The impact of an ageing population

1

• The impact of an ageing population
• Ralph Lattimore
• (Productivity Commission)
• VET Planning and Research Network
• Melbourne, Victoria
• 22 April 2005

2
Todays 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
coffin?
Age structure
1945
Age
80
Males
Females
70
60
50
40
30
20
10
0
-3
0
3
per cent of population
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?
80
4.0
1944-2051
1944-2051
70
Total fertility rate
Total dependency
3.5
60
3.0
50
TFR
Dependency ratios ()
40
Youth dependency
2.5
30
2.0
Aged dependency
20
10
1.5
1944
1959
1974
1989
2004
2019
2034
2049
1944
1959
1974
1989
2004
2019
2034
2049
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
3.3
Actual
Projected
3.1
2.9
Completed
2.7
fertility rate
2.5
fertility rates
2.3
2.1
1.9
Tempo effects are at work
1.7
Total fertility rate
1.5
1975
1985
1995
2005
2015
2025
2035
2045
Calendar years
9
Dealing with some fertility myths

• Increasing fertility rates does not have big
  effects on ageing over the 2044-45 horizon
• The view that declining fertility is the main
  source of ageing is wrong
• It is not true that if fertility falls below
  replacement that Australias population will fall
  without a large migration program
• the migration rate could halve and still
  stabilise Australias population

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
0.500
0.400
Accelerating phase
0.300
0.200
Change in share aged 65 ( points)
Historical average
1922
-
2000
0.100
0.000
-
0.100

1922
1932
1942
1952
1962
1972
1982
1992
2002
2012
2022
2032
2042
12
Ageing doesnt stop in 2045
The 50 year horizon
100
Total dependency ratio
90
80
70
Aged dependency ratio
60
50

40
Youth dependency ratio
30
20
10
0
2004
2029
2054
2079
2104
2129
2154
2179
2204
2229
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
Annual growth rate in people aged 15-64 years
3
2003-04
2.5
2
Per cent
1.5
1
0.5
0
1944-45

1964-65
1984-85
2004-05
2024-25
2044-45
14
Cohort data females
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
15
Male cohorts
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
16
The cohort method
2014
2009
2004
B
A
1
1
1999
C
B
1
A
participation rate
2
2
1965
-
69 cohort
C
2
1960
-
64 cohort
B
3
C
1955
-
59 cohort
3
Birth cohorts
35
-
39
40
-
44
45
-
49
30
-
34
Age group
17
Participation rates
66
66
Participation rate
Participation rate
without ageing
without ageing
64
64
62
62
Ageing
Ageing
Participation rate ()
Participation rate ()
effect
effect
60
60
Participation rate
Participation rate
58
58
with ageing
with ageing
56
56
2004
2009
2014
2019
2024
2029
2034
2039
2044
2004
2009
2014
2019
2024
2029
2034
2039
2044
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
0.4
females 65 years
0.35
0.3
females 25 years
0.25
males 65 years
Share
0.2
males 25 years
0.15
0.1
0.05
0
1981
1987
1993
1999
2005
2011
2017
2023
2029
2035
2041
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 Commissions 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
1130
Did not engage
342 (30)
Selected for Pilot
788 (70)
Exited before
Pending
Ineligible (127)
assistance
43
Found unsuitable (74)
74
Client declined (141)
Commenced Intensive Support
671
Exited
88
Stayers
583
Education outcome
19
Still unemployed
344
Job outcome
220
Full time
Part time
Casual
53
75
92
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
4
3.7
3.5
3
2.5
2
2
1.4
1.5
0.8
1
0.5
0
Aggregate participation rate 2044-45
Total hours worked 2044-45
GDP per capita 2044-45
Sum of GDP 2004-05
to 2044-45
28
Placing the problem in perspective
0.500
0.80
Employment to
0.475
Population ratio
0.75
(LHS)
0.450
0.70
0.425
Participation rate
Employment to population ratio
0.400
0.65
0.375
0.60
0.350
Participation
0.55
0.325
rate
(RHS)
0.300
0.50
1856
1874
1892
1910
1928
1946
1964
1982
2000
2018
2036
29
Productivity ageing small effects?
Even with inverted u shape
1.1
1.1
males
1
1
0.9
0.9
females
females
relative productivity index
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
19
34
39
44
49
54
59
64
69
29
24
70
-
-
-
-
-
-
-
-
-
-
-
30
30
45
50
60
65
15
40
55
25
20
30
Economic growth slump ahead
1.9
1.8
Without ageing
1.7
1.6
Ageing effect
Growth ()
1.5
With ageing
1.4
1.3
1.2
2006
2009
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
2045
31
Different scenarios for economic growth
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




