Peter Costello


Australia's Demographic Challenges


The starting point for thinking about our long-term, future is the Intergenerational Report that I released with the 2002-03 Budget. This was the first time any attempt had been made by an Australian Government to look across the generations and identify the challenges which demographic change will bring to our society and our government.

The need to prepare for Australia’s changing demographics is one of my highest priorities. We need to start preparing for these changes now. In some cases this will not be easy. But just as many of the benefits we enjoy today are the outcomes of the sacrifices and investments of earlier generations, so too the prosperity of future generations depends upon the decisions we make today.

The Intergenerational Report looked ahead 40 years. Our society – the way we live, the opportunities available to us, and indeed our own aspirations – will change dramatically over the next 40 years, just as it has over the past 40 years.

In 1962, only 35 per cent of women participated in the labour force. Now more than 55percent do. In the early 1960s the average family consisted of a single (usually male) breadwinner supporting a wife and two or three children. Today around 44 per cent of families have two incomes; around 23 per cent of families have a single parent; and we are having far fewer children. Our fertility rate has fallen to around 1.75 – well below the replacement rate.

Our society has aged significantly over the last 40 years. For example, in 1962 just over 30 per cent of the population was less than 15 years old. Today it is around 20 per cent, and by 2042 it is projected to fall to under 15 per cent.

In contrast, the proportion of the population aged 65 and over increased relatively slowly over the last 40 years, from around 8.5 per cent in 1962 to 12.7 per cent in 2002. Over the next 40 years, however, we are projecting that this will nearly double, and in 2042 almost one in every four Australians will be aged 65 or over (with the largest increase being in the number of Australians aged 85 and over). At the same time, growth in the potential labour force (that is, people of workforce age) is expected to fall from around 1.2 per cent per annum over the last decade to zero in forty years’ time.

By its nature demographic change arrives slowly, but its effect is profound. Demography is destiny.

We have a number of choices as to how we address these issues. The decisions we make today will affect the kind of Australia our children and grandchildren will live in. The time to start thinking about these issues is now. There is no need for panic measures. But there is a need for careful and determined policy. What we decide in the next few years will have a significant bearing on our quality of life and our children’s future.

I have spoken previously about the need to grow the economy more quickly if we are to properly address an ageing population. Economic growth can generate the extra income in society to meet the demands of an ageing population. One important area where I believe there is scope to improve economic growth is through increases in labour force participation.

Amongst OECD countries, Australia’s total participation rate ranked 12th in 2002, suggesting there is significant potential to improve participation both in the short and medium term.

Today I am releasing a Government paper – Australia’s Demographic Challenges - which canvasses a number of opportunities, on which we are asking for community comment, to improve participation. The paper sets out three complementary policy areas which could lift labour force participation:

  • improvements in the capacity for work, through better health and education;
  • better incentives for work; and
  • improved flexibility in the workplace.

Improving the Capacity for work

Our society is more educated and better skilled now than it was 40 years ago. As a result, we have also become more flexible, adaptable, and better able to use new skills and technologies.

But as the world around us continues to change rapidly, especially through technological change, efficient and effective post-compulsory education and training systems will become more important. Current and future workers will need to improve and continually update their skill levels.

Such education and training needs a strong foundation of skills learned in schools. Recent OECD studies confirm Australian students rate highly in international comparisons of reading, scientific and mathematical literacy. However, we can improve further. For example, an estimated 12 per cent of 15 year old Australian students, and around 20 per cent of the adult population, continue to have very poor literacy skills.

We need to ensure existing literacy and numeracy programs continue to deliver results. We need to help people improve their foundation skills. We need to ensure that transition and employment services better help people in their moves between jobs, from training to jobs, or from periods out of the labour force back into employment.

Further improvements in skills and education would have widespread benefits. A higher average level of education and skills should lead to greater productivity and economic growth.

Health is another key aspect of our capacity to work. Poor health often leads to early retirement, spells out of work, and lost productivity through sickness or injury. Thirty per cent of 50 to 65 year olds who retire in Australia do so because of illness or disability.

Improvements in treatments over the last 40 years mean that the health issues facing Australians today are very different from those of 40 years ago.

In 1962, the government of the day was concerned about tuberculosis and poliomyelitis. Just under 4 000 new cases of tuberculosis were diagnosed in 1963 (tuberculosis accounted for 0.5 per cent of deaths in 1962), and consequently, the government spent more than 6 million on an anti-tuberculosis campaign.

Over the last 40 years deaths from infectious diseases have fallen. Deaths due to cardiovascular/heart diseases, cancer and diabetes have all increased in relative terms, with deaths resulting from cancer roughly doubling to 28 per cent of all deaths. Today theAustralianGovernment funds programs aimed at preventing cancer, such asthe National Tobacco Strategy and early detection programs like theBreastScreen Australia and the National Cervical Screeningprograms jointly funded with the States and Territories. Funding for these detection programs is in the order of $100 million per annum.

