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Securing Australia's economic future calls for some unpleasant medicine

By Saul Eslake - posted Saturday, 15 December 2001

There’s no doubting that the Howard Government is keenly aware of the ageing of the Australian population. Elderly voters have fared well under the Howard Government. Even when it was in cost-cutting mode, back in its first term, pensioners benefited mightily from a decision to index pensions to male total average weekly earnings, rather than the consumer price index. And when the spending floodgates were lifted ahead of this year’s elections, the government’s consciousness of the growing electoral clout of the ‘grey vote’ was again apparent in the $600 cash bonus for pensioners, and in the decision to allow senior citizens to earn up to $32,612 before being required to pay income tax (compared with, say, $13,000 for a single-income family with a child under five).

But while these and other forms of munificence directed towards senior citizens undoubtedly contributed – if only at the margin – to the Government’s return to office with an increased majority, the Government now needs to consider the sustainability of this strategy over the longer term.

The challenges facing Australia from population ageing are, admittedly, less onerous than those confronting, for example, Japan and continental Europe. Their population profiles are older than Australia’s; and they have, for the most part, universal publicly-funded pension schemes.


Nonetheless, Australians aged 65 and over are expected to account for around 22 per cent of the population in forty year’s time, compared with just over 12 per cent today. As a result, the cost of age pensions is projected (by the OECD) to rise from around 1½ per cent of GDP to around 4½ per cent; while total (public and private) health care costs could rise from the present 8½ per cent of GDP to around 15 per cent. Meeting the budgetary costs associated with the ageing of the population could thus require, other things being equal, an increase in the share of national income taken in taxes of between 7 and 8 percentage points. Access Economics (admittedly, probably less in favour with the Government today than when they used to do the Liberal Party’s costings) suggests that required tax increases could be equivalent to tripling the GST.

In broad terms, the Government thus has three options. It can begin the task of preparing younger Australians – already paying compulsory superannuation contributions and (in many cases) HECS debts which those now contemplating retirement did not have to shoulder at the same age – to expect an even higher taxation burden during their working lifetimes. It can begin hosing down expectations that large-scale funding will be available to address other pressing long-term concerns, such as environmental degradation, Australians’ participation in higher education and the adequacy of Australia’s defence preparedness. Or it can begin to contemplate measures intended to slow the rate at which the ‘baby boom’ generation stakes an increasing claim on the public purse, and increasing the share of their lifestyle and health care costs which are met from their own resources.

Political pragmatism would probably see the greatest weight being placed on the first two options. After all, those most adversely affected or concerned by strategies falling under these headings are set to decline as a proportion of the electorate over the next few decades; while those who would inevitably see their interests as being threatened by the third option will become electorally more significant as the years pass.

But, as is often the case, political pragmatism would also have potentially significant long-term costs. A steady increase in the tax burden – likely to take the form of ever-increasing income taxes given the political obstacles to any increase in the GST – would undermine Australia’s economic growth rate, accelerate the departure of talented Australians at the prime of their working lives, and act as a disincentive to capital investment. A failure to tackle issues such as environmental degradation or the need to upgrade Australia’s human capital would also have potentially serious adverse economic and social consequences.

By contrast, halting (or even to some extent reversing) the recent trend towards allowing senior citizens more generous access to the public purse than either earlier generations of senior citizens enjoyed, or other citizens currently enjoy, though undoubtedly unpopular with at least some of their number, would appear to have few adverse economic or social consequences beyond perhaps reducing the inheritances to which some of their dependants might otherwise be entitled.

There are a number of options which could and should be considered in this context which fall well short of curtailing access to free hospital and medical treatment under Medicare, or subsidized access to pharmaceuticals under the Pharmaceutical Benefits Scheme (which, I should emphasize, I am not advocating).


The OECD has estimated that if tighter targeting of the age pension reduced eligibility to (say) 30 per cent of the elderly population from the present level of around 70 per cent, the cost of pensions would be roughly halved as a percentage of GDP by 2030.

Thirty per cent eligibility is almost certainly too ambitious a target; but there are certainly feasible means of achieving better targeting than at present. For example, the age at which people become eligible for the pension – which, when it was set at 65 for males in 1909, was above the average life expectancy at birth – could be raised gradually, as it is being for women (from 60 to 65 by 2020) and as it is in countries such as Sweden and the United States. The rate at which the ‘preservation age’ (the age at which superannuation savings can be accessed without foregoing concessional taxation treatment) is being raised from 55 to 60 (under present legislation, between 2015 and 2025) could be sped up, thereby reducing opportunities for ‘double dipping’. The pension assets test could be amended to include the value of owner-occupied housing above a given value in determining the eligibility for pensions.

More generally, there should be more serious questioning, on both fairness and cost grounds, of the present policy of allowing people with similar incomes to be taxed at significantly different rates simply on the basis of their age.

In relation to health care costs, the government should reject pressure to extend the Pharmaceutical Benefits Scheme to cover non-essential drugs such as Viagra. It should revisit the question of whether those entering aged-care accommodation should be required to contribute at least part of the value of the homes which they no longer require to the cost of their care, rather than to their children’s inheritances. And it could perhaps investigate schemes designed to recover some of the costs of publicly provided health care from deceased estates, as have been trialled in France – or which some local councils operate in regard to municipal rates.

None of these or similar options is likely to be popular. But then, nor was the GST.

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About the Author

Saul Eslake is a Vice-Chancellor’s Fellow at the University of Tasmania.

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