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Delayed retirement: a bitter, but necessary pill to swallow


Kyneton Morris

By

March 29th, 2017


Why are young Australians being asked to work longer than originally anticipated? Kyneton Morris explores the necessity behind raising the retirement age.


Australia is a diverse nation with a population spanning many generations and demographics. Back in 2014, then-treasurer Joe Hockey announced that the required retirement age to receive the age pension would gradually be raised from 65 to 70.[1] This policy was naturally unpopular and Hockey felt the full brunt of democracy as backlash came from all angles. I remember particularly well the onslaught of attacks from radio stations and social media news outlets. The political left attacked this change because it meant less per capita welfare over the span of our lives. But what are the economic implications of this policy, and why was it enacted?

In Australia, there are substantial issues surrounding the aging population. Firstly, the share of elderly/retirees in the population is greater than ever before. The proportion of people aged over 65 is projected to rise from 13% of the population in 2002, up to 25% in 2042.[2] This is even further contrasted to the early 1900s, when the age pension was first created, where Australians had an approximate life span of 50 years (compared to 80-85 years in 2016).[3] An important indicator in forecasting is the dependency ratio, which is the ratio of working-aged (15-64 years old) to over 65 year old’s, which over the past 25 years has fallen from 6.1 to 4.5, and further expected to drop to 2.7 by 2055.[4] This movement will cause an increase in demand for welfare and an aggregate decrease in the labour force. As we know from static comparatives, an increase in demand for welfare and a decrease in fiscal supply will (holding healthcare and aged care supplies constant) cause per capita welfare prices to go up. Even with cuts to the proportion of age pension and a shift towards superannuation payments, aging and the retired population will take a serious toll upon our universal healthcare system. There are two solutions possible, the first being an increase in taxation revenue or a decrease in per capita welfare, with the latter solution being discussed.

You may be sceptical about the potential crises in Australia, as we are still experiencing growth and productivity. In macroeconomics, economic strength is generally defined by GDP (gross domestic product) per capita; that is total national production, per year, per person. Production is also defined as a function of labour and capital meaning that with more workers comes higher GDP per capita, and by extension economic strength. However, outside technology and productivity growth, the main reason for labour force growth in Australia has been gender equality. In the past 40 years, female participation in the workforce has increased by 20% and male participation has steadily fallen.[5] Once the effect of equality in the workforce converges upon the natural rate, there will be significant growth damage and a decreasing labour supply. As seen below in figure 1, there is a trend towards a lessening male participation rate, and that can be heavily attributed to the retiring population. With a current fertility rate of 1.8 births per woman in 2015,[6] we are reproducing at a slower rate than ever, meaning youth is becoming increasingly scarce. Although gender equality has carried us forward for the last 40 years, ceteris paribus the future is looking progressively bleak in terms of economic strength.

Source: Australian Bureau of Statistics 6202.0 labour force statistics 2017

Understandably, there are plenty of counter arguments regarding the working elderly, such as experience/skills inflation, occupational health and safety risks (OH&S) and age discrimination within the workplace. But it is precisely for these reasons there needs to be early action, so that both the nation and employers can prepare for this shift. There is valid concern regarding the personal sacrifice and contribution of our time and energy into the workforce. However, working becomes necessary for maintaining our changing demographics and ensuring future quality of life for the youth and retirees. If no one is there to support these vulnerable groups of Australians, serious health and quality of life issues will come as a result.

In the medical world, it is commonly stated that prevention is better than cure. Think about it this way: if economists are doctors of the world, then their task must be to prepare for future emergencies as timely as required. With the strength of the Australian workforce under threat, I believe that raising the retirement age is necessary for the future sustainability of our economy.

Image: SalFalko

[1] Department of Human Services 2016, Age Pension, Australian Government available at https://www.humanservices.gov.au/customer/services/centrelink/age-pension
[2] Department of Treasury 2017, Australia’s Demographic Challenges, Australian Government available at http://demographics.treasury.gov.au/content/_download/australias_demographic_challenges/html/adc-04.asp
[3] Australian Institute of Health and Welfare 2017, Life Expectancy, Australian Government available at http://www.aihw.gov.au/deaths/life-expectancy/
[4] Department of Treasury 2015, 2015 Intergenerational Report: Chapter 1 – How will Australia change over the next 40 years?, Australian Government available at: https://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/04_Chapter_1.ashx
[5] Parliament of Australia 2015, Labour force statistics: a quick guide, Australian Government available at http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1516/Quick_Guides/LabourForce
[6] Australian Bureau of Statistics 2015, Teenage fertility rate lowest on record, ABS available at http://www.abs.gov.au/ausstats%5Cabs@.nsf/0/8668A9A0D4B0156CCA25792F0016186A?Opendocument

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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