Wednesday, March 24, 2010


Talk to Centrelink Financial Information Service Officers, Brisbane
March 24, 2010

With the recent publication of the federal government’s third intergenerational report since 2002 we’ve had another surge of concern about the ageing of the population. I want to try to clarify for you what this is likely to involve. It’s been generally portrayed as a bad thing - a threat - but, though it will certainly bring changes, many of those changes will be for the better. Let’s start by being clear on what ageing involves.

What is population ageing?

All of us get older every year, so what does it mean to say the population is ageing? It means the average age of all the people in Australia is rising - though by a lot less than 12 months each year. The average age would be falling if a lot more babies were being born to counter the fact that we’re getting older as individuals but, in fact, women are having fewer children than they used to in earlier decades (even though the fertility rate recovered a little in the noughties). The other factor is that the death rate is falling as we live longer lives. So a lower birth rate and rising longevity are the main causes of population ageing, but it’s being made more acute by the fact that the great bulge in the population that is the baby boomers (people born between 1945 and 1960), which is working its way through like a pig in a python, has reached the point where they’re turning 65 and starting to retire.

The latest report tells us that the number of people aged 65 to 84 is projected to more than double over the next 40 years, while the number over 85 more than quadruples. At present there are five people of working age to support every person of 65 or over, but this is projected to fall by almost half (to 2.7).

The ‘problem’ of ageing is exaggerated

Since a big part of the cause of ageing is that we’re living longer, you’d think this would be seen as a good thing, something to be celebrated. But ageing is almost always portrayed as a bad thing - a cause of many problems - and the latest intergenerational report is no exception. It tells us ageing will cause the economy to grow more slowly - our material standard of living won’t rise as quickly as it has been. As well, we’re told, increased spending on the aged will put great pressure on the federal budget, creating a ‘fiscal gap’ between government spending and revenue equal to 2.75 per cent of GDP by 2050, which is equivalent to about $35 billion a year in today’s dollars.

It’s true that the economy’s likely to grow a little more slowly in coming decades, mainly because of slower growth in the number of people joining the workforce. However, when you examine the report and its projections you find that most of the expected growth in government spending comes not from costs associated with the higher number of old people, but from the rising cost of new health technology and the likelihood that all of us will be demanding more and better healthcare. So the budget will have a problem with inexorably rising spending on healthcare. But though the politicians don’t like to admit it, the obvious solution to that problem is that we’ll all have to pay more tax from our rising incomes over the next 40 years.

It’s true that most other developed countries - the US, Britain, Europe, even New Zealand - will face serious budgetary problems coping with the growing cost of aged pensions and aged care. But that’s because their unfunded pension schemes are much more generous than ours, being unmeans-tested and, in many cases, related to the individual’s pre-retirement income. We don’t have problems to anything like the same degree because our age pension is so frugal, being means-tested and flat-rate. The compulsory super scheme we’ve put in to supplement the age pension - so that most people will retire with a combination of age pension and private pension - is an accumulation scheme that makes no promises about how much you’ll end up with.

Many ageing problems will solve themselves

The next point I want to make is that many of the ageing problems people point to will, to some extent, sort themselves out. Where they don’t, the government will sort them. The point is that our economy is ‘dynamic’ - it changes over time in response to situations that arise. People don’t just sit there accepting their fate, they try to do something about it. And though it’s wrong to imagine that ‘market forces’ have magical powers to eliminate all problems, it’s equally wrong to imagine they have no power to improve matters and that the only solutions come from government action.

Take for instance the often-heard complaint that the babyboomers can’t afford to retire because they haven’t saved enough. There’s truth in this complaint - even though I have to say that this problem arises because the babyboomers are sure they couldn’t get by on the age pension - even though all previous generations have - and even though they haven’t bother to save much. But here’s the real point I’m making: if it’s true the babyboomers can’t afford to retire then they won’t retire. They’ll keep working, even if only part-time. And every year they postpone their retirement is one extra year of saving plus one less year of having to support themselves in retirement.

And, indeed, this trend has already begun. In the 1980s and early 90s we saw a trend towards earlier and earlier retirement. Some of this was voluntary - such as federal public servants whose pension scheme had a quirk that encouraged them to retire just before they turned 55 - but a lot was involuntary, particularly for less-skilled blue-collar workers being made redundant from manufacturing. As you know, people are able to get access to their superannuation savings from the age of 55 - and earlier if they’re made redundant.

