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Some policy suggestions to improve the affordability of retirement

By Peter Costello - posted Friday, 5 March 2004

The starting point for thinking about our long-term, future is the Intergenerational Report 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 that demographic change will bring to our society and our government.

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 55 per cent 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 past decade to zero in 40 years time.

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.

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

The new paper, Australia's Demographic Challenges, 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.

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.

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.

Over the past 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 the Australian government funds programs aimed at preventing cancer, such as the National Tobacco Strategy and early detection programs like the BreastScreen Australia and the National Cervical Screening programs jointly funded with the States and Territories. Funding for these detection programs is in the order of $100 million per annum.

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This is an edited version of an address delivered on 25 February, 2004.

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About the Author

Peter Costello AO is a former, and longest serving, Commonwealth Treasurer. He is a company director and a corporate advisor with the boutique firm ECG Financial Pty Ltd which advises on mergers and acquisitions, foreign investment, competition and regulatory issues.

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