The release of the sixth edition of the Federal Government’s Intergenerational Report (IGR) has generated more commentary this year than previous editions.

Past editions

We have had IGRs in 2002 and 2007 (Costello), 2010 (Swan), 2015 (Hockey) and 2021 (Frydenberg).

Why have an IGR?

An IGR is required by the Charter of Budget Honesty Act 1998 (CBH Act). According to the explanatory memorandum (EM) for that legislation, its purpose is “to produce better fiscal outcomes through introducing institutional arrangements to improve the formulation and reporting of fiscal policy”, and to “assess the sustainability of current government policies” with the content and format of the report to be determined by the Treasurer.

The CBH Act originally said that reports were to be published every five years. This requirement was adjusted by the government in 2020 as part of its Covid-19 legislative amendments.

It is notable that governments of both persuasions released new IGRs not long after forming government after a period in opposition.

A review of the relevant documents demonstrates that, over time, the IGRs have become more sophisticated especially in terms of messaging and use of graphs.

However, comparisons between the documents can be tricky as different calculation methods have been used. Except for the 2015 IGR, most have determined life expectancies using the “period method”. The 2015 IGR used the “cohort method”, which considers likely mortality improvements whereas the period method does not. For example, in the 2015 IGR says females born in 2045 can expect to live 96.0 years. The 2023 IGR expects females born in 2043 to live 87.9 years.

Circumstances not as pessimistic as initial forecasts predicted

All IGRs published to date have made assumptions which have been more conservative than actual reality.

This applies to:

• Future life expectancies – in 2002 it was assumed that by 2022 males would have a life expectancy of 80.7 years and females 86.1 years. The 2023 IGR provided updated stats of 81.3 years and 85.2 years respectively.
• Health, age pension and aged care (as a percentage of GDP) – in 2002 it was predicted that by 2022, 9.8% of GDP would be swallowed up in these areas.  In 2023, the figure was 7.6% of GDP.  Age pension expenditure, as a percentage of GDP, was 36% lower than expected while health was 13% lower; aged care was 10% higher than expected.
• Population – in 2002, Treasury thought by 2022 there would be 23.2 million Australians. By 2021, we had 25.7 million people living here. That is almost 11% more people who are all aged under 65.

The 2023 IGR assumes that we will have almost 2 million more people living in Australia by the mid-2060s than was assumed for the 2021 IGR (40.5 million compared with 38.8 million).

Our financial future after the baby boom generation exits stage left

By 2045 very few of the first post WWII baby boomers will still be alive and by 2065 almost all that generation will be deceased.

It was only from IGR 2015 that the fall in Age Pension expenditure was seen from the mid-2030s onwards. It is not clear why the earlier IGRs missed this aspect.

The 2002 IGR states that by 2042 age pension expenditure was expected to be 4.2% of GDP. The 2023 IGR predicted this would fall to 2.2% of GDP for the 2041 year – a fall of over 50%. Some of this fall is due to policy changes and superannuation savings but, most will be due to changing demographics.

The 2.2% of GDP is smaller than what we will be paying in actual terms. Remember that by the mid-2040s the economy will be much larger than it is now and assuming an average of 2% growth each year, it will be 20% larger.

Aged Care & National Disability Insurance Scheme (NDIS) expenditure

For some time there has been an expectation that aged care will become a major budgetary problem. The numbers do not show this. What the latest IGR report shows is that other expenditure such as NDIS will be growing faster.

For example, in the 2002 IGR it was predicted that by 2022, 1% of GDP would be spent on aged care. The 2023 IGR has this figure at 1.1% of GDP.

The current IGR predicts that aged care will increase to 2.5% of GDP by 2063. Whilst this is a more than 100% increase it is a lower increase than had been originally predicted.

The NDIS first appeared in the 2015 IGR. At the time it was expected to have expenditure of 0.9% of GDP in 2055. The 2023 IGR expects this to have increased by over 100% to 2% of GDP by 2053.

Superannuation tax concessions

As with Treasury Tax Expenditure Statements released earlier this year, the current IGR claims that superannuation tax concessions are expensive when expressed as a percentage of GDP.

The Treasury analysis that produced these statistics assumes that all investments in superannuation would be owned in an individual’s name and face the full force of marginal tax rates. Clearly this is not how many people behave.