An Ageing Australia: Preparing for the Future

(1)

Productivity Commission

Mike Woods

Deputy Chairman, Productivity Commission

COTA National Policy Forum

An Ageing Australia:

Preparing for the Future

(2)

Productivity Commission 2

The population will grow strongly…

20 25 30 35 40 45

2012 2024 2036 2048 2060

million 95 % con fi de nce i nter v al 90 % con fi de nce i nter v al Base projection 38.3m 44.4m 42.3m 34.2m 32.6m 22.7m

(3)

But it will age

0 20 40 60 80 100 120 140

2012 2027 2042 2057 2072 2087 2102

2011-12:

1.3 centenarians to 100 babies

2100-01:

130 centenarians to 100 babies

2059-60:

24 centenarians to 100 babies

(4)

Ageing will reduce labour supply

2.8

-8.4

-4.6

0.7 0.4

-10 -8 -6 -4 -2 0 2 4 6

Participation rate

Employment rate

Average hours

15+ share of pop

Total (hours per capita)

+

(5)

An age of diminished expectations

- 6 - 4 - 2 0 2 4 6 8

1987 1997 2007 2017 2027 2037 2047 2057

The boom years 2.7% growth

1.1% growth per annum

0.8% growth per annum

(6)

Current expenditures are weighted

towards older Australians (2011-12)

0 20 40 60 80 0-4 5-9 10-1 4 15-1 9 20-2 4 25-2 9 30-3 4 35-3 9 40-4 4 45-4 9 50-5 4 55-5 9 60-6 4 65-6 9 70-7 4 75-7 9 80-8 4 85-8 9 90-9 4 95-9 9 100+ Health Age Pension Other Aged care Education

(7)

Australian Government fiscal

pressure (per cent of GDP)

2011-12 2049-50 2059-60 Difference between 2011-12 and 2059-60 (fiscal pressure)

% % % Percentage points

Health 4.1 6.4 7.0 2.9

Age Pension 2.7 3.7 3.7 1.0

Aged care 0.8 2.2 2.6 1.8

Education 1.9 1.7 1.7 -0.2

Disability support services 0.3 0.6 0.6 0.3

Disability support pension 1.0 1.0 1.0 0.1

Family Tax Benefit (A & B) 1.4 0.7 0.6 -0.7

Parenting Payment 0.3 0.3 0.3 0.0

Other social security & welfare

payments _2.1 _2.2 _2.2 _0.1

Defence & other expenditures 6.1 5.4 5.4 -0.7

(8)

(9)

Addressing the fiscal gap

• The fiscal gap must be addressed through

− Reducing public expenditure (but do not neglect

innovative private co-contributions as an option for this)

− Increasing taxation

− Some hybrid of the two

• Privatising assets may be desirable on efficiency

grounds, but it is not a long term strategy

• Options canvassed include:

− Changes that stimulate labour force participation rates of

older people and reduce government outlays

− Examining new ways to help fund government-provided

services

(10)

Mismatch between life expectancy

and retirement policy

People are living longer, but not increasing the time spent in the workforce

43.2 42.6 43.8 44.4 44.9 45.4

13.2 20.0 23.9

27.7 30.7 32.6

0 20 40 60 80 100 Oldest Gen (1901-1925) Silent Gen 1926-1945 Baby Boomers 1946-1965 Gen X&Y 1966-1985 iGeneration 1986-2005 GenWhats 2006-2060 L ife exp ectan c y after 15 (y ear

s) _{Average years in labour force}

Average years outside labour force

56.4 62.4

67.7 72.2

75.6 77.9

(11)

Increasing the eligibility age will have a

fiscal and labour market impacts

• Increasing the eligibility age to 70 would defer

retirement, increase participation, and

stimulate private savings

− increase participation rates for people in the

relevant ages by around 3–10 per cent (after taking into account DSP takeup)

• There would be fiscal savings

− Ongoing fiscal savings of between 0.1 and 0.15 per cent of GDP per annum from 2035

− $150 billion (2011-12 prices) in net fiscal savings from 2012-13 to 2059-60

(12)

Wider applicability to the retirement

income system

• The eligibility age is only one mechanism that

influences the period of time receiving the Age

Pension

• Strong linkages between the Age Pension and

the superannuation system

• The issues raised by growing longevity should

be considered for the whole retirement income

system

(13)

Older Australians are often income

poor, but asset rich (2009-10)

0 150 300 450 600 0 400 800 1 200 1 600 2 000 <20 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+ A v er ag e h o me v al u e ($'000) A v er age w eek ly disposable i nco me ($) Own home Value (RHS) Household disposable income (LHS)

(14)

Equity release schemes could help

households fund co-contributions

• Already in use to help households pay their

council rates

− Also for Age Pension under certain conditions

• Effects could be significant

− Contribution of half the annual real increase in home values towards aged care services could reduce government expenditures by around 30 per cent

− This would still leave older households with an appreciating asset base

(15)

A scheme designed for aged care

• The Commission’s

Caring for Older Australians

report proposed an equity release scheme

− Allows eligible individuals to access equity in their home to pay for aged care services

− Scope for use for both community and residential care services

− Provides for better consumer directed care

(16)

Productivity and costs in the health

sector

• Area of largest fiscal pressure

• Significant variations in the productivity of

different health service providers

• Potential areas for reforms include:

− Organisation efficiencies - ‘lean’ care models

− Sharper incentives

− Diffusion and adoption of leading practice, cost

effective technologies and clinical practice: ‘Do not do’ lists

− Workforce reform

− Efficient procurement

(17)

Potential savings

4 5 6 7

2011-12 2026-27 2041-42 2056-57

With

productivity shock Business as usual

Sh

are

of

GDP

(

(18)

Planning for the future

• Population ageing is a desirable side product

of success

• However, it entails major economic and social

transformation

− Current fiscal pressures, falling terms of trade and weak productivity trends