ONLY an economist could turn the prospect of living longer into a looming crisis.
ONLY an economist could turn the prospect of living longer into a looming crisis.
But practitioners of the dismal science have been warning for some time of the disastrous consequences for economic growth and government budgets of the ageing of the population.
The first Intergenerational Report by the federal Treasury, commissioned by then treasurer Peter Costello in 2002, was the first to quantify the yawning fiscal gap looming in federal finances.
An updated report in 2010 projected that, if steps were not taken, the budget would be in deficit by 3.75 per cent of gross domestic product by 2050 and accumulated net government debt would balloon to around 20 per cent of GDP.
This week, the International Monetary Fund devoted a chapter of its Global Financial Stability Report to fretting about the ''longevity risk'' facing economies with ageing populations. Like a slow-moving, grey blob spreading out across the economy ''as populations age in the decades ahead, the elderly will consume a growing share of resources'' it observed.
An ageing population hurts the budget bottom line in two ways, by increasing demands for spending and reducing potential revenue.
Older people generally require higher levels of services, putting pressure on hospitals, subsidised pharmaceuticals schemes, and, of course, requiring greater levels of in-home and centre care.
As people live longer, rather than keeling over at the age of 55, they are at higher risk of developing diseases of the mind, not just body, like dementia, which also require high-level, ongoing care. New and more expensive technologies are also becoming available. Meanwhile, a shortage of younger workers means pressure on staffing costs.
On the revenue side, the dwindling proportion of young workers means there is fewer people to pay the income taxes needed to look after the old. In 1970, there were 7.5 working-aged people for each person aged over 65. Today, there are 5. By 2050, there will be just 2.7. A shrinking working-aged population will result in falling working hours and slower economic growth.
Treasury expects real economic growth to slow from an average of 3.3 per cent over the past 40 years to 2.7 per cent in the coming 40.
The new grey economy will spawn new industries and employment in aged care and retirement services. Keeping up is the ever-present problem.
Yesterday's aged care reform package is a necessary step towards addressing the needs of an ageing population. But there is a long road ahead to put government finances on a truly sustainable footing and keep providing the standard of living we have come to expect.
Frequently Asked Questions about this Article…
What is "longevity risk" and why are economists concerned about an ageing population?
Longevity risk is the economic challenge that comes when people live longer and the population ages. Economists and institutions like the IMF warn it acts like a slow-moving "grey blob" that increases demand for health and care services while shrinking the share of working-age taxpayers, putting pressure on government budgets and long-term economic growth.
How does an ageing population hurt government budgets and public finances?
Ageing populations raise spending needs—more pressure on hospitals, subsidised pharmaceuticals, in‑home and centre care, and long-term dementia care—and reduce revenue because there are fewer working taxpayers. The combined effect increases deficits and public debt unless policy changes are made.
What did the Intergenerational Report and Treasury projections say about future deficits and government debt?
An updated Intergenerational Report noted that, without policy changes, the budget could be in deficit by about 3.75% of GDP by 2050 and accumulated net government debt could rise to around 20% of GDP, highlighting the scale of the fiscal challenge from ageing.
How will a smaller working‑age population affect economic growth?
A shrinking working‑age population leads to fewer people paying income tax and fewer total working hours, which slows economic growth. The article cites Treasury estimates that average real growth could slow from about 3.3% over the past 40 years to around 2.7% in the coming 40 years.
Which industries are likely to grow because of an ageing population and could attract investor attention?
The "grey economy" is expected to create demand and jobs in aged care, retirement services and related health and care technologies. The article notes those sectors will expand as governments and families respond to higher care needs.
What are the main cost drivers in ageing societies that investors should watch?
Key cost drivers include rising demand for hospital services, subsidised medicines, in‑home and centre-based aged care, ongoing dementia care, more expensive medical technologies, and higher staffing costs due to shortages of younger workers.
Are governments taking steps to address the financial pressure of ageing populations?
Some steps are being taken— the article points to a recent aged care reform package described as a necessary first step— but it also warns there is a long road ahead to put government finances on a truly sustainable footing while maintaining living standards.
What demographic metrics and reports should everyday investors monitor about ageing and economic risk?
Investors should watch demographic ratios (for example, the working‑age people per person over 65: 1970 was about 7.5, today about 5, and projected to be 2.7 by 2050), Treasury growth projections, Intergenerational Report findings, and international analyses like the IMF's Global Financial Stability Report on longevity risk.
Call 1300 880 160
Start a chat
Schedule a call