Living a healthy lifestyle can significantly reduce the occurrence of many common conditions that prevent people from participating fully in the workforce. Physical fitness, for example, can protect against high blood pressure and mild depression, and – alongside ergonomic job design – can help reduce back injury.

The traditional focus of governments is on those who have become ill.

But preventative medicine would take some pressure off the doctors and hospitals who treat the sick, and mean the sustainability of the system as a whole would be enhanced. Most importantly, it would bring benefits in terms of improved quality of life for individuals, with consequent benefits for workforce participation and productivity.

Rebalancing to preventive medicine would represent ‘value for money’ in a health system facing rising costs and an ageing population.

Better Incentives

Labour force participation largely results from choices by individuals and families. These choices however are influenced by tax arrangements, provision of income support and retirement incomes policies.

Our income support system provides people with assistance during times when they are finding it hard to support themselves. The current system was set up at a time when full-time work was the norm for men but many groups, such as women and people with disabilities, were not expected to have a job. Today, opportunities and expectations are different.

Around 2.7 million working-age Australians are on income support - over one in five of all adults of working age. 40 years ago just under 1 per cent of the population was on an invalid pension. In 2002 we had over 3 per cent of the population on the Disability Support Pension (DSP). Many remain on income support for long periods of time, and we have one of the lowest rates of employment for disability pensioners and lone parents in the developed world. We now have more than 225,000 men aged between 50 and 64 receiving DSP. That is, approximately one in every eight men in this age group is receiving DSP.

Is it right that very few working age people on income support are required to look for work? Under current arrangements, only one in ten parents in jobless families is required to look for work as a condition for receiving their income support payment. Such a passive system works against the goal of encouraging people to join in paid work.

The challenge ahead is how to redesign the current system to achieve an appropriate balance between incentives, assistance and obligations that will encourage workforce participation and assist each person to achieve their potential.

When looking at incentives for work, it is equally important that the retirement incomes system does not encourage people to prematurely leave the workforce – particularly if early retirement is predicated on taxpayers funding the major part of retirement.

Forty years ago, the workforce was dominated by men who started work when they turned 15 or 16 and worked till they retired at 65 on the Age Pension. Many spent 50 years in the workforce. Some full time workers now spend as little as 30 years in the workforce, yet life expectancy is increasing rapidly. In 1964, the average 65 year old man could expect to live for a further 12 years. For women, the corresponding figure was 16 years. By 2004, life expectancy for a 65 year old man had increased by 50 per cent, to 18 years. Women today can expect to live for a further 21 years after reaching age 65. Further increases in life expectancy are projected over the next 40 years, and emphasise the importance of retirement income policy.

Preservation rules that allow access to superannuation as a lump sum before Age Pension age can encourage people to prematurely retire. They can send the signal that this is the de-facto retirement age. We need to guard against this. In 1997 the Government decided to increase the preservation age to 60 years by 2024. However, even these changes still allow many of the baby–boomer generation to access superannuation lump sums before Age Pension age.

As our retirement income system matures, is it fair to allow those with superannuation assets to retire early, run down their assets, and then rely on taxpayers to fund the major part of their retirement? This is an important issue that we will need to consider very carefully.

Looking forward, the retirement income system also needs to consider changing preferences for work by older Australians. The Government has already made it easier for people over age pension age to continue to work if they wish to. The Senior Australians Tax Offset, and the reduction in the age pension income test taper rate from 50 per cent to 40 per cent, mean that people who continue to work will pay less tax while retaining more of their age pension.

However, the superannuation system is still largely built on historical principles that a person must be in the workforce to make superannuation contributions and retire from the workforce to receive their benefits. The concept of a set retirement age must change in line with the demographic changes occurring in Australia.

The opportunities for older Australians to remain in the workforce are likely to grow as the population ages. Older workers are also expected to want to retain a connection with the workforce but gradually wind down their hours of work. The superannuation system needs to cater for these changing workplace arrangements. To this end, I am announcing today that the Government will amend the superannuation laws to allow people to access their superannuation from preservation age as an income stream. This will allow people to take advantage of opportunities to work part time and supplement their income with their superannuation.

I am also releasing today a retirement income statement which announces further initiatives designed to further broaden the availability of superannuation, provide more choices in financing retirement income, make superannuation more adaptable to changing work arrangements and improve the integrity of the system.

These initiatives will allow any one under the age of 65 to make contributions to a superannuation fund and simplify the superannuation contribution and cashing rules for people between the ages of 65 and 74.

