Australia, like many developed countries in the world, has an ageing population. Over the next 40 years, the proportion of the Australian population that is of working age is expected to fall, with only 2.7 people of working age to support each Australian aged over 65 by 2050. This compares to five working people to each Australian aged over 65 today and 7.5 in 1970. Some developed countries are facing an ageing crisis. Slow growth rates in demand and falling ratios of workers to age pensioners are having significant negative impacts on countries such as Japan, Italy and Greece. Australia is fortunate that successive governments have made hard decisions to deal with Australia’s ageing population that have put us in a strong position relative to the rest of the developed world.
The commissioning of the first Intergenerational Report (the IGR) in 2002-03 to consider the Commonwealth’s fiscal outlook over the long-term led the world in dealing with an ageing population. The numbers in the third IGR published last year remain alarming, but less so than they were in the first IGR. Rather than a quarter of the population being aged over 65 by 2050 as stated in the first IGR, Treasury now projects the proportion will be 20 per cent. There are two reasons for Treasury’s more optimistic forecasts on population. First, it underestimated the 21st century mini-baby boom in Australia – or as demographer Bernard Salt puts it, the baby boom echo. The baby bonus and the echo of the baby boomers both contributed to higher levels of fertility in Australia than was expected.
A second contributing factor is the larger than expected migration inflow since 2003. Rather than the 90,000 a year intake Treasury had estimated in the 2003 IGR, Australia accepted an average of 244,000 migrants a year over the three years to June 2009. High levels of migration are good for Australia. Migration tends to reduce the rate at which the population ages since migrants are generally younger than the average age of the Australian population. Around 89 per cent of migrants are aged under 40 compared to 55 per cent of the existing Australian population. Migration also assists in providing skilled and unskilled labour. Without substantial migration there is upward pressure on wages as business competes for a shrinking pool of labour, ultimately driving up inflation. We need unskilled as well as skilled labour. Currently the policy is too focused on skilled labour alone, but this ignores the fact that labour shortages exist at all skill levels. Increasing population, whether through higher fertility or higher net migration adds to economic demand, improves the tax payerto- retiree ratio, takes pressure off the tax base and puts downward pressure on inflation.