Phil Gallagher, PSM Manager, Retirement and Intergenerational Modelling Unit

DEPARTMENT OF THE TREASURY

AUSTRALIAN POLICY APPROACH TOINTERGENERATIONAL ISSUESPresentation for NDRC & Australian Treasury Bilateral Seminar Program 22 December 2008

Phil Gallagher, PSMManager,

Retirement and Intergenerational Modelling UnitTax Analysis Division, AUSTRALIAN TREASURY

•Phone +61 2 6263 3945•email phil.gallagher@ treasury.gov.au

•websites www.budget.gov.au• http://rim.treasury.gov.au

Views expressed in this presentation are those of the author and are not necessarily those of any Commonwealth Agency or of the Government


Objective of the presentation

• To show how policy reports such as the Australian Intergenerational Report have been used to identify sustainability issues for:– Labour force growth and economic growth– Government spending

• To introduce the policy framework used by the Australian Treasury to respond to these issues


Outline

Part 1 – Identifying the problem

• Origins of the IGR• Treasury long term modelling• Drivers of Intergenerational change -

Demography, Labour Force, Productivity

• Economic projections • Fiscal projections

Part 2: Policy responses


Origins of the IGR1996 Commission of Audit Report recommended a

Charter of Budget Honesty

Section 20(1) requires the Treasurer to publicly release and table intergenerational reports

Section 21 outlines contents of intergenerational reports

• Required to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change

Two reports so far – 2002 and 2007


Treasury long term modelling

• The aim of Treasury long term modelling is not to predict the future

• The aim is to assess risks associated with current trends and current policies

• The aim is also to model the effects of policy change and the threats to sustainability

• Policies and trends will change


Drivers of intergenerational change

DEMOGRAPHY


Treasury fertility projectionsTotal fertility per woman

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

1947 1957 1967 1977 1987 1997 2007 2017 2027 2037 2047

1.50

1.75

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

History IGR2 Projections IGR1 Projections IGR2

Total fertility Projected total fertility


Net migration

• IGR1 assumed net migration of 90,000 per year

• IGR2 assumes 110,000 per year which was the average of the last ten years

• We would now assume between 160,000 and 180,000


Mortality – IGR2survival probabilities

Year of life table Males Females Males Females1905 64 68 1 21921 67 72 6 191954 71 77 45 531976 73 80 49 582004 81 86 60 67

Projection year2020 84 88 66 712050 88 91 73 78

Age of 50% survival (years) Age of 90% survival (years)


Life expectancy is increasing

Table: Life Expectancy at Birth (in years) IGR2

2004 2017 2027 2037 2047

Males 78.5 81.4 83.2 84.6 86.0

Females 83.3 85.6 87.2 88.5 89.8Source: Treasury Projections

Table: Life Expectancy at Birth (in years) IGR12004 2017 2027 2037 2047

Males 77.6 80.1 81.2 82.1 82.9Females 83.0 85.1 86.2 87.1 88.0Source: Treasury Projections


Life expectancy is increasing

Table: Life Expectancy at age 60 IGR12004 2017 2027 2037 2047

Males 21.3 23.0 23.7 24.3 24.8Females 25.3 26.8 27.6 28.3 28.9Source: Treasury Projections

Table: Life Expectancy at age 60 IGR2

2004 2017 2027 2037 2047

Males 22.2 24.2 25.5 26.6 27.7

Females 25.7 27.4 28.6 29.8 30.8

Source: Treasury Projections


Australia - changing age structure

1972

2047 2006

1000000 500000 0 500000 1000000

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

1000000 500000 0 500000 1000000

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+

1000000 500000 0 500000 1000000

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80-84

90-94

100+


Changing age structure 2

Projected population and proportions of total IGR2Age range 2007 2017 2027 2037 20470 to 14 19.1% 17.7% 16.7% 15.7% 15.0%15 to 64 67.4% 65.6% 62.7% 60.7% 59.7%65 to 84 11.7% 14.5% 17.8% 19.4% 19.7%85 and over 1.7% 2.2% 2.7% 4.2% 5.6%Total persons (millions) 20.9 23.2 25.3 27.1 28.5

Projected population and proportions of total IGR1Age range 2007 2017 2027 2037 20470 to 14 18.9% 16.9% 15.6% 15.0% 14.3%15 to 64 68.0% 67.8% 64.0% 61.3% 60.4%65 to 84 11.5% 19.4% 20.7% 19.9% 20.3%85 and over 1.7% 2.7% 4.0% 3.9% 5.1%Total persons (millions) 20.6 22.4 23.9 25.0 25.6


