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

Demographics: from pyramid to …

1945

Males Females

-3% 0% 3%0

10

20

30

40

50

60

70

80

Age

per cent of population

Age structure

2045

-2.5% 0% 2.5%0

10

20

30

40

50

60

70

80

Males Females

per cent of population

coffin?

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?

10

20

30

40

50

60

70

80

1944

1959

1974

1989

2004

2019

2034

2049

Dep

ende

ncy

ratio

s (

%)

Aged dependency

Total dependency

Youth dependency

1944-2051

1.5

2.0

2.5

3.0

3.5

4.0

1944

1959

1974

1989

2004

2019

2034

2049

TF

R

Total fertility rate

1944-2051

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

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

1975 1985 1995 2005 2015 2025 2035 2045

Calendar years

fert

ility

rat

es

Completed fertility rate

Actual Projected

Total fertility rate Tempo effects are at work

10

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)

11

Ageing about to escalate

-0.100

0.000

0.100

0.200

0.300

0.400

0.500

1922 1932 1942 1952 1962 1972 1982 1992 2002 2012 2022 2032 2042

Cha

nge

in s

hare

age

d 65

+ (

% p

oint

s)

Historical average 1922-2000

Accelerating phase

12

Ageing doesn’t stop in 2045

0

10

20

30

40

50

60

70

80

90

100

2004 2029 2054 2079 2104 2129 2154 2179 2204 2229

%

Total dependency ratio

Aged dependency ratio

Youth dependency ratio

The 50 year horizon

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.

13

Potential workforce will slow

0

0.5

1

1.5

2

2.5

3

1944-45 1964-65 1984-85 2004-05 2024-25 2044-45

Per

cen

t

2003-04

Annual growth rate in people aged 15-64 years

14

Cohort data: females

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69

1886-1900 1906-1910 1916-1920 1926-1930 1936-1940

1946-1950 1956-1960 1966-1970

15

Male cohorts

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69

1896-1900 1906-1910 1916-1920 1926-1930 1936-1940

1946-1950 1956-1960 1966-1970

16

The cohort method

A 1B

1

part

icip

atio

n ra

te

Age group

Birth cohorts

A2

B2

B3

C3

C2

C1

20042009

1999

2014

35-39 40-44 45-4930-34

1960-64 cohort

1955-59 cohort

1965-69 cohort

17

Participation ratesP

art

icip

atio

n r

ate

(%

)

2004 2009 2014 2019 2024 2029 2034 2039 204456

58

60

62

64

66

Participation rate with ageing

Participation rate without ageing

Ageing effect

Pa

rtic

ipa

tion

ra

te (

%)

2004 2009 2014 2019 2024 2029 2034 2039 204456

58

60

62

64

66

Participation rate with ageing

Participation rate without ageing

Ageing effect

18

Not everyone agrees!

19

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)

20

Rising education may be one reason

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

1981 1987 1993 1999 2005 2011 2017 2023 2029 2035 2041

Sha

re

females 65 years

males 65 years

males 25 years

females 25 years

21

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

22

Labour supply: will there be shortages?

• Clearly some shortages in specific occupations

• For example, already some evident occupational shortages in nursing

23

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

24

But uncertainty means …

• Long run participation rates could diverge from the Commission’s base case

• We did sensitivity analysis

• Does not change implications much

25

An example: getting DSP beneficiaries into work

Met voluntarily with Job Network provider

Selected for Pilot788 (70%)

Did not engage342 (30%)

Exited beforeassistance

74Commenced Intensive Support

671

Pending43

Exited88

Still unemployed344 Job outcome

220

Education outcome19

Full time53

Part time75

Casual92

1130

Ineligible (127)Found unsuitable (74)Client declined (141)

Stayers583

26

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

27

Impacts of higher older male participation

2%

1.4%

0.8%

3.7%

0

0.5

1

1.5

2

2.5

3

3.5

4

Aggregateparticipation rate2044-45

Total hours worked2044-45

GDP per capita2044-45

Sum of GDP 2004-05to 2044-45

28

Placing the ‘problem’ in perspective

1856 1874 1892 1910 1928 1946 1964 1982 2000 2018 20360.300

0.325

0.350

0.375

0.400

0.425

0.450

0.475

0.500

0.50

0.55

0.60

0.65

0.70

0.75

0.80

Participation rate (RHS)

