Australian Government Research on Ageing: Potential Impacts and Policy Responses Presentation for AN

1
Australian Government Research on
AgeingPotential Impacts and Policy
ResponsesPresentation for ANU Master of
Economics Course, 24 October 2006

• Phil Gallagher
• Manager,
• Retirement and Income Modelling UNIT
• Tax Analysis Division, TREASURY
• Phone [phone], Fax [phone]
• email pgallagher_at_ treasury.gov.au
• websites www.budget.gov.au
• http//rim.treasury.gov.au
• Views expressed in this presentation are those of
  the author and are not necessarily those of any
  Commonwealth Agency or of the Government

2
Objective of the presentation

• Primarily to show how policy reports such as the
  Australian InterGenerational Report an be used to
  change the nature of long term economic and
  fiscal policy

3
Outline

• Part 1
• The Origins of the IGR
• Aim of Treasury long term modelling
• Treasury Long Term Models
• Drivers of InterGenerational Change -Demography,
  Labour Force, Productivity,
• Economic Projections
• Fiscal Implications
• PART 2 Policy Responses

4
The Origins of the IGR (1)

• The 1996 Commission of Audit Report recommended a
  Charter of Budget Policy
• SECT 20 Public release and tabling of
  intergenerational reports
• (1) The Treasurer is to publicly release and
  table intergenerational reports as follows
• (a) the first intergenerational report is to be
  publicly released and tabled within 5 years after
  the commencement of this Act (b) subsequent
  intergenerational reports are to be publicly
  released and tabled within 5 years of the public
  release of the preceding report.
• SECT 21 Contents of intergenerational report
• An intergenerational report is to assess the long
  term sustainability of current Government
  policies over the 40 years following the release
  of the report, including by taking account of the
  financial implications of demographic change.

5
The Origins of the IGR (2)

• In 1999 - the OECD began a project on projecting
  the long term implications of population ageing
• Treasury was to do the Australian projections

6
Treasury Long Term Modelling

• The aim of Treasury long term modelling is not to
  predict the future
• The aim is to assess risks associated with
  current trends and current policies
• The aim is also to model the effects of policy
  change and the threats to sustainability
• Policies and trends will change

7
Treasury Long Term Models

• Population model - POPMOD
• Labour Force Projection model - LFSMOD
• GDP projection based on these and productivity
  analysis
• Superannuation and retirement income
• Whole of population projection - RIMGROUP
• Expense projection models
• Whole framework used in Intergenerational Report,
  Commission of Audit, OECD exercises
• Framework (other than population model
  retirement incomes )largely replicated by the
  Productivity Commission

8
Drivers of InterGenerational Change

• DEMOGRAPHY

9
Fertility ChangeTotal Fertility per 1000 women
10
Selected projections of age-specific fertility
rates
11
Treasury draft revisions to fertility
12
Net Migration

• IGR assumed net migration of 90,000 per year
• RIM now assumes 110,000 or 115,000 per year

13
Life Expectancy increase
14
Australia - Changing Age Structure
15
Changing Age Structure 2
Table 1 IGR 2002 population projections as at
June 30
16
Changing Age Structure 3
17
Drivers of InterGenerational Change

• Labour Force Trends

18
Approach to labour force projections
19
Labour force participation - males
20
Labour force participation - females
21
Aggregate Participation Rates, 15 years and over
22
Total participation rates
23
Labour Productivity Growth
24
Economic Implications
25
GDP Growth Components
26
Growth in Real GDP and Real GDP per
capita(annual average growth rates - per cent)
27
Fiscal Implications

• Two factors drive expenses - demographic changes
  and real increases in per capita spending

28
Growth Indices for Different Age Groups
29
Growth in Numbers On Social Security
30
Disability Support Pension Male Coverage
31
Disability support client numbers without 2002
budget changes
32
Income support as of GDP
33
Health - Demographic Non-Demographic Growth
34
Commonwealth Health ProgramsReal growth per
person of a given age
35
PBS Average Real Expenditure by Age
36
Projection of Health Aged Care Expenses( of
GDP)
37
Education, Unfunded Super and Total (GDP)
38
Fiscal Pressure with Taxes as Constant Proportion
of GDP
39
Summary of Part 1

