Date posted: 08/07/2021

Intergenerational Report paints rosier picture

The latest IGR seems to imply that the three big expenditure areas of health, aged care, and age pension outlays are more or less under control.

In brief

  • Aged care, health and retirement income spending appear to be under control over the next 40 years
  • Super savings are expected to lead to a sustained decrease in age pension outlays

From an Australian Government budgetary perspective, we can always look at expenditure items from a percentage of GDP viewpoint. Increases in expenditure as a percentage of GDP over time always look scary. But what do these increases really mean?

Australian GDP is currently estimated to be A$2 trillion, according to the Australian Bureau of Statistics.

The Intergenerational Report (IGR) assumes that economic growth over the next 40 years will average 2.6% per annum, which means Australia is forecast to have a A$5.5 trillion economy in 2060-61. This is 175% larger than it is currently.

How realistic is the Treasury’s assumption?  The 2.6% growth rate is 0.4 percentage points per annum lower than the average of the past 40 years. (A 2.6% average growth rate will mean the economy is expected to double in size every 27.5 years.  A 3.0% growth rate doubles the economy every 24 years.)

The IGR notes that the Government expects to spend 1.2% of GDP on aged care in 2020-21.

By 2060-61, aged-care spending is expected to grow to 2.1% of GDP or a 175% increase – in real terms an increase – but an increase in a significantly larger economy.

It appears that Treasury is predicting that aged-care spending will not increase as fast as was forecast in previous IGRs. However, the latest IGR notes that long-term projections of aged-care spending are difficult because of developments in labour productivity in the sector, demand and consumer preferences.

‘Compulsory superannuation has been effective in increasing individual retirement savings and reducing reliance on the age pension.’ 
The 2021 Intergenerational Report

In addition, the Government has yet to fully respond to the Aged Care Royal Commission. Further responses are likely to cost significantly more. All IGR estimates are based on current policy settings.

Healthcare spending

The IGR estimates that Federal Government healthcare spending is about 4.25% of GDP in 2020-21 and will grow steadily to about 6.25% of GDP over the next 40 years. This is a much lower rate of increase than predicted in past IGRs. But, again, these increases occur with a much larger economy.

Retirement Income System (RIS)

The IGR says spending on the age pension is likely to fall from about 2.7% of GDP in 2020-21 to 2.1% of GDP in 2060-61. This is expected to happen even though the estimated number of Australians of at least aged pension age is expected to double to more than 8 million over the next 40 years.

Why the reduction? “Compulsory superannuation has been effective in increasing individual retirement savings and reducing reliance on the age pension as a primary source of retirement income. As younger generations retire with greater superannuation savings, the total proportion of older Australians receiving the age pension will continue to decline.” (IGR 2021 p.112)

The following graph tells this story quite well:

It is clear from this graph that the Government expects the number of full-rate pensioners to fall by roughly 50%, while those who receive no pension is expected to increase by about 60%.

Clearly much will depend on how well super fund investments perform.

The Government expects superannuation tax concessions to increase from about 2% of GDP in 2020-21 to 2.9% of GDP in 2060-61.

Future fiscal Armageddon averted? 

The IGR is based on Treasury’s best estimates founded on what has occurred in the past and what may happen in the future. All past IGRs (2002, 2007, 2010 and 2015) concluded that the Federal Government was heading towards very difficult budgetary outcomes primarily caused by dramatic increases in health, aged care and age pension outlays, based on policy settings at the time.

The current IGR seems to offer a very different outcome. It seems to imply that these three big expenditure areas are more or less under control under current settings.

The IGR’s outcomes are very sensitive to slight changes in the assumptions used. This year’s IGR does contain some sensitivity analysis, but more could be provided. We encourage Treasury to do that in the interests of providing a more realistic picture of the variation in possible future outcomes.

Intergenerational Report

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

Read report