Intergenerational reports serve the important purpose of putting economic sustainability and demographic change on the policy agenda. The fourth Intergenerational Report, released late last week, projected Australia’s population to be growing – to 39.7 million – and ageing, with the above-65 age group rising to 22.5% by 2054-55.
But how appropriate are the report’s demographic assumptions? How would some of the economic outcomes differ under alternative demographic assumptions and over a longer timeframe? And should greater attention be paid to the potential consequences of population growth?
The demographic assumptions
The population projections underpinning the report illustrate the population trajectory that would result under constant annual net international migration of 215,000, a total fertility rate of 1.9 births per woman, and forecast male and female cohort life expectancies at birth increasing from 91.5 and 93.6 years in 2015 to 95.1 and 96.6 respectively in 2055.
The projected population for 2050 is 1.9 million larger than the 35.9 million projected by the third Intergenerational Report. This sparked the “Big Australia” debate.
The difference is primarily due to the fourth report’s higher assumed net international migration.
Are the population growth projections too conservative?
The assessment of prospective population growth in the fourth report is too conservative, mainly because its immigration assumption is too low. The report assumes immigration will be lower than recent departmental forecasts.
Even though it assumes the unemployment rate will fall, the report does not allow for future immigration to be affected by a tighter jobs market or by the increasing numbers of baby boomer retirements and the larger population it projects.
The report assumes fertility will continue to be around its post-2010 level. Following the global financial crisis, fertility declined not only in Australia, but also in much of Europe and the US. Australia’s post-2010 fall in birth rates is due to reduced fertility below age 30. This may reflect a postponement of births, as research suggests is the case in Europe.
A small recovery in fertility could be in prospect as previously postponed births eventuate – especially if, as the report assumes, the economy strengthens.
The report’s forecast life expectancies are consistent with recent research. Despite its high and rapidly increasing life expectancies, Australia’s population is likely to remain one of the youngest in the OECD.
The benefits of a youthful migrant intake
In theory, “best policy” should be assessed relative to the entire future, as opposed to just the 40 years considered by the Intergenerational Report. Demographic changes that affect reproduction will have flow-on effects over the entire future.
Under higher migration levels, per capita living standards would be higher in 2055. The percentages of GDP spent on health, aged care and pensions would be lower compared to under lower migration, according to the report. Higher immigration creates a more economically favourable proportionate population age structure than lower immigration due to the high concentration of newly arrived migrants in the younger working ages.
Beyond 2055, the annual benefits from the age structure-related effects of higher immigration are likely to diminish. Between 2015 and 2055, the vast majority of the additional population which would result from higher immigration will still be below the retirement age. Beyond 2055, progressively larger shares of migrants and their descendants will enter older age.
My research with Ross Guest shows the benefit of higher immigration to the employment-to-population ratio starts to diminish after 43 years.
One for the country?
The report projects a lower GDP per capita would result in 2055 under higher fertility than under lower fertility. This appears at odds with former treasurer Peter Costello’s playful urging to Australians in 2004:
You should have one [child] for the father, one for the mother and one for the country. If you want to fix the ageing demographic, that’s what you do.
As shown by my research, the negative effect of higher fertility on GDP per capita is likely to diminish over time, as the additional population resulting from the higher birth rates increasingly spreads beyond the child ages.
If, instead of a per capita basis, denominators that reflect the greater health and other needs of older age groups relative to the young are considered, my research shows the age structure-related effect of higher fertility could become positive in the longer run.
The Intergenerational Report’s projected benefit to GDP per capita from the age-structure-related consequences of higher immigration would have been diminished, and the cost of higher fertility increased, by the trend towards a later pattern of workforce participation and the measures to reduce ageing-related costs which it illustrates.
Towards a ‘Huge Australia’?
The modest age-structure-related benefits of higher immigration need to be weighed against its substantial long-run population size consequences.
If net immigration and fertility were to continue indefinitely at the report’s assumed annual levels of 215,000 and 1.9 births per woman respectively, and (just) the current (period) life expectancy were to prevail, then over the very long run Australia’s population would grow, ever more gradually, towards roughly 143 million. Clearly, such growth would transform the life conditions of future generations.
Future reports should incorporate more discussion of the challenges posed by the population size trajectories they project, how best to accommodate growth and the desirability and feasibility of changing the course of population growth.