Report outlines new challenge of old

The Productivity Commission is predicting one in four Australians will be aged 65 or more by 2044 - roughly twice as many as now - giving rise to significant economic and fiscal impacts.

Its Economic Implications of an Ageing Australia study found the “profound ageing” of Australia will reduce economic growth at the same time as it intensifies demands for public services, such as health, aged care and the age pension.

The study says age-related spending will grow to exceed the growth of tax revenue, opening a fiscal gap equal to around 6.5 per cent of GDP by 2045.

Taxation levels will need to rise by 21 per cent by 2045 in the absence of policy actions to “reduce this fiscal pressure and/or finance the fiscal gap”.

With the workforce shrinking as a proportion of the population, per capita gross domestic product growth is projected to fall to as low as 1.25 per cent per year in the 2020s, about half the rate in 2003-04.

This will accompany a projected drop in overall economic participation rates from about 63.5 per cent in 2003-04 to 56.3 per cent by 2044-45.

A range of policy measures would be needed to reduce the fiscal impact of ageing, the study found, and would have to be on a “broad front and at all levels of government”.

The major source of budgetary pressure is health care costs, which are projected to rise by about 4.5 percentage points of GDP by 2044-45, with ageing accounting for nearly one-half of this.

Commission chairman Gary Banks said timely action would avoid a need for costly or inequitable ‘big bang’ interventions later.

“Population ageing can only be conceived as a crisis if we let it become one, and the actions of governments today will determine how well Australia copes with ageing pressures in the future,” he said.

At the same time, he said the study found “plausible increases” in fertility and net migration would have little impact on ageing trends.