But that was a long time ago, and though some public servants may still be retiring early because of quirks in their super schemes, for about the past decade the tide has been turning and the proportion of 55 to 64 year-olds participating in the labour force has been rising, not falling. That is, people are tending to retire later. Since 2001 the participation rate for men aged 55 to 59 has risen from less than 72 per cent to more than 78 per cent. Since 1993 the participation rate for men aged 60 to 64 has risen from 54 per cent to almost 60 per cent. I expect this trend has a lot further to run.

You can see the federal government seeking to reinforce this trend, first by phasing up the female age pension age from 60 to 65; second, by introducing tax-free treatment of retirement income provided the individual has turned 60; and now in last year’s budget by beginning to phase the age pension age up to 67. The limited outcry over these moves is a sign they fit with people’s changing social attitudes. We’re living a lot longer than we used to, and are healthier than we used to be, so it follows that we can work for more years before we retire. It doesn’t make much sense for all of our extra years of life to be spent in retirement. What about manual workers whose bodies may not hold up for another two years to 67? We already make provision for them - disability support pension.

The pension age is being raised in most developed countries and I don’t think we’ve seen the last of our government’s efforts to raise the de facto retirement age. The next step - which may be recommended in the Henry tax reform report - would be to raise the age at which tax-free retirement benefits are available to align it with the age pension age. Nor do I think that 67 is the highest the pension age will go.

It’s often said that, whether or not older people want to keep working, they can’t because of employer prejudice against older workers. Older workers are the first to be laid off and the last to be rehired, we’re told. I’m sure there was a lot of truth to this complaint and there may be some lingering vestige of such a prejudice, but I’m equally sure it’s disappearing and probably largely gone.
Why? Because, at a time of population ageing, where skilled labour is perpetually in short supply, it’s a luxury employers can no longer afford. And most of them have already figured that out.

So I believe employers’ attitude towards older workers is in the process of reversing itself. One consequence of ageing is that fewer and fewer young people will be leaving education each year and joining the workforce (though this will be countered to some extent if we achieve high levels of skilled immigration). This being the case, employers will be anxious to retain the services of their existing, older - but skilled and experienced - workers. They’ll generally be sorry to see them retire and willing to offer the flexible arrangements necessary to have them stay on, even if only part-time.

Older workers possess something economists call ‘firm-specific knowledge’. They know how things are done; they know why they’re done that way and not some other way. When in the recessions of the early 1980s and the early 1990s big companies followed the corporate fashion of the time and sought to impress the sharemarket by announcing mass redundancies, they learnt the hard way that getting rid of your older workers involved also excising the firm’s ‘corporate memory’, so that it lost the ability to do certain things. Some of these key people had to be brought back, sometimes at great expense and as an admission of error. It’s no longer fashionable for big companies to try to impress with huge layoffs, and I suspect that part of the reason for this is the belated recognition that getting rid of your corporate memory isn’t a smart thing to do.

As older workers become more inclined to stay on, and employers become more desirous of having them stay on, governments are increasingly likely to change the tax laws to accommodate and encourage this trend. That’s because reversing the trend to early retirement represents the easiest and most obvious way to reduce the economic and budgetary costs of ageing. The next best way is to do more to help mothers return to the workforce and help more to work full-time rather than part-time. It’s probably no coincidence that we’re now finally seeing some action on paid parental leave.

The changing balance of supply and demand for labour

The key to understanding how ageing will affect workers is to understand the basic economic forces we’re dealing with - the changing balance of the supply and demand for labour. You also need to understand where we’re coming from. The economy is now emerging from a period of about 30 years - starting in the mid-1970s - when the number of people wanting to work greatly exceeded employers’ demand for workers and the rate of unemployment was always high. According to the economic textbook, such a position can’t be sustained because the price of labour (wages) will always adjust to bring supply and demand into balance. But the labour market doesn’t work the way textbooks say it does and, as I say, we went through a protracted period in which the supply of labour exceeded demand.

The supply of people wanting work was plentiful for three main reasons. First, because of the high fertility rate in the 50s, 60s and 70s, a lot of young people were entering the labour force each year. Second, because the bulge of babyboomers were at their prime working age. And third, because changing social attitudes and rising levels of educational attainment were prompting a lot of married women to return to the workforce.

