Ageing population cost to the economy revealed

The march of Baby Boomers into old age will cost $36bn by the end of the decade — more than Medicare and the NDIS, new figures show.

An ageing population will drain the nation’s finances, new figures show.

The quickening march of Baby Boomers into old age will cost the budget $36 billion by the end of the decade with a $9bn increase in the age pension alone that will not be offset by higher tax concessions in superannuation, a new report says.

An analysis of the fiscal impact of an ageing population by the Parliamentary Budget Office, with demographic changes sharpening in the next decade, shows the net cost in 2028-29 will be higher than the total price of Medicare or the National Disability Insurance Scheme.

In fact, the total cost will make ageing a larger spending item than six of the 10 biggest commonwealth outlays.

“Australia is in the midst of a particularly significant phase of demographic change,” the report says.

A breakdown of the budget effect shows a drop in revenue by about $20bn and an increase in spending of $16bn, more than half of which is made up of age pension increases with a projected $5bn jump in aged care costs.

But that number comes with a degree of uncertainty, the PBO notes, as the conversation around growing expectations for quality care becomes louder.

“Some of (these ideas) are being considered by the royal commission … and also have the potential to motivate further reforms which could increase funding pressures in the future,” the report says.

Successive federal governments have resisted advice and independent recommendations to include the full value of the family home in both the asset test for the age pension and in the means test for aged care, on account of ballooning taxpayer costs.

The PBO also says migration “can slow the pace of population ageing” and has done since World War II although Scott Morrison has announced Australia’s rate will be kept 30,000 people lower than it has been for the next four years.

The ratio of workers to those in retirement is crucial, the PBO says, because the labour force will be 600,000 workers smaller due to the ageing population at the end of this decade.

As a consequence, the stresses on taxpayers during this time will be “unique.”

“With the large baby boomer population reaching retirement age this trend (of increasing workers until the early 2000s) has turned, with the proportion of the working-age population beginning to shrink,” the report says.

“Australia’s ageing population will mean a greater share of the national income that is generated from superannuation assets will be tax-free which will add to an ageing-related detraction in revenue.

“In a similar vein, retirees tend to spend less than working-age people and can have a higher proportion of spending on GST-free categories, particularly healthcare.”

A bipartisan commitment to increase the superannuation guarantee to 12 per cent “will likely lead to lower wage increases, shifting a greater proportion of earnings into the superannuation system.”

The analysis adds to the 2015 Intergenerational Report which took a long-term view of pressures and did not specifically address costs related to social security or aged care.

Despite the added costs and loss of revenue, the PBO is careful to say that total revenue is still expected to increase by $166bn in real terms over the same period. Similarly, spending elsewhere in the budget is projected to grow by $119bn.