0
72 708
1.511
-0.235
Base case
17 500
73 731
1.545
-0.187
Older male participation rate up 10 pts
58 344
75 885
1.617
-0.097
Participation rises to 80 OECD
15 697
73 610
1.541
-0.205
Older female PR converge on males
-14 282
70 987
1.451
-0.293
High life expectancy
17 060
73 761
1.546
-0.200
Low life expectancy
13 269
73 178
1.527
-0.220
High migration
-13 779
72 198
1.493
-0.252
Low migration
14 126
73 310
1.531
-0.215
0.57 fixed migration rate
-28 504
71 746
1.478
-0.268
High fertility
29 382
73 638
1.542
-0.204
Low fertility
-226
71 167
1.458
-0.287
Most ageing
290
73 124
1.525
-0.221
Least ageing
32
Fertility effects on labour supply growth per
capita
0.2
0.1
0
-0.1
Low fertility case
-0.2

-0.3
-0.4
Base case
-0.5
-0.6
High fertility case
-0.7
2006
2011
2016
2021
2026
2031
2036
2041
33
The demand for coffins and prams
14
12
10
8
Births and deaths per 1000 people
6
4
2
0
2001-02
2050-51
34
Health costs rise with age
6000
1200
Public hospitals
Pharmaceutical
Females
Benefits
5000
1000
Scheme
Males
4000
800
Males
3000
per person
per person
600
2000
400
1000
200
Females
0
0
0
15
30
45
60
75
0
15
30
45
60
75
35
Share of VET students by age
12
10
8

6
4
2
0
18
24
30
36
42
48
54
60
66
72
78
84
90
96
lt12
Age
36
Growth in VET declines
3
2.5
2

1.5
1
0.5
0
2003-04
2008-09
2013-14
2018-19
2023-24
2028-29
3033-34
2038-39
2043-44
Full time equivalents
37
The fiscal outcomes in education
2044-45

2002-03




State
s

Aust
.
Govt
.

Total


States
Aust.Govt.

Total

Territories

Territories
.















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


0.0
3

0.87

0.89

HECS repayments

-

-
0.11

-
0.11


-

-
0.1
7

-
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)
2044-45
2003-04
Spending category
Difference (fiscal pressure)
Percentage points


4.5
10.3
5.7
Health
1.4
2.5
1.1
Aged Care carers
1.7
4.6
2.9
Aged pensions
-0.6
3.1
3.8
Other social safety net
-0.5
4.7
5.2
Education
6.5
25.2
18.7
Total
39
Things could be worse
High ageing (low fertility, high LE, low
migration)
2044-45
2003-04
Spending category
Difference (fiscal pressure)
Percentage points


5.1
10.8
5.7
Health
2.4
3.5
1.1
Aged Care carers
2.9
5.7
2.9
Aged pensions
-0.8
3.0
3.8
Other social safety net
-0.9
4.1
5.3
Education
8.6
27.2
18.8
Total
40
Policy responses to ageing

• Ironically, population policies dont 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)
140.0
Japan
Japan
120.0
100.0
Germany
80.0
Germany
UK
UK
60.0
Canada
40.0
Canada
20.0
0.0
2005
2014
2023
2032
2041
2050
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 dont 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 dont panic! But take action!