24 July 2010

Ageing of the population

The so-called ageing problem is a result of two factors – declining mortality and declining fertility.  But, for Australia at least, these trends have existed for the last 150 years or more.  In 1860, Australia’s death rate was 2.0% p.a. – it is now 0.7%.  The birth rate was  4.3% p.a. – it is now 1.2%.  But ageing has not been a problem.  Why, because per capita incomes have been steadily increasing as part of the normal economic growth process.  In other words, we, and our ancestors could progressively afford to support the growing proportion of elderly (as well as support children to an older school-leaving age).

So why the hysteria over Australia’s looming ageing problem? The reason, apparently, is that whereas the decline in the death rate over those 150 years has been gradual and stable, the decline in the birth rate has been very unstable.  The birth rate suffered a sharp decline during the great depression of the late 1920s and early 1930s, and then recovered strongly, culminating in the post-war baby boom, after which the declining trend resumed.  So the ageing effect will be more severe than previously.

But how serious will this ageing problem be as the baby-boomers enter retirement?  According to the latest inter-generational report, average per capita incomes are projected to grow by an average 1.5% p.a. in real terms over the next 40 years, compared with 1.9% over the previous 40 years.  This modest decline of 0.4% is attributed partly to the ageing effect and partly to a projected decline in productivity growth.  But 1.5% p.a. is still a significant rate of increase.  Is there any reason to expect it will be insufficient to support the growing number of people in retirement?

The projections of productivity growth in the report are based on extrapolation of past growth rates, so one might question whether these rates will continue.  Economic growth theories that predict they will continue are based on a continuation of high national savings rates (about 20% of GDP for Australia).  These savings must be invested, otherwise massive and escalating unemployment will result.  This new investment adds to our capital stock and generates productivity gains.

So continuing productivity and income growth seems a reasonable expectation.  The most likely threat to this would, I believe, come from depletion and dilution of our natural resource base, urban traffic chaos, overcrowding and its effect on infrastructure development costs, and other symptoms of the ‘law of diminishing returns’.   But these are all induced by population growth, so suggestions that population growth is a solution to the ageing problem are self-defeating.  To the contrary it could worsen it!


If someone were to produce an age-dependency affordability index, similar to the Housing Affordability Index, it would provide a useful measure of Australia’s ability to support the growing proportion of persons not in the work force.  I am surprised that no one has attempted to do this as an on-going exercise.#

Bob Braby is a long standing member of Sustainable Population Australia

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