Research Fellow, Rafal Chomik,
blogs on the accuracy of the projections made in the
Intergenerational Reports and concludes that Australian policy
makers have a long way to go to prepare Australia for the
challenges of population ageing.
Chomik, Senior Research Fellow
Birthdays are a good time for self reflection. This month's
tenth birthday of the first Intergenerational Report (IGR) - an
account of the long term fiscal sustainability of Commonwealth
policies produced every 3-5 years - was no exception.
The occasion was marked with a conference in
Canberra, bringing together leaders from the civil service,
academia and industry to reflect on ten years of projections and
policies coming out of the IGR, as well as some of the remaining
problems. CEPAR Director, Professor John Piggott, spoke about pension policy and Deputy
Director, Professor Peter McDonald, presented on population projections.
Of course, evaluating the past is easier than projecting the
future, but instructive nonetheless . The projections are for forty years and include
the impact of population ageing on the retirement income
The current picture looks positive. Australia's retirement
system compares well internationally. Spending on age-related
pensions, the aged dependency ratio, and old-age poverty (measured
after housing costs) are low by international standards.
Super assets are approximately equal to GDP, one of the highest
ratios in the world.
And the IGRs have shown successively less severe population
ageing and less dramatic increases in related spending. The 2002
report projected that in 2041-42, the cost of pensions would be
4.6% of GDP. By the 2007 report, this was 0.3 percentage points
lower. The 2010 projection was 0.6 percentage points lower
The first thing to note about these figures is that improvements
in the projections within the three reports are not necessarily
because of policy reforms, though there were many. Much of this is
due to the underlying, long-term demographic and labour market
assumptions. For example, the long-term fertility rate assumption
increased from 1.6 to 1.7, and then to 1.9 births per woman; net
migration from 90,000 to 110,000, and 180,000 people per year; and
mature age participation saw dramatic upward revisions.
In most cases, Treasury was taking very recent experience and
keeping it constant for 40 years. While IGR projection methodology
is commendable on many counts, these examples suggest some
assumption myopia. Increases to participation, for instance, have
been variously predicted and documented. Longevity assumptions also need careful analysis.
Recent mid-life longevity increases took most people by surprise,
particularly in Australia: between 1950 and 1980, life expectancy
at birth and at 50 increased by 7% and 10%, respectively, but
between 1980 and 2007 the increase was 12% and 26%. CEPAR is looking at this by fitting a
mortality model with data on reductions in smoking, a key
explanation of the trends.
Other assumptions could be changing too (e.g. decumulation of
Super) but the IGR does not make this clear. The reports already
provide a lot of background information, but there is a case for
still greater transparency, or even, as
suggested by Adrian Pagan, Professor
of Economics at the University of Sydney, that an independent body
such as CEPAR be tasked to formally provide analysis for the
The second thing to note about the figures is that while they
are less severe than in other countries and than was previously
expected, they still show that demographic shift remains a
challenge. IGR 2010 projects that, without policy change, ageing
pressures will result in a fiscal gap of 2.75% of GDP by 2050.
Policy measures implemented over the last decade addressed various
objectives of a well-designed retirement income system to different
degrees. But at times reforms were piecemeal and poorly balanced
the competing objectives. The 2009 increases to Age Pension level
(an adequacy measure) were balanced with a tighter means test and
higher eligibility ages (to address sustainability), a sensible
balance. By contrast, the 2012-13 budget savings sought from Super
meant that the objectives of economic and administrative efficiency
were undermined through greater complexity and uncertainty. As a
consequence some issues remain unresolved, including those related
to decumulation, taxation, early retirement, and choice.
A final point about the IGR process is that its methodology is
seldom used to demonstrate specific policy impacts. This is a
shame, because an important reason for predicting the future is in
understanding how it can be shaped. It could answer questions about
what changes will keep budgets balanced despite the demographic
shift. One reading could be that if the IGR and the projected
fiscal balances are tools to evaluate the fiscal sustainability of
current policy then, by their own measure, successive Governments
have failed to implement policies that will keep budgets
The tenth birthday of the Intergenerational Report is also the
twentieth birthday of the Superannuation Guarantee. These are a
cause for celebration, but also a reminder that much remains to be
done to shape policy structures for an older Australia.
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PAPER > Long-term Fiscal Projections and the Australian
Retirement Income System