becoming more expensive (and presumably better) and because we want them.

The report points to a budget problem. By 2061 government spending will exceed government revenue by 2.5 per cent of gross domestic product (GDP), and by 5 per cent on a less optimistic set of assumptions, but that’s only because of a self-imposed decision not to let the tax take climb.

For completely political reasons, the Coalition imposed an arbitrary cap on the tax-to-GDP ratio of 23.9 per cent of GDP a few elections back, a cap that will be reached in about 15 years.

“Some might suggest an easy way to paint a more optimistic picture of the budget position would be to remove the tax-to-GDP cap,” Frydenberg said on Monday. “But as we know, you can’t tax your way to prosperity.”

Prosperity, in the sense of being able to afford to pay increased tax, shouldn’t be much of a problem. The report says by 2061 real GDP per person is expected to be almost twice as high as it is now. We shouldn’t find it too difficult to shell out an extra few per cent of GDP in tax.

But other costs aren’t acknowledged. The report includes a chapter headed “environment” that refers to the costs of climate change and its impacts on agriculture and the resources sector, but includes not one financial measure of that impact.

The NSW intergenerational report, released just three weeks earlier, said more frequent and severe natural disasters could cost the state an extra $17 billion a year.

In the 2016 election. Labor was castigated for its failure to cost its climate change policy. Frydenberg has failed to cost the Coalition’s in 2021.

And there’s another big thing the report fails to acknowledge. Yes, the number of Australians of working age for each Australian of traditional working age will drop from four to 2.7 and yes, this will be a problem, but old people aren’t the only dependents.

Children are also dependents, and as the proportion of the population who are older dependents has been growing, the proportion who are younger dependents has been shrinking.

The total dependency ratio – the number of Australians of working age per Australian either over 65 or under 15 – was acknowledged in earlier intergenerational reports. It is unacknowledged in this one, but is expected to slip from 1.8 to 1.6 – a drop, but a less alarming drop than the aged-dependency ratio.

It’s also less alarming because we’ve been there before. During the 1960s, a time generally regarded as pretty pleasant, Australia had 1.6 people of traditional working age for each Australian either over 65 or under 16. There were a lot of children about in the 1960s but we managed to care for them.

A key difference, identified by tax and transfer specialist Miranda Stewart at the University of Melbourne, is that children are more likely to be cared for off-budget, especially off the Commonwealth’s budget, and so don’t force their way into the intergenerational report.

Much of their care is provided privately, either by the private payment of childcare fees and school fees or by parents, mainly mothers, doing it unpaid.

As with the resource costs identified in Frydenberg’s report, these resource costs are real. The point is, we’ve coped with them before.

This article was first published in the print edition of The Saturday Paper on Jul 3, 2021 as "Demography is destiny".