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!