Intergenerational Report Mk 2 shows need for more policy initiatives

The Government, and probably successive governments, will have to introduce new policy initiatives if the country is to counter the problems associated with an ageing population, consultants say.

According to Steve Schubert, director of actuarial benefits consulting at Russell Investment Group, the second Intergenerational Report, published yesterday by the Commonwealth Treasury, drilled down further into some of the areas highlighted in the first report, in 2002. The latest report showed, for instance, that the increasing cost of health is not only being caused by an ageing population but also by improvements in medical science and technology. “We would still have a blowout in health costs, anyway,” Schubert said. While the report claimed some future success to flow from the Simplified Superannuation legislation, Schubert said that the jury was still out as to whether this will have a long-term benefit in terms of the intergenerational problems. “Simplified Superannuation does cost money,” he said. “I think it is clear that there needs to be further policy initiatives … I think the timing of the report is interesting. Last time it was introduced on Budget night and there were some policies announced with it. Perhaps there will be some other initiatives in the next Budget in five weeks’ time.” The report shows that the ‘fiscal gap’ – the amount spending exceeds revenue – will be 3.5 per cent of GDP in 40 years, which compares with 5 per cent of GDP 40 years after the first intergenerational report in 2002. This is due to a lower rate of projected spending growth per person and higher projected nominal GDP. The lower increase in spending (than projected previously) is mainly in health, however, this is partly offset by increases in areas such as education and aged care. Health, nevertheless, remains by far the biggest single pressure point for spending. It is expected to rise from just under 4 per cent of GDP this year to more than 7 per cent in 2046-47. Spending on pharmaceutical benefits is expected to grow faster than Australian Government spending on hospitals, medical benefits and other areas. The cost of age pensions is expected to rise from just over 2 per cent to 4 per cent. The report says: “It will be important to focus on the efficiency and effectiveness of government spending, including the potential role of market-based mechanisms in managing spending pressures. It may also be necessary to make choices about spending priorities as fiscal pressures associated with ageing and other factors emerge.” The report says that last year’s Budget changes to super – Simplified Superannuation – “;should assist in relieving pressure in the longer term by encouraging higher retirement saving and longer workforce participation”. The retirement of the biggest group of babyboomers, in the 2020s, will lead to a substantial fall in the proportion of the population of traditional working age, which will lead to a slowing of economic growth. Real GDP per person will fall from 2.1 per cent average for the last 40 years to 1.6 per cent over the next 40. Labour productivity is assumed to be steady at 1.8 per cent. If budget surpluses are maintained to 2022-23 as projected, net debt will not re-emerge until the mid-2030s but will “rise very quickly to reach 30 per cent of GDP in 2046-47 and continue to increase after that”, the report says.