http://www.theage.com.au/text/articles/2005/04/11/1113071908882.html
The truth about Costello's report on ageing
Date: April 12 2005
A new study of ageing Australia is based on faulty assumptions, writes Tim Colebatch.
Everyone knows that as Australia grows older, caring for the elderly will cost us more. I think most of us, being sensible people, also know that in 2005 it's impossible to estimate with any precision how much more ageing will cost us in, say, 2050.
The real issue is what we should do to anticipate the problem. As Treasury secretary Ken Henry keeps telling us, it's all about the three P's: population, participation (in the workforce) and productivity. What we need now is a practical policy road map for raising all three of them.
Unfortunately, that was not what Treasurer Peter Costello asked the Productivity Commission to do when he set them an assignment to work on the ageing problem. He asked them rather to do what cannot be done with any precision: to quantify the future costs of ageing on growth, and on the fiscal balances of Australia's governments.
The commission knew what the Treasurer wanted it to say, and it said it. While its language is more measured, its findings essentially replicate the doom and gloom of Treasury's Intergenerational Report three years ago. It predicts health costs going through the roof as Australia turns into a nation of pill-popping geriatrics tottering between doctors' rooms, pharmacy counters, operating theatres and aged-care homes - leaving a relatively smaller number of workers to pay the bills.
Within 40 years, it predicts, government spending on health and aged care will soar from 6.5 per cent of GDP to 12.5 per cent. Welfare spending will also rise, although education spending will fall. Overall, it estimates the net impact on government finances will be to open up a fiscal hole worth 6.4 per cent of GDP - in today's Australia, equivalent to $55 billion a year.
How do we fill that hole? Basically, we would have to raise taxes. In today's money, by 2045, the average worker would have to pay an extra $100 a week in taxes. Sure, in 2045, they'll be much richer than we are, but not so much that they wouldn't miss their equivalent of our $100 a week.
If you believe all this, surely the first thing you'd want to ask a mob like the Productivity Commission is what to do about it. But if you did, you know the commission would come up with a lot of politically unwelcome proposals that would set hares running in all directions. So Costello deliberately did not ask the commission for a reform blueprint, but told it to deliver "useful background information for future planning and policy development".
The problem is that no one can offer information on the future. We're not there yet, and all we can do is make guesses. And don't be fooled: the report the commission releases today on Economic Implications of an Ageing Australia is solely guesswork, and very dubious guesswork at that.
The most interesting change from its draft report last year is in its assumptions on future fertility. Based on advice from Australia's best demographers, it now assumes that women in future will average 1.8 babies each, compared with the Bureau of Statistics' mainstream projection of 1.6. The effect on future population estimates is dramatic. By 2051, on this scenario, Australia would have almost a million more children under 15 than the bureau projected, and 1.5 million more people of working age.
Surely this should help reduce the cost of ageing? Not much, the way the commission sees it. Even with the nation facing decades of labour shortages, it projects that without policy changes, fewer and fewer males will even look for work, unemployment will remain locked at roughly 5 per cent, and within those at work, people will work fewer and fewer hours.
It is telling the Government that on current policies, the growing problem of social exclusion will get worse and worse, so that for the next 50 years a worsening labour shortage will go hand-in-hand with a growing number of males excluded from the workforce.
It is the least-known scandal about the Australian economy, but among men of prime working age (25 to 54), Australia's employment rates are already among the lowest in the Western world. In 2003, the OECD's latest Employment Outlook reveals, 15 per cent of Australian men of prime working age had no job, nor did 31 per cent of women the same age.
Yet the commission's report assumes - without any explanation - that they will get far worse. Within 20 years, with labour in short supply, it assumes 18 per cent of men aged 35 to 44 would have no job (compared with 12 per cent now). The jobless rate would jump to 21 per cent among men aged 45 to 54, 42 per cent among those aged 55 to 64, and so on.
Suppose that Australia could lift its participation rates to be fifth best among the OECD's rich list rather than fifth worst. Treasury researchers David Gruen and Matthew Garbutt argued in a 2003 paper that the resultant rise in GDP would close the fiscal gap. Some quick figuring yesterday suggests that among males alone by 2051, that would put 740,000 more workers into jobs than the commission assumes, and well over a million more workers including women.
The commission argues that if labour shortages led to more workers being hired, they would be relatively unproductive, part-timers or casuals who would contribute little to GDP. Given rising education levels, that is unlikely, and the commission's scenario of plunging male employment rates is ludicrous.
Economists have a four-letter word to describe this sort of modelling: GIGO (garbage in, garbage out). If your modelling assumptions are garbage, then you get garbage results.
Ageing is a serious issue. It deserved more than this report delivered.
Tim Colebatch is economics editor.