Reaping the benefits of an ageing population
Wednesday 28 May 2014
For over 35 years Australian politicians and economic commentators have been worrying about the ageing of the population. Their anxieties focus on labour-force participation and the dependency burden that older people (aged 65 plus) are thought to place on working taxpayers.
Is this anxiety justified? To answer this question, we need to look at our present situation and at projections based on present trends. We should also consider wider evidence from other developed nations.
But first, we should remember the reasons for our rising average age. Demographic ageing is a consequence of birth control and better health. Families no longer have to cope with multiple unplanned pregnancies, most children live to grow up, and most of us will live on into our mid-80s. This means that the average age of the population must increase.
What impact does this have on labour-force participation and dependency? Most commentators focus on the number of people of so-called working-age, those aged 15 to 64, arguing that they are the key tax-paying contributors to public revenue and that older people are dependent on them.
This is simplistic. First, not all people aged 15 to 64 both work and pay income tax. Second, an increasing number of older people are working, and many of the others do not require pensions or other welfare. Third, it ignores the fact that children are also dependants.
To see the effects of demographic ageing on paid labour, and thus on income-tax revenue, we need to look at actual labour-force participation. And to work out actual dependency we need to include children and calculate numbers in the labour force as a percentage of the total population. There is plenty of data to hand, and this provides a window on the recent past.
Our increasing maturity has a long history; since 1901 Australia has aged by nearly 15 years and, by almost any measure, has become richer, healthier, and able to pay a lot more tax. The journey started with a median age of just under 23 in 1901, rising to 29 in 1978 and 37 in 2013.
More than half of this demographic ageing occurred between 1978 and 2014 but numbers in the labour force grew strongly. Rather than drifting away into early retirement many older people have stayed at work or gone back to work.
We can trace the story from 1966 when comparable statistics were first collected. From that date to December 2013 total labour-force participation grew by 10 percentage points, from 42 per cent to 52 per cent.
Thus, in 1966 real dependency was much higher than in 2013. Despite this the average person’s standard of living and quality of life were high. By today’s standards, the 1966 economy was prosperous. Unemployment was less than 2 per cent, the proportion living in poverty was lower than today, and housing was much more affordable.
But that was then. What of the future? Current labour-force participation rates are unusually high because Australia is going through a sweet spot, enjoying the demographic dividend where proportions of children and older people are low compared to what they have been or to what they will be. (In 1901, when we were very young, total work-force participation was around 43 per cent.)
We can apply current labour-force participation rates to the population projections prepared last year by the Australian Bureau of Statistics. If we assume greatly increased life expectancy (rising from the early 80s to the early 90s), together with the two-child family and nil net migration, total participation falls to 44 per cent in 2061. This is lower than in 2013 but higher than in the prosperous 1960s. What this means is that a long-lived society enjoying zero population growth would do quite well.
This should comfort our worried commentators. But with the right economic opportunities and good policies, including incentives to employ older Australians, age-specific labour-force participation rates could well rise higher than they are today.
This is no pipe dream. Other developed countries already show higher participation rates than ours.
Some, with an older age structure than Australia, such as the Netherlands and Switzerland, have participation rates that are much higher.
In contrast, countries with more youthful populations than Australia (Poland, Ireland and Chile) have lower rates than ours. In fact, OECD data show no statistical correlation between a country’s age structure and the proportion of its population aged 15 plus in the labour force. The future is what we choose to make it.
An older age structure has many benefits. Besides the only way to avoid it in the long term is to have many children and die young. We have tried hard to escape from this way of life and, now that we have, we can reap the benefits.
Katharine Betts is Adjunct Associate Professor at the Swinburne Institute for Social Research. This article is based on her recent paper ‘The ageing of the Australian population: triumph or disaster?’