Boomers' retirement starting to bite

Rightly or wrongly, the baby boomers are often made out to be an economically selfish bunch. Such sweeping claims can only get us so far, but this is a generation that has enjoyed asset price booms, job security and social spending that their kids are unlikely to experience.

So it has been surprising to see the boomers' economic role getting some more positive press lately.

For one, they received some of the credit for a fall in last month's unemployment rate, because more of them have been dropping out of the labour force and into retirement.

To a non-economist, it may conjure up images of older workers nobly stepping aside to give younger job seekers their turn.

There have even been hints of a loosening in the boomers' powerful grip on the housing market (which has come at the expense of younger people, who face higher prices).

Almost 40 per cent of boomers were planning to sell the family home and downsize, according to a survey reported in The Australian Financial Review this month, in a trend that could contain price growth by lifting the supply of houses.

It all seems a bit out of whack with the stereotypes of "generation me", as the boomers have been called in the US. So what's going on?

Has there been some role reversal, with the boomers' retirement actually benefiting younger people?

Unfortunately, things are nowhere near as simple. Instead, these snippets of "good news" caused by an ageing population are only the first signs of bigger challenges looming down the track.

The baby boomers are a large cluster of people born between 1946 and 1961, when birth rates skyrocketed around the world.

About 4 million of them were born in Australia, and as more reach retirement age it will unleash big economic changes.

But this is not just some far-away issue that concerns only demographers. These changes are now increasingly visible in the labour market.

The media's main interest in the jobs market is the unemployment rate, but this tells only part of the story. Another critical issue is the share of the population that is working and paying tax, and the share that is being supported by the taxpayer because they are too old or too young to work. On this front, things are getting more challenging.

Consider the participation rate, the share of the working-age population with a job or looking for one.

Australia's participation rate is now at its lowest level since 2006, at 64.9 per cent, after peaking in 2010. Mechanically, this lowers unemployment, because it means there are fewer people competing for jobs. But if you look a bit deeper, it is not so rosy.

A paper by the ACTU last week confirmed the slide in participation in recent years is the result of the population getting older.

Even though some people over 65 are choosing to keep working, the paper showed Australia's participation rate has nonetheless been dragged down by the growing share of the population that is older, and less likely to work.

Indeed, it estimated ageing was directly responsible for a 0.6 percentage point fall in the participation rate since 2010.

"So what?" you may ask.

A change of 0.6 percentage points sounds tiny, but it is equal to an extra 115,000 people leaving the workforce, many of whom will be dependent on other taxpayers in years to come. In other words, the much-hyped ageing of the population is already taking place right in front of our eyes.

Economists talk about a "demographic dividend" - when the share of the population of working age increases, so does an economy's capacity to grow. Well, this process has now gone into reverse.

Australia's "old age dependency ratio" - which compares the number of people over 65 to those of working age - will jump by a quarter between 2010 and 2020 and keep rising thereafter, says Standard & Poor's.

Slowly but surely, the same dynamic is starting to drag on growth in material living standards in most big Western economies.

ANZ economists said last week Germany's potential annual economic growth rate would be 0.6 percentage points lower over the next two decades because of demographic factors, while Italy's and Japan's would be 0.4 percentage points lower. It is less severe in Australia, but even so, our economy will receive a much smaller kick-along than in the past.

By ANZ's reckoning, demographics will add 0.6 percentage points to our annual growth rate between 2011 and 2030, compared with the more than 1 percentage point a year added between 1991 and 2010.

Changes like this do not occur instantly. But it is clear that ageing will become a growing headwind for many of the world's biggest economies.

Asset markets - including the biggest, property - will no doubt be affected too, though it is hard to say how. But even if the boomers' retirement does flood the market with family-sized homes and improve affordability, this will probably be a small benefit compared with the challenges of an ageing population.

Ross Gittins is on leave.