Employment toPopulation ratio (LHS)

Par

ticip

atio

n ra

te

Em

ploy

men

t to

popu

latio

n ra

tio

29

Productivity & ageing: small effects?15

-19

25-2

930

-34

30-3

940

-44

45-4

950

-54

55-5

960

-64

65-6

9

70+

males

females

0.5

0.6

0.7

0.8

0.9

1

1.1

0.5

0.6

0.7

0.8

0.9

1

1.1

20-2

4

rela

tive

prod

uctiv

ity in

dex

females

1.68

1.69

1.70

1.71

1.72

1.73

1.74

1.75

2005 2014 2023 2032 2041%

Effect on productivity growthEven with inverted u shape

30

Economic growth slump ahead

2006 2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039 2042 2045

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

Ageing effect

With ageing

Without ageing

Gro

wth

(%

)

31

Different scenarios for economic growth

29073 1241.525-0.221Least ageing

-22671 1671.458-0.287Most ageing

29 38273 6381.542-0.204Low fertility

-28 50471 7461.478-0.268High fertility

14 12673 3101.531-0.2150.57% fixed migration rate

-13 77972 1981.493-0.252Low migration

13 26973 1781.527-0.220High migration

17 06073 7611.546-0.200Low life expectancy

-14 28270 9871.451-0.293High life expectancy

15 69773 6101.541-0.205Older female PR converge on males

58 34475 8851.617-0.097Participation rises to 80% OECD

17 50073 7311.545-0.187Older male participation rate up 10 pts

072 7081.511-0.235Base case

$$%%

Per person GDP

‘dividend’ cf base

Real GDP per capita in 2044‑45

Per capita GDP

growth to

2044‑45

Per capita labour supply growth

to 2044‑45

Scenario

32

Fertility effects on labour supply growth per capita

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

2006 2011 2016 2021 2026 2031 2036 2041

%

Base case

High fertility case

Low fertility case

33

The demand for coffins and prams

0

2

4

6

8

10

12

14

2001-02 2050-51

Up 50%

Down 30%

Bir

ths

and

deat

hs p

er 1

000

peop

le

34

Health costs rise with age

0

1000

2000

3000

4000

5000

6000

0 15 30 45 60 75

$ pe

r pe

rson

Males

Females

Public hospitals

0

200

400

600

800

1000

1200

0 15 30 45 60 75

$ pe

r pe

rson

Males

FemalesPharmaceutical BenefitsScheme

35

Share of VET students by age

0

2

4

6

8

10

12

<=12 18 24 30 36 42 48 54 60 66 72 78 84 90 96

Age

%

36

Growth in VET declines

Full time equivalents

0

0.5

1

1.5

2

2.5

3

2003-04 2008-09 2013-14 2018-19 2023-24 2028-29 3033-34 2038-39 2043-44

%

37

The fiscal outcomes in education

2002-03 2044-45

States & Territories

Aust. Govt. Total States & Territories.

Aust.Govt. Total

% % % % % %

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 0.03 0.87 0.89 HECS repayments - -0.11 -0.11 - -0.17 -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

38

Overall fiscal pressure (spending)

6.525.218.7 Total

-0.54.75.2 Education

-0.63.13.8 Other social safety net

1.74.62.9 Aged pensions

1.42.51.1 Aged Care & carers

4.510.35.7 Health

Percentage points%%

Difference (fiscal pressure)

2044-45 2003-04Spending category

39

Things could be worse

8.627.218.8 Total

-0.94.15.3 Education

-0.83.03.8 Other social safety net

2.95.72.9 Aged pensions

2.43.51.1 Aged Care & carers

5.110.85.7 Health

Percentage points%%

Difference (fiscal pressure)

2044-45 2003-04Spending category

High ageing (low fertility, high LE, low migration)

40

Policy responses to ageing

• Ironically, population policies don’t do much and could hurt

41

Why is population policy not the remedy?

• Plausible migration changes have little direct effect on ageing

42

Immigration-induced population growth needed to offset ageing

Population (million)

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2005 2014 2023 2032 2041 2050

UKUK

GermanyGermany

JapanJapan

CanadaCanada

0.0

43

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

44

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

45

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

46

Implications: don’t panic! But take action!