What will Australia look like in 40 years? We look at the key takeaways from the Intergenerational Report.
The 2023 Intergenerational Report (IGR) is a crystal ball insight into what Australian society will look like in 40 years and the community’s needs as we grow and evolve. It doesn’t map out our path to flying cars and Jetsons-style robotic domestic help (unfortunately). Still, it does forecast structural trends that will give many of us anxiety about what we must do now to navigate the future successfully.
The report links the continued growth and prosperity of Australia to five significant areas of influence:
We’re ageing
Thanks for the reminder. The number of people aged 65 and over will double, and those aged 85 and over will more than triple. We’re expected to live longer, with the life expectancy of men increasing from 81.3 to 87 years and from 85.2 to 89.5 for women by 2062-63. And that’s a problem for the younger generation.
Who bears the burden of an ageing population?
Australia’s low birth rate, limited migration and increased longevity all have an impact. The old age percentage – the number of people aged 65 and over for every 100 people of traditional working age (15 to 64) – will increase from 26.6% to 38.2%.
From a tax perspective, Australia’s reliance on personal tax means workers will bear an increasing proportion of the tax burden under current fiscal policy. In a recent interview, former Treasury boss Ken Henry labelled it an “intergenerational tragedy,” with personal tax growing from 11.7% of GDP to 13.5% based on current policy. The report says that “only 12% of Australians aged 70 and over pay income tax, and this age group now makes up 12.2% of the total population. This age group is expected to increase to 18.1% of the total population in 2062-63.” Wholesale tax reform will be required to prevent the growing tax burden on individuals dragging on the economy. With economic growth expected to slow to 2.2% from 3.1% over the next 40 years, the solution will not magically arise from corporate Australia. If it were not for our high inflation rate, you would think an increase in the GST was imminent.
Services and who pays
Demographic ageing alone is estimated to account for around 40% of the increase in Government spending over the next 40 years.
The outcome of an ageing population, as you would expect, is increased demand for care and support services that will push the Federal Budget back to a point where deficits are the norm if the current policies remain in place.
From a consumer perspective, it also means that the trend towards user pay will only increase. As individuals, we need to ensure that we have the means to fund our old age because Government resources will be limited by increasing demand, and this demand is funded by a deteriorating percentage of workers contributing to tax revenue.
We will also likely need to look at how we generate income. For some, that might mean working longer. For others, it is value adding – creating, buying and selling assets in some form, whether that is business, innovation, or through more traditional assets such as property or financial products.
Superannuation
Australia currently has the world’s fourth largest pool of retirement assets, with total superannuation balances projected to grow from 116% of GDP in 2022-23 to around 218% by 2062-63. Our superannuation system will be what underwrites retirement for most Australians. Approximately 70% of people over aged pension age receive some form of Government income support. Over time, and as our superannuation system matures, this percentage is expected to decline sharply as a percentage of GDP with Government support supplementing rather than providing for retirement (the first generation of workers with superannuation guarantee throughout their working life hit retirement age around 2058).
However, the IGR points out that “the cost of superannuation concessions will increase, driven by earnings on the larger superannuation balances held by Australians.” The proposed tax on future earnings on super balances above $3m may not be the last.
You can expect the management of superannuation to be a priority for Government to ensure that retirement savings are maximised to reduce the reliance on Government support and to ensure that this enormous pool is leveraged for the gain of members and the nation.
Growth of services
Like most advanced economies, global competition has shifted Australia’s industrial base from producing goods to services. Ninety percent of jobs are now in services.
With an ageing population, health and care services demand is expected to soar. People aged 65 or older currently account for around 40% of total Australian health expenditure, despite being about 16% of the population. The IGR estimates that the workforce required to support this sector will need to be twice the size of what it is now to meet demand by 2049-50.
The Government’s most significant spending pressures will be health, aged care, the NDIS, defence and interest payments on government debt. Of these, the NDIS is the fastest growing at 7% annually.
The role of technology
The speed of technological change is difficult to predict, and the IGR doesn’t attempt to make predictions. But we know that technology has had a transformational impact on labour productivity (the value of output of goods and services produced per hour of work). Over the last 30 years, labour productivity has accounted for around 70% of Australia’s gross national income growth. But, tempering this is a slowing of labour productivity growth since the mid-2000s.
We know technological disruption is coming, and the debate about the role of artificial intelligence is only just beginning. We also know that unless technology is accessible, our future will be polarised by those who have not benefited from technological change.
Climate change transformation
There are two critical aspects to climate change: the cost of rising temperatures and the opportunity created by the shift to renewable energy.
Temperatures are anticipated to increase by 1.5 degrees before 2100, potentially before 2040.
From 1960 to 2018, climate disasters reduced annual labour productivity in the year they occurred by about 0.5% in advanced economies. However, labour productivity is estimated to be around 7% lower for severe climate disasters after three years. With rising temperatures, floods, bushfires and other extreme weather events are expected to increase in frequency and severity. The impact of climate change spelt out in the report is sobering, with disruptions and changing patterns impacting agriculture, tourism, recreation and industries that rely on labour-intensive outdoor work.
On the positive side, Australia could benefit from new “green” industries, such as hydrogen and other clean energy exports, critical minerals and green metals. It is also likely to drive new, innovative ideas as businesses invest in and develop low emissions technologies, providing a source of future productivity growth in a more sustainable economy. Australia’s potential to generate renewable energy more cheaply than many countries could also reduce costs for both new and traditional sectors relative to the costs faced by other countries.
Geopolitical risks
Australia relies on open international markets. Trade disputes and military conflicts pose an external threat to Australia’s economy and well-being. While the IGR cannot predict the nature of geopolitical events, it notes the importance of investing in national security. This includes cybersecurity, ensuring access to international markets, and deepening regional partnerships to reduce supply chain vulnerabilities.