Date posted: 01/07/2021

Intergenerational Report makes for sobering reading

The Australian Government’s fiscal position will remain challenging for the next 40 years

In brief

  • The Intergenerational Report estimates what the Australian Government’s fiscal position will look like over the next 40 years
  • The old age dependency ratio is expected to decline to 2.7 from 4.0
  • An improving participation rate may bolster the long-term outlook

The latest Intergenerational Report (IGR) shows that the Australian Government’s fiscal position will remain challenging for the next 40 years, primarily because of lower population growth and population aging.

The IGR, which the Treasurer, Josh Frydenberg, released on 28 June, must be produced under the Charter of Budget Honesty provisions and seeks to estimate the Government’s fiscal position over the next 40 years based on current policy settings and expected economic conditions.

IGR based on estimates

It’s important to remember that the IGR is based on estimates that Treasury makes about future economic conditions. A slight change in these estimates will see a very different outcome.

For example, sustained long-term improvement to productivity would dramatically alter the long-term expected results for the better. Conversely a lower productivity outcome than has been assumed will create significantly worse outcomes.  

How to achieve better productivity over the medium- to long-term will be a chestnut all Australian governments will grapple with for many years.

Old-age dependency ratio

The IGR notes: “In 1981-82, for every person aged over 65, there were 6.6 working-age people. In 2019-20, for every person aged over 65, there were 4.0 working-age people. This ratio is projected to fall further – by 2060-61, for every person aged over 65, there will only be 2.7 working-age people.”

The following graph from the IGR shows this story quite dramatically:
Old-age dependency ratio

Workforce participation

The IGR makes the following assumption: “The total participation rate is projected to decline from 66.3% in March 2021 to 63.6% in 2060-61. The decline is due to the negative effect of aging on the participation rate being only partially offset by higher participation for younger, and future, generations.” 

Graphs of the participation rate over the past 43 years shows the following:

Male and Female participation

Recent improvements in the participation rate of those aged at least 65 maybe because of increases in the age pension age.

Improving the participation rate of those aged 65-plus would dramatically help the Government’s fiscal position. We can expect further policy development in the area over time. However, this is a very tricky issue to solve, and achieving anything meaningful in this area has not been easy.

Perhaps it is time once again to dust off and resurrect some Howard Government policies – namely the Pension Bonus Scheme and Old-Age Worker Tax Offset – that had been removed progressively since 2007. The Government might also consider increasing the income-free threshold for age pensioners who are still working.

The pervasive incidence of age discrimination also needs to be addressed.

Intergenerational Report

The Intergenerational Report projects an outlook for the economy and the Australian Government’s budget over the next 40 years.

Download report