Drivers of intergenerational change

LABOUR FORCE TRENDS AND PROJECTIONS


Approach to labour force projections

45-54

44.3%

54.3%

64.3%

74.3%

84.3%

94.3%

1 978/ 79 1 988/ 89 1 998/ 99 2008/ 09 201 8/ 1 9 2028/ 29 2038/ 39 2048/ 49 2058/ 59


Overall participation rates

40

45

50

55

60

65

70

75

80

19

78

19

83

19

88

19

93

19

98

20

03

20

08

20

13

20

18

20

23

20

28

20

33

20

38

20

43

20

48

40

45

50

55

60

65

70

75

80

Participation rate 15-64 (IGR1) Participation rate 15-64 (IGR2)

Participation rate 15+ (IGR1) Participation rate 15+ (IGR2)

Per cent Per cent


Male total participation rates

0

10

20

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

15 - 19 20 - 24 25 - 34 35 - 44 45 - 54

55 - 59 60 - 64 65 - 69 70+ Total 15+

Per cent Per cent


Female total participation rates

0

10

20

30

40

50

60

70

80

90

1978

-79

1983

-84

1988

-89

1993

-94

1998

-99

2003

-04

2008

-09

2013

-14

2018

-19

2023

-24

2028

-29

2033

-34

2038

-39

2043

-44

0

10

20

30

40

50

60

70

80

90

15 - 19 20 - 24 25 - 34 35 - 44 45 - 54

55 - 59 60 - 64 65 - 69 70+ Total 15+

Per cent Per cent


Unemployment rate

• The long term unemployment rate assumption is 5% as it was for IGR1


Drivers - productivity

-1

0

1

2

3

4

5

6

1970-71 1980-81 1990-91 2000-01

-1

0

1

2

3

4

5

6

Average 1980s

Average 1990s

Average 2000sAverage 1970s

Per cent Per cent


Projecting GDP using the 3P’s

In words GDP=Labour productivity * Average hours * Employment ratio * participation rate * Population 15+

PopPopLF

LFEmp

EmpHours

HoursGDP

GDP


Growth in economic aggregates

Labour Real GDPDecade Population productivity Employment Real GDP per person

1960s 2.2 2.9 2.6 5.1 2.8

1970s 1.3 2.0 1.7 3.0 2.2

1980s 1.5 1.2 2.4 3.4 1.8

1990s 1.2 2.1 1.2 3.3 2.1

2000s 1.2 1.5 1.9 3.0 1.8

2010s 1.0 1.8 0.8 2.6 1.6

2020s 0.8 1.8 0.5 2.3 1.4

2030s 0.6 1.8 0.4 2.2 1.5

2040s 0.5 1.8 0.3 2.0 1.6


Selected expense projections

• Age Pension

• Health – particularly Pharmaceutical Benefits


Population age groupgrowth indexes

50

100

150

200

250

300

350

400

450

500

2007 2017 2027 2037 2047

50

100

150

200

250

300

350

400

450

500

0-18 19-54 55-64 65-84 85+ Total

Index Base = 100 Index Base = 100


Effect of Superannuationon Age Pension status

80

100

120

140

160

180

200

2007 2012 2017 2022 2027 2032 2037 2042 2047

0

20

40

60

80

100

Projected superannuation assets (LHS) full pension (RHS)

part pension (RHS) no pension (RHS)

Per cent of GDP Per cent of people of Age Pension age


Results – age pensions

Per cent of GDP 2006-07 2011-12 2016-17 2026-27 2036-37 2046-47IGR2 2.50% 2.77% 2.98% 3.51% 4.07% 4.43%IGR1 2.78% 2.85% 3.20% 3.94% 4.40% 4.55%Real per capitaIGR2 1,231 1,460 1,698 2,296 3,093 3,942IGR1 1,274 1,425 1,727 2,442 3,145 3,820


Some key IGR sensitivity analysisfor Age Pension

• Longevity– Highly significant impact

• Plausible higher LE increases cost by 0.50 % of GDP

• Participation– Significant impact

• Plausible higher participation decreases cost by 0.24 % of GDP

• Migration– Higher migration decreases cost by about 0.14%

• Productivity– Negligible impact as pension rises or falls in line with

wages


Health

• Drivers – age distribution and non-demographic growth rates

• Results


Age distribution of Pharmaceutical benefits to males

Per capita expenditure actualsMale 2003 2004 2005 20060-4 43.47 35.41 32.82 27.525-14 26.55 27.25 26.90 27.4715-24 53.14 52.71 52.25 52.5425-34 86.91 89.59 94.85 100.7735-44 136.75 146.32 152.78 157.7845-54 245.61 264.89 277.86 277.3255-64 499.99 539.66 564.59 563.2365-74 960.16 1047.02 1108.79 1118.4575-84 1282.72 1400.00 1499.10 1526.0385+ 1137.08 1258.93 1312.58 1363.08

