Ageing population no burden to the future rich

Apr 27 2004

Living standards will increase by up to 35% over the next 25 years, even taking into account the ageing population and the higher cost of caring for older people, according to a Melbourne economist.

Professor Ian McDonald of the Department of Economics at the University of Melbourne, has warned it is unreasonable to ask people today to make sacrifices for people in the future who will be better off.

“Employment participation should be encouraged in as far as it is efficient” he says, “but early retirement is not in principle bad”.

Professor McDonald has been researching the implications of an ageing population for the future performance of the Australian economy and concludes that the ageing population is not a threat to living standards, which may reasonably be expected to grow at a healthy rate, even though the population will age.

“Research is indicating that people in the future will be considerably richer than they are today” he explains.

“In such a context, increased time spent in paid employment would have a negligible effect on living standards. If the retirement age were pushed out to 68.1 years for men and 66.6 years for women, it would only generate a 0.9% improvement in the overall 35% improvement to living standards projected for the next 25 years. That is a tiny amount.”

Professor McDonald says the highest costs of an older population are the aged pension and expenditure in the health sector. But he says “the revenue requirement to support the current aged pension policy is moderate, and can easily be borne by the increasingly well-off Australian people”.

Although increases in health expenditure will be costly and are more uncertain, Professor McDonald says this is not because of the numbers of aged people now and in the future, but because of uncertainty over the amount and cost of health services to be provided.

“There is a fear that rapid growth in productivity in health, through the discovery and development of new methods of treatment, will create a massive increase in the demand for health services per person.”

The solution to that problem rests with government management of health policy he says, and not hoping to increase tax revenue by making people stay in employment longer.

“Dealing with increases in the demand for health services is not a problem that can or should be tackled by measures aimed at raising employment participation. That would be an indirect approach that does not get to the heart of the matter – the sensible allocation of resources to health. To not address the direct cause and to instead increase employment participation risks putting the Australian people on a treadmill of rising employment to support health services that become poorly and extravagantly organized.”

Professor McDonald will be speaking tonight (April 27) as part of the seminar series ‘Mature Aged Workers’ for the Centre for Public Policy at the University of Melbourne. He will present research originally submitted to the House of Representatives Standing Committee on Employment and Workplace Relations.

Professor McDonald’s comments to the Standing Committee are online at:
http://www.aph.gov.au/hansard/reps/commttee/R7417.pdf.