To broaden the choices for financing retirement, I am also announcing today that the Government will extend complying status (thus allowing generous tax and social security concessions) to new market-linked income stream products which require an orderly draw down of capital over a person’s life expectancy. These products will be non-commutable and will restrict payments to a set proportion of the account balance.

At the same time, a 50 per cent social security assets test exemption for particular income stream products will apply so that it is more consistent with the intended role of the age pension as a safety net for people who have not been able to fully save for their retirement. The higher pension reasonable benefit limit and a 50 per cent assets test exemption will apply to these products purchased on or after 20September 2004. This will allow industry time to develop and have these products on the market.

The combination of age pension, superannuation and associated tax concessions provides a firm base for most people’s retirement incomes. This year, taxpayers will provide almost $19billion to fund age pensions and a further $11 billion for superannuation tax concessions. These arrangements provide Australians with higher levels of retirement incomes than ever before.

More flexible work options

With much reduced growth in the working age population in the future, it will be essential that we generate flexible work opportunities for all those who want them – including those who are currently unable to find a job at all, or who are looking to increase the hours that they work. Reducing the amount of regulation imposed on those seeking to negotiate mutually beneficial wages and conditions is the key to this flexibility.

Australian workplaces, and the Australian workforce, are likely to be very different in the future. There will be a large increase in the number of older workers, and quite possibly, a strong demand for part time or flexible working hours, especially from those with caring responsibilities. There may also be increased demands for part-time work by older people as they make a more gradual transition to retirement, facilitated by the changes to superannuation arrangements that I have announced today. It is important that our labour market is flexible enough to address these diverse needs and generate jobs for all those who want them.

Mature-age workers are vital to our workforce – they are important in our workplaces and we need to support their ongoing participation and the choices they will want to make about work and leisure. This will be more important as Australians grow older and live longer.

We need to move away from concepts of early retirement and, compulsory retirement at a set age. We need to support a wide range of choices that people will make:- to work part time work or to reduce their level of responsibilities as they get older whilst still remaining in the workforce.

The Government has already legislated to remove any age discrimination that exists for employment by the Australian Government, and provides leadership in promoting community understanding of the economic and social imperatives of greater participation by mature age people. The Business Council of Australia has recently issued a guide for supporting older workers, which is aimed at encouraging big business to keep more older Australians in the workforce.

The Prime Minister has also asked the Community Business Partnership to suggest practical ways to encourage the private sector to employ more mature workers. The Partnership is expected to report back around the middle of this year.

Increased flexibility in the workplace relations system would allow older workers to choose whether to remain in the workforce for longer in part time work as they approach retirement. A flexible workplace relations system will also enable older workers to balance caring responsibilities by allowing employees and employers to negotiate mutually beneficial family friendly work arrangements.

Reforms introduced by this Government have made Australia’s labour market more flexible through less regulated minimum conditions of employment. The award system has been reduced to 20 allowable award matters. However, areas of overlap and duplication remain, particularly where minimum standards are provided elsewhere in Australian or State Government regulations.

A number of further workplace relations reforms are currently proposed: reform of unfair dismissal laws to minimise the impact on employment, particularly for small business; simplification of procedures for agreement-making; improvements to the remedies and sanctions against unprotected action; improvements to bargaining processes; and improvements to the processes for union right of entry to the workplace. These reforms have been blocked in the Senate.

Wage setting processes also are complicated by cross jurisdictional issues arising from workplace relations issues being covered by State and Australian Government legislation. This can create significant issues for businesses operating in a number of States. Some currently proposed legislation seeks to broaden the federal jurisdiction in workplace relations matters.

The way forward

Some people argue that we don’t need to take steps now to address the ageing of the population. After all, some of these demographic changes have a long way to go before they fully work out.

But just as a demographic change takes a long time to take effect, so too does the policy response. The people who will be carrying the tax system in 40 years time have already been born. There are long lead times in implementing change in the area of their retirement incomes. To achieve worthwhile change in 30 or 40 years time requires action now.

The Demographics paper I am releasing today seeks to encourage community debate about planning for our future. It provides a readable and accessible introduction to the major issues that I have discussed today. Such is the importance of these issues that the Government will be seeking feedback from the community about the choices and options we face.

A series of round-table discussions will be conducted with key players. Interested parties will also be able to make written submissions.

We need to act now so we can maintain a prosperous economy and a cohesive society that does not leave an enormous burden on future generations. We cannot expect these problems to fix themselves and that is why in the area of retirement incomes policy I have announced today several initiatives that provide greater flexibility and sustainability to our retirement income system.

As I said at the outset, we do not face an insurmountable crisis. But we do face a significant challenge. The longer we leave our response the greater the changes we will need and the harsher the remedies will become.

Thank you

25 Feb 2004

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