How to rebalance the scales amid our ageing population

Reading the 2023 Intergenerational Report (IGR) released last month finally gave shape to the vague sense of fear I had been feeling as I entered my early 20s. 

I was already concerned about climate change, housing affordability and my HECS debt. I can now add Australia’s inexorably ageing population to my growing list of worries. 

Many in my generation are also worried – the proportion of Australian youths aged 15 to 19 with a positive outlook for the future decreased by 5.6 percentage points between 2020 and 2022 alone, according to Mission Australia.

The IGR served as a warning for my generation. More and more of our tax dollars would go towards providing the support older Australians rightfully expect, unless we start shifting course now.

The challenges of an ageing population

Treasury projects that Australia’s population will age quite dramatically over the coming decades. The share of older Australians aged 65 and above will grow by six percentage points by 2063 – that’s more than one-third its current share (Figure 1).

Our ageing population will place an intensifying strain on our nation’s bottom line. In fact, the IGR predicts that approximately 40 per cent of the Federal Government’s increased spending to 2063 will be due to population ageing alone.

Of course we want to provide high-quality care for our parents and grandparents as they age. But the demographic changes facing us make this burden particularly heavy. It will be expensive and hard to find enough workers to care for them. 

Health and aged-care spending are set to grow by 6.7 and 5.7 per cent respectively each year. Cumulatively, these sectors will demand markedly more of our income over time (Figure 2).

Additionally, health and aged care have long been plagued with chronic labour shortages that increasingly demands policy action as the population ages. Previous CEDA research found that without intervention, there would be a shortfall of at least 110,000 direct-care workers by 2030.

Millennials, Gen Z and Gen Alpha are set to bear the brunt

The projected increases in spending on health and aged care would be much less of an intergenerational concern if we had other substantial revenue sources to draw from. Traditionally, this would include indirect goods taxes such as the fuel and tobacco excises. However, emerging forces that are shifting consumer preferences will erode these tax bases over time (Figure 3).

The shrinking revenue from goods taxes forces the Government to rely increasingly on personal income tax revenue. Concerningly, Australia is already the second-most reliant of 38 OECD countries on income tax for tax revenue, according to the OECD. Yet Millennials, Gen Z and Gen Alpha will have to continue contributing more of our income to support government spending (Figure 4).

This is just the latest addition to the increasing burden my generation will carry. Former Treasury Secretary Ken Henry – author of the Henry tax review – described it best when he warned we were already “weighed down with HECS debt”, would have to “repay a mountain of public debt” from the pandemic, were “dealing with the consequences of climate change”, and “facing diminishing prospects of ever being able to afford a home of [our] own”. I couldn’t agree more. 

Good policy can lift the weight off our shoulders

We must find ways to offset the impacts of our ageing population. Fortunately, there are several levers we can pull. 

1. Migration policy can be adapted to boost our working population 

Skilled migrants typically bring a multitude of direct and indirect benefits and are net contributors to our economy. They contribute to the labour force, create demand for goods and services, and pay taxes.

CEDA has long advocated for the Federal Government to establish a new ‘Essential Skills’ visa that would bring in workers for critically labour-starved sectors such as health and aged care. 

The benefits of such a policy would be three-fold: we can directly target sectoral skills shortages that will worsen as the population ages; the working-age population would get a much-needed boost, creating a better economic dependency ratio; and our looming tax burden can be shared amongst more people to reduce the load on each individual income earner. 

2. Broad-based tax reform is the way to go to share the burden

Contrary to popular belief, tax reform isn’t just about increasing taxes. A better designed tax system would be more equitable as well as more efficient. 

Australia’s superannuation tax system is a good candidate for reform. Current policies are overly concessional and simplistic, and chiefly benefit the wealthy. Treasury analysis reports that almost 40 per cent of concessional benefits on superannuation earnings currently flow to the top 10 per cent of earners. 

In line with recommendations from the Henry tax review, a progressive tax rate could be implemented in place of the current flat 15 per cent contributions and earnings rate, while remaining concessional compared to income-tax rates.

This would reweight the tax burden intra-generationally, inviting wealthier people to provide more revenue support while reducing pressures on lower income Australians. 

3. Property tax reform can help ease Australia’s housing crisis

CEDA has previously recommended an annual broad-based property tax to replace stamp duties. This would provide a consistent revenue stream for state and territory governments. 

Doing away with stamp duties would additionally boost the dynamism of the housing market. This would be a win for older and younger Australians alike – reducing the barriers to downsizing for older Australians while increasing the supply of suitable housing for younger Australians.

Big or small, any policy commitments to rebalance the scales would be a welcome relief to my generation.

The Intergenerational Report provides a map for the future and flags the obstacles in our way. We must now begin to chart the path ahead.