The latest intergenerational report is unfortunately further evidence that Treasury has become not a source of frank and fearless advice but a political extension of the Treasurer’s office. It is also a reminder of how economic discussions have become captured by stale and increasingly meaningless statistics.
Consider the rising so-called dependency ratio, which once again is trotted out to scare the population into supporting mass migration and ever higher taxation.
We’re told the number of people aged 65 and older for every 100 people of working age, defined as 15 to 64, will increase from 27.4 this year to 40.2, which is meant to be a terrible thing.
Choosing 65 as the starting age of dependency has been a mainstay of demographic and economic statistics for decades, gaining traction in the 1930s when the US enacted social security under Franklin Roosevelt’s administration. That was the age defined-benefit payments were available to workers who had contributed to the system throughout their working lives. The US pinched that number from Germany, which was the first to establish a similar scheme.
Even official retirement ages have increased to 67 in many countries, including Australia, yet the 65 number just won’t go away.
Moreover, the popular idea that people over 65 are generally dependent on the rest of us is silly and mildly insulting. For a start, this is the richest portion of the population by far, with significant housing and superannuation savings.
Many, if not most, could afford to look after themselves without requiring higher taxes on younger people. And to the extent that’s not the case, better policy settings, such as compulsory annuitisation of at least some of their superannuation savings at retirement would fix the problem of some retirees’ blowing their super on holidays or cars and going on the pension.
Furthermore, retirees with substantial equity in their home, which has been exempt from any means testing since 1912, could be required to return part of their Age Pension payments on death if they, quite understandably, didn’t want to move and sell their home to finance their living costs. Including home values above, say, $5m wouldn’t be a huge burden on them or their children.
Beyond the question of wealth, many people are still working full or part time well past 65. There have been no scientific studies that justify using that age as the point where citizens of wealthy countries can’t or won’t work on average. And to the extent some don’t, it’s often the result of the tax and transfer system itself, which discourages work by withdrawing Age Pension payments or other concessions.
Far from the oldies being a drain, increasingly it’s the under-65s who are becoming the fiscal problem. The National Disability Insurance Scheme, whose costs have been steadily exploding since the shockingly poorly designed program was rolled out, is available only to those under 65.
More than 780,000 people are now on the NDIS, which was supposed to have a maximum of about half that. That compares with about 625,000 Australians who are aged over 85. The cost this financial year will easily exceed $52bn, up from about $28bn only a few years ago, which works out about $66,000 a year on average per participant. Bear in mind the maximum annual Age Pension is $32,180 for singles and $48,516 for a couple. The bottom line is the official dependency ratio should start at age 75 or even 80, given how much healthier people are at that age compared with previous generations.
The IGR laughably assumes NDIS costs will grow by only 2 per cent a year from next year, about a fifth of the growth rate in recent years. That’s not a projection, that’s just a lie, which leads me to the ridiculous assumption about productivity and economic growth.
After minus 0.11 per cent a year since the Labor government was elected, we’re supposed to believe labour productivity growth roars back to 1.2 per cent a year on average for the next 40 years. That’s calculated by dividing GDP by hours worked.
In 1987 Nobel prize-winning economist Robert Solow famously remarked one could “see computers everywhere but in the productivity statistics”. Artificial intelligence, the supposed justification for the forecast surge in productivity, has been increasing dramatically and there’s little sign of it boosting GDP anywhere, however much it’s improving our lives. Solow’s remark is likely to be just as apt 40 years later.
Finally, the IGR assumes net overseas migration will remain well above 200,000 a year, even though polls consistently show most voters want a drastic reduction in the level. More people are waking up to the nonsense that Australia needs the highest immigration rate in the developed world because of population ageing, which is occurring even more dramatically in other rich nations. Canada and Japan were doing fine last time I checked.
Peter Costello deserves credit for instituting a process 24 years ago that triggered a far wider understanding of the impact even small changes in productivity, population growth and participation – what many dubbed the three Ps – could have on our living standards well into the future. A periodic forecast remains a good idea, but the quality of the analysis has deteriorated greatly since 2002.
