Same old story: grey growth will push nation's economy into the red

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.