Baby boom to baby bust

Bernard Salt's Australia

THE Big Tilt is the proposition that from 2011 onwards there will be a fundamental shift in the demography of Australia.

This is the idea that over the past 60 years the number of people entering the workforce has exceeded the number exiting through retirement. But with what some demographers are calling "the baby bust", and with the first baby boomer born in 1946 turning 65 in 2011, this means that during the 2010s more people will exit than enter the productive stage of the life cycle. This is best demonstrated through the interplay between the 15 and the 65 cohorts.

Between 1981 and 1985 the number of 15-year-olds increased by 23,000 to 271,000, whereas the number of 65-year-olds increased by 7000 to 122,000. This means that in the early 1980s the working-age population expanded by 16,000. This is good news for the economy: more workers, more consumer demand, more tax. Fast forward 30 years to the 2010s. Over the four years to 2015, the number of 15-year-olds will increase by 3000 to 290,000, whereas the number of 65-year-olds will increase by 33,000 to 246,000. This means that in the early 2010s the working-age population will contract by 30,000. This is the essence of the big tilt: it is boomers exiting at a faster rate than Ys entering the productive stage in the life cycle.

This is no "growth-ist plot" to ramp up the level of immigration. If 30,000 more people turn 65 and exit the productive phase in the life cycle than 15-year-olds enter, who is going to pay the taxes to support the lifestyle to which we have all become addicted? Perhaps this is an aberration unique to the early 2010s. Fast forward to the early 2020s. Over the four years to 2025 the number of 15-year-olds is expected to grow by 14,000, whereas the number of 65-year-olds will expand by 20,000.

The baby bust, the big tilt, whatever you want to call this bold new demographic world, it is like nothing we have experienced before. It works silently, eating away at the consumer and the tax base just as it worked for the consumer and the tax base over the past 60 years: more babies and more young migrants pumped up the worker base.

But at some point it all comes crashing down. And that point is upon us or at least will be upon us in the coming decade. And it's not just Australia where the demography tilts in favour of the retirement age group. The working-age population in Japan has contracted from 87 million in 1994 to 81 million in 2010; over the previous 16 years the working-age population had expanded by nine million. Which period delivered greatest prosperity to the Japanese people?

Other industrialised nations are similarly affected by an ageing workforce, most notably France, Germany and South Korea. The big tilt impact on Australia, Canada and New Zealand has been modified or at least delayed by immigration, although eventually the boomers retire and the tilting process is set in motion. The same logic applies to the US, although in that market the immigration factor is augmented by a strong birthrate and especially among the Latino and African-American communities.

In the attached chart I show the number of people added each year to the working-age cohort between 1950 and 2050. Over the past 60 years the number added to the working-age population has fluctuated between 150,000 and 200,000. This is the population that buys consumer goods, that reproduces, that forms households, that takes out loans and that pays tax. This is the piston that drives the Australian economy and that largely delivers our lifestyle and prosperity. The issue is how Australia navigates the demographic fault line that will slow growth in the productive cohort. Rightly or wrongly, the Australian economy has geared itself over 60 years around continued growth in the age group that delivers household formation.

This nation produces 150,000 dwellings a year. Whole sections of the workforce depend on such demand continuing, including, according to the last census, 35,000 plumbers, 64,000 carpenters and 69,000 electricians.

If there is no upward adjustment to immigration to offset the impact of retiring baby boomers, then household formation will slow and there will be a reverberation through the Australian economy and workforce.

I am not averse to a moderate rate of growth, but any moderation of the migrant intake needs to take into account the fact boomers are set to retire en masse. And the moderation needs to be scaled-in over a decade to enable the economy and the worker base to readjust. The anti-growth lobby argues that upping immigration to offset the boomer retirement effect simply means that we will need even more workers to support today's migrants when they retire. This is incorrect.

The Superannuation Guarantee introduced in 1993 means late boomers, generation Xers and Ys, who will have paid into super for most of their working lives, will be largely self-funded in retirement from the mid-2020s onwards.

This nation has a short-term retirement liability to first-wave boomers born in the late 1940s who went into the workforce in the 1960s and who will retire over the next 15 years. This lot paid taxes for 25 years (to 1993) to governments of the day that promptly spent those taxes on health, education, defence, welfare -- but not on a national pension scheme. The logic was that the taxpayers of the day would fund their retirement. Well, that day has now arrived and if we don't increase the number of taxpayers through migration then we will need to increase the amount of tax paid per taxpayer. Or we could ask baby boomers to go with less in retirement. Which of these options do you think is the most politically palatable?

Then again, you could do as many anti-growth people do and pretend that boomers staying a bit longer in the workforce means that the problem doesn't exist and never will exist. The Big Tilt changes everything. It means that what we have come to expect from life in a world of rising consumption, tax and workers will get that much harder in a world of shrinking consumption and tax.

The Big Tilt: What Happens When the Boomers Bust and Xers and Ys Inherit the Earth by Bernard Salt is published today (Hardie Grant, $29.95).