The effects of ageing will be felt more over the coming decade than in the past due to the impact of the baby boomer generation retiring.
This change has already begun to detract from economic growth, after decades of providing a boost to growth.
Ageing will reduce tax revenue and add to spending pressures…
Since 2011 – when the first of the baby boomer generation turned 65 – the share of the population of retirement age has increased significantly and the share of the population of prime working age has begun to fall. This flows through to the budget in the form of a reduction in revenue, due to lower labour force participation, and an increase in spending, reflecting greater demand for government programs that support older Australians. Over the next decade, the ageing population is projected to subtract 0.4 percentage points from the annual real growth in revenue and add 0.3 percentage points to the annual real growth in spending. In real dollar terms, this equates to an annual cost to the budget of around $36 billion by 2028–29. This is larger than the projected cost of Medicare in that same year.
…with the budget impact coming in waves.
The workforce participation and Age Pension impacts of the baby boomer generation reaching retirement age are already evident and are likely to peak during the next decade. The impacts on health and aged care spending will increase more gradually and peak later, as baby boomers move into their 70s and 80s. Demand for health services typically starts to increase when individuals are in their 70s, and demand for aged care services when they are in their 80s. Expectations of Australians around increases in the quality of health and aged care services could further increase these costs.
However, ageing is only one of many drivers of the future budget position.
The influence of ageing should be considered in the context of the overall budget position. Ageing is estimated to detract around $20 billion in real terms from revenue in 2028–29, but population and income growth are expected to increase revenue by around $187 billion (resulting in a net increase in 2028–29 in the order of $166 billion). Similarly, while ageing is projected to add around $16 billion in real terms to Commonwealth spending in 2028–29, broader factors such as population growth and indexation of payments are expected to increase spending by around $104 billion (resulting in a total increase in 2028–29 in the order of $119 billion)