• The Australian population will age - largely
  because of a decline in fertility from 1961
• Although labour force participation of women and
  the population aged 15-64 is projected to rise,
  total labour force participation for all persons
  15 and over declines
• GDP per capita continues to rise over the whole
  projection period, and does not slow to the same
  extent as GDP growth. Productivity has an
  important effect on both projections.
• On current trends and policies, Commonwealth
  demographic expenditure could grow by over 5
  percentage points of GDP by 2041-42

40
Part 2

• POLICY RESPONSES

41
Broad options

• Reduce expenditure eg pharmaceuticals and
  disability pensions, but problems if reduce money
  to States
• Increase tax or other revenue
• Public pre-funding eg the Future fund and
  surpluses deposited at the reserve bank
• Private pre-funding which offsets public funding
  eg Australias Superannuation Guarantee
• Increase GDP

42
Problems from Vertical Fiscal Imbalance

• 50 of State Government budgets spent on health
  and education
• Productivity Commission found that State Fiscal
  Gaps varied between 0.8 and 2.3 of GDP,
  depending on how Commonwealth increased its
  payments to the States
• Potential for more pressure on State public
  hospital expenditure

43
Method 2 increase revenue

• But what about incentives and efficiency?
• The number of people keen to pay more tax does
  not appear to be growing

44
Method 3 Public pre-funding eg the Future fund
and surpluses deposited at the Reserve Bank
45
The Australian Future Fund

• In April 2006 the Australian Government
  eliminated its general net debt
• The Government has set up a Future Fund to meet
  it public sector liability for superannuation of
  100b
• Uses some surpluses and asset sales eg TELSTRA
  share holding
• Will payout from 2020

46
Method 4 Increase private saving which offsets
public spending
47
Superannuation

• This is private pensions or saving for retirement

48
Employee Superannuation Coverage and Why It
Increased

1986/7 Award Superannuation 1992/93
Superannuation Guarantee
49
Superannuation Assets Ratio to GDP
50
Real Average Balances
51
Method 5 Increasing GDP
52
Economic Policy Themes the 3Ps
Total population
Share of population 15
Participation rate
Unemployment rate
Average hours worked
Capital deepening
Multifactor productivity
53
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Average hours worked
Unemployment rate
Participation rates
Share of population 15
Total population
54
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Average hours worked
Unemployment rate
Participation rates
Share of population 15
Total population
55
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Foreign investment
Average hours worked
Unemployment rate
Participation rates
Share of population 15
Total population
56
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Foreign investment
Average hours worked
Taxation of skilled labour
Unemployment rate
Participation rates
Share of population 15
Total population
57
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Foreign investment
Average hours worked
Taxation of skilled labour
Unemployment rate
Welfare reform
Participation rates
Share of population 15
Total population
58
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Foreign investment
Average hours worked
Taxation of skilled labour
Unemployment rate
Welfare reform
Participation rates
Labour market/workplace relations
Share of population 15
Total population
59
Policy responses
Multi-factor productivity
Immigration
Capital deepening
Taxation of capital
Foreign investment
Average hours worked
Taxation of skilled labour
Unemployment rate
Welfare reform
Participation rates
Labour market/workplace relations
Share of population 15
Education and training
Total population
60
Policy responses
Immigration
Multi-factor productivity
Taxation of capital
Capital deepening
Foreign investment
Average hours worked
Taxation of skilled labour
Welfare reform
Unemployment rate
Labour market/workplace relations
Participation rates
Education and training
Share of population 15
Microeconomic reform and sound macroeconomic
policy frameworks
Total population
61
Questions
62
Extra topic

• Why we did not do intergenerational accounting

63
What is generational accounting?

• The governments intertemporal budget constaint

64
Generational accounting 2
65
Why the Australian Government has not used
Generational Accounting

• Data requirements are greater than the approach
  used
• Results are very sensitive to starting points and
  assumptions about trend growth rates
• There are assets and liabilities not held by
  governments which affect outcomes
• Assumptions must be made about intergenerational
  savings behaviour and altruism.
• The measure requires careful interpretation
• Simpler methods give us changes over time and
  allow conclusions on sustainability at a program
  and budget level