An Ageing Australia: Preparing for the Future

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1 An Ageing Australia: Preparing for the Future Mike Woods Deputy Chairman, Productivity Commission COTA National Policy Forum Productivity Commission

2 million 90% confidence interval 95% confidence interval The population will grow strongly m 42.3m 38.3m m 32.6m 30 Base projection m Productivity Commission 2

3 But it will age : 130 centenarians to 100 babies : 1.3 centenarians to 100 babies : 24 centenarians to 100 babies Productivity Commission 3

4 Ageing will reduce labour supply = Participation rate Employment rate Average hours 15+ share of pop Total (hours per capita) Productivity Commission 4

5 An age of diminished expectations Real net disposable income growth will fall from current levels 8 6 The boom years 2.7% growth % growth per annum % growth - 6 per annum Productivity Commission 5

6 Current expenditures are weighted towards older Australians ( ) Aged care 40 Age Pension 20 Education Health 0 Other Productivity Commission 6

7 Australian Government fiscal pressure (per cent of GDP) Difference between and (fiscal pressure) % % % Percentage points Health Age Pension Aged care Education Disability support services Disability support pension Family Tax Benefit (A & B) Parenting Payment Other social security & welfare payments Defence & other expenditures Total Productivity Commission 7

8 Policy responses Productivity Commission 8

9 Addressing the fiscal gap The fiscal gap must be addressed through Reducing public expenditure (but do not neglect innovative private co-contributions as an option for this) Increasing taxation Some hybrid of the two Privatising assets may be desirable on efficiency grounds, but it is not a long term strategy Options canvassed include: Changes that stimulate labour force participation rates of older people and reduce government outlays Examining new ways to help fund government-provided services Productivity reforms in health care Productivity Commission 9

10 Life expectancy after 15 (years) Mismatch between life expectancy and retirement policy People are living longer, but not increasing the time spent in the workforce Average years outside labour force Average years in labour force Oldest Gen ( ) Silent Gen Baby Boomers Gen X&Y igeneration GenWhats Rounding errors means numbers may not exactly sum Productivity Commission 10

11 Increasing the eligibility age will have a fiscal and labour market impacts Increasing the eligibility age to 70 would defer retirement, increase participation, and stimulate private savings increase participation rates for people in the relevant ages by around 3 10 per cent (after taking into account DSP takeup) There would be fiscal savings Ongoing fiscal savings of between 0.1 and 0.15 per cent of GDP per annum from 2035 $150 billion ( prices) in net fiscal savings from to Signalling effect could be important too Productivity Commission 11

12 Wider applicability to the retirement income system The eligibility age is only one mechanism that influences the period of time receiving the Age Pension Strong linkages between the Age Pension and the superannuation system The issues raised by growing longevity should be considered for the whole retirement income system Productivity Commission 12

13 < Average weekly disposable income ($) Average home value ($'000) Older Australians are often income poor, but asset rich ( ) Household disposable income (LHS) Own home Value (RHS) Productivity Commission 13

14 Equity release schemes could help households fund co-contributions Already in use to help households pay their council rates Also for Age Pension under certain conditions Effects could be significant Contribution of half the annual real increase in home values towards aged care services could reduce government expenditures by around 30 per cent This would still leave older households with an appreciating asset base Productivity Commission 14

15 A scheme designed for aged care The Commission s Caring for Older Australians report proposed an equity release scheme Allows eligible individuals to access equity in their home to pay for aged care services Scope for use for both community and residential care services Provides for better consumer directed care Avoids the forced sale of the family home Productivity Commission 15

16 Productivity and costs in the health sector Area of largest fiscal pressure Significant variations in the productivity of different health service providers Potential areas for reforms include: Organisation efficiencies - lean care models Sharper incentives Diffusion and adoption of leading practice, cost effective technologies and clinical practice: Do not do lists Workforce reform Efficient procurement Preventative health (though needs to be realistic) Productivity Commission 16

17 Share of GDP (%) Potential savings 7 Business as usual 6 5 With productivity shock Productivity Commission 17

18 Planning for the future Population ageing is a desirable side product of success However, it entails major economic and social transformation Current fiscal pressures, falling terms of trade and weak productivity trends The preferable time to contemplate the policy implications of these developments is while these near-inescapable trends are still in their infancy Productivity Commission 18

19 Productivity Commission 19

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