All males 257.41 280.47 298.54 305.30


Real age adjusted pharmaceuticalspending history - PBS, s100 and RPBS

($ per person)

0

50

100

150

200

250

300

350

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

0

50

100

150

200

250

300

350Real dollars per person Real dollars per person


Pharmaceuticals spendingIGR1 v IGR2 per capita and % GDP

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2007 2012 2017 2022 2027 2032 2037 2042 2047

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

IGR1 IGR2

$ real per Per cent of GDP

Real $ per capita

Per cent of GDP


Health overall results

0

2,000

4,000

6,000

8,000

10,000

2006-07 2011-12 2016-17 2021-22 2026-27 2031-32 2036-37 2041-42 2046-47

0

2

4

6

8

10

IGR1 IGR2

Real per person

Per cent of GDP

Real dollars per person Per cent of GDP


Ageing and non-ageing factorsaffect health spending

• Non-demographic growth is the key driver of health spending in the past two decades

• In the projections, ageing contributes only around ¼ of the increase in spending


Summary of Australian Government spending differences

Spending Area 2006-07 2046-47 Difference

Health 3.8 7.3 3.5

Aged Care 0.8 2.0 1.2

Payments to individuals 6.7 7.1 0.4

Education 1.8 1.8 0

Total 13.1 18.2 5.1


Summary of Part 1• The Australian population will age - largely because of a

decline in fertility from 1961

• Although labour force participation of women and the population aged 15-64 is projected to rise, total labour force participation for all persons 15 and over declines

• GDP per capita continues to rise over the whole projection period, and does not slow to the same extent as GDP growth. Productivity has an important effect on both projections

• On current trends and policies, Commonwealth demographic expenditure could grow by 4.75 percentage points of GDP by 2046-47


Part 2

POLICY RESPONSES


Projection of spending pressure

0

1

2

3

4

5

2006-07 2016-17 2026-27 2036-37 2046-47

0

1

2

3

4

5Per cent of GDP Per cent of GDP


Projected primary balances

-4

-3

-2

-1

0

1

2

2006-07 2016-17 2026-27 2036-37 2046-47

-4

-3

-2

-1

0

1

2Per cent of GDP Per cent of GDP


Some improvement in fiscal pressure since IGR1

-5

-4

-3

-2

-1

0

1

2

2006-07 2011-12 2016-17 2021-22 2026-27 2031-32 2036-37 2041-42 2046-47

-5

-4

-3

-2

-1

0

1

2

IGR1 IGR2

Per cent of GDP Per cent of GDP


Broad policy options

1. Increase GDP

2. Reduce expenditure eg pharmaceuticals and disability pensions, but problems if reduce money to States

3. Increase tax or other revenue

4. Public pre-funding eg the Future fund and surpluses deposited at the reserve bank

5. Private pre-funding which offsets public funding eg Australia’s Private Pension System Superannuation Guarantee

6. Private insurance as a substitute for public insurance


Method 1: Increasing GDP


Productivity policyProductivity policy

Participation policyParticipation policy

Population policyPopulation policy

Economic policy themes the ‘3Ps’

Total populationTotal population

Share of population 15+Share of population 15+

Participation rateParticipation rate

Unemployment rateUnemployment rate

Average hours workedAverage hours worked

Capital deepening

Multifactor productivity


Policy responses

Multi-factor productivityMulti-factor productivity

Capital deepeningCapital deepening



Participation ratesParticipation rates



ImmigrationImmigration










Taxation of capitalTaxation of capital

Policy responses











Foreign investmentForeign investment

Policy responses











Taxation of skilled labourTaxation of skilled labour


Policy responses











Welfare reformWelfare reform



Policy responses














Labour market/workplace relations


Policy responses
















Education and trainingEducation and training

Policy responses









Microeconomic reform and sound macroeconomic

policy frameworks

Microeconomic reform and sound macroeconomic

policy frameworks

Education and trainingEducation and training








Policy responses


Questions

Documents

Phil Gallagher, PSM Manager, Retirement and Intergenerational Modelling Unit