As a consequence of this period of excess supply of labour, the balance of power in industrial relations shifted decisively in favour of employers. We saw a marked decline in strikes and other industrial disputes and, indeed, the steady decline of the union movement. More to the point for our present purposes, employers realised there was rarely any shortage of people wanting to work for them and so they became a lot more picky. They could demand higher levels of education than were needed to perform the tasks involved; they could favour married women over young people (more reliable); they could decline to interview any job applicant who’d been unemployed for more than a month or so and, above all, at a time of rapidly changing technology they could favour hiring young people over older people, whether those oldies were job applicants or existing employees. I can remember a time in the days of the Fraser government when there were concerns about high youth unemployment, it was considered virtuous to bundle older workers into retirement to make way for the younger generation.

Why did employers behave like this? Because the excess supply of labour allowed them to. The trouble is, because this excess lasted for 30 years, many people have come to regard it as part of the natural order - the way the world has always worked and always will.

In truth, that era has ended and we’ve entered a new era where employers’ demand for labour now exceeds the supply of people wanting to work. And this means the balance of industrial power is shifting from the employers back to the workers, just where it was in the post-war period that ended in the mid-70s. Why has the balance of supply and demand shifted? In a word, because of ageing. With an older population, you get more people who consume but don’t produce. So the demand for labour remains strong, but the supply of labour declines. To be more specific, we have fewer young people joining the workforce each year as the low rates of fertility in the 80s and 90s have their effect and as the babyboomers start surging into retirement.

The point is, it’s this change in the balance of demand and supply that gives workers the upper hand and forces employers to change their behaviour in line with the changed economic reality.

Employers will stop favouring young people over older people because they have to. There just won’t be enough young people entering the labour market to allow them to discriminate against older workers.

More generally, shortages of skilled labour will become commonplace, and rather than giving their workers a hard time, employers will have to try harder to retain the services not just of older workers but of all workers and discourage them from being poached by rival firms. Salaries will be higher, perks will be greater and employers will be a lot more solicitous of their workers’ welfare. Firms will vie to be seen as the ‘employer of choice’ in their industry. Why will they? Economic necessity.

This is the amazing thing about the portrayal of ageing as a great problem for the economy. It will be a problem for employers, but just the opposite for workers.

Before I move on, let me warn you about something. At about the time of the first intergenerational report in 2002, people focused their minds on ageing, looked at their existing workforces and noticed the high proportion of babyboomers, all of whom were about to retire. They did a bit of manpower planning and projected that, within 10 or 20 years there’d be huge shortages of doctors, nurses, teachers and many other professions. You could add all these shortages together and conclude that, with all these unfilled vacancies, the economy will surely grind to a halt. But I warn you against such a conclusion. Why? Because, as I said at the beginning, the economy is dynamic. Or to put it another way, because nature abhors a vacuum. Those massive projected shortages won’t transpire because, to a greater or lesser extent, people will find a way to overcome them. They’ll try to attract skilled immigrants, they’ll look for labour-saving solutions, they’ll allow nurses to do the work of doctors, or whatever.

I haven’t left myself much time to talk about the effect of the resources boom. In the last part of the noughties, immediately before the global financial crisis, we were in the grip of a resources boom, getting sky high prices for coal and iron ore as China and India undertake the massive and protracted installation of all manner of infrastructure needed to turn them into developed economies. The result for us was a booming economy, the lowest unemployment rate in 30 years and widespread shortages of skilled workers. We’ve been through resources booms before and the GFC seem to bring that one to an end as all the others had ended. But China and India turned out not to be greatly affected by the global recession. They have resumed their rapid march towards economic development, their demand for our resources has continued unabated and, after falling somewhat, resource prices are on the way up. We’re in for another period of huge investment in increased mining capacity, including a huge investment in LNG facilities. So the resources boom is back on, it seems like it won’t be long before the economy is back to full employment and skill shortages, and Asia’s heightened demand for our minerals and energy could run on for a decade or two.

If so, this will have profound effects on our economy. It will keep our exchange rate and interest rates high, and lead to a much bigger mining sector, but smaller manufacturing, agriculture and tourism sectors. It will change the mix of occupations accordingly, and it will change the nation’s geographic balance, favouring rapid growth in Western Australia and Queensland and much slower growth in the other states. Population will shift to the mining states as it has been for some time. That will be great for Queensland, though it will continue suffering the same problems it’s been suffering from for a while: growing pains.