Politics Analysis

ABUL RIZVI: Using immigration to manage Australia's ageing population

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Australia's ageing population presents a set of economic challenges (image by Emiliano via Flickr)

For developed nations, the period 1950 to 2050 will be an extraordinary population shock, tracking the four stages of the boomer life cycle: childhood, adulthood, old age and death.

Nations will move through these four stages in different timeframes, depending on their rate of net migration and when they transitioned to below replacement fertility of less than two births per woman.

Continental Europe and Japan entered the old age stage – that is their working age to population ratio went into decline – from around 1990, but it wasn’t until 2010 that all developed nations, plus China and Russia, entered this stage. Nations with high net migration such as Australia will move through the stages more gradually than nations with low or negative migration.

The population of 23 mainly developed nations is projected to fall by 50% or more by 2100. While Japan has already moved into stage four where deaths substantially exceed births, during the 2020s a large number of nations will move firmly into stage four including Germany, Spain, Italy, Russia, South Korea and most significantly, China.

The rise of China coincided with the biggest increase in the working age population of any nation in history and it will now be followed by the biggest decline in working age population in history.

The nature of each nations' economy at each stage was and will in future be dramatically different. During the childhood stage, aggregate demand in most developed nations was strong while the working-age to population ratio was low and declining — bringing up large families is expensive.

The 1950s and 1960s was a highly egalitarian time in the history of developed nations with very progressive tax rates — top marginal tax rates were often well above 70% and cut in at a relatively low income.

Most developed nations had substantial inheritance taxes and strong unions delivered high wages growth. Due to the added impact of post-war migration, Australia’s population grew at a phenomenal 2.4% per annum during the 1950s and almost 2% per annum during the 1960s.

Businesses thrived in providing goods and services needed by a rapidly growing population and governments repaid the massive debts accrued during World War II.

From the mid-1960s, most developed nations entered stage two of the population shock as early baby boomers began entering the workforce. Together with the rise in female participation, stage two represented the largest injection of workers into developed economies ever.

Strong unions drove up wages and that turbo-charged aggregate demand as baby boomers formed new households and spent money like never before. During the 1970s, that contributed to the unusual phenomenon of stagflation — simultaneously high levels of inflation and unemployment.

The government response over the next 40 years was to "fight inflation first" through tight monetary and fiscal policies; industrial relations "reform" to put a lid on wage growth and disempower unions; cut company taxes to encourage business investment and expand productive capacity; make income taxes less progressive by cutting marginal rates; cut or abolish inheritance taxes while increasing consumption taxes; and privatising as many government functions as possible — even if that meant consumers would pay more for privately delivered services.

These supply-side policies started a long-term trend of a falling labour income share of GDP and a rising capital income and profit share. They also triggered a significant rise in inequality.

The developed world as a whole has now been in stage three of the population shock for around 10 years. Over the next few decades, it will move deeper into stage three and eventually stage four. This will result in persistently weak aggregate demand — retirees generally spend less than when they were forming households and bringing up children.

It will be exacerbated by rising inequality, weak wages growth and in Australia a very high household debt to income ratio. Stage three will also result in declining growth in hours worked. Weak aggregate demand will discourage business investment, resulting in anaemic productivity growth and slowing real economic growth.

Productivity and real economic growth in every major developed nation has been substantially lower in stage three compared to stage two irrespective of when that nation entered stage three.

To deal with weak aggregate demand, central banks, starting with those in Japan and continental Europe, have implemented extraordinary monetary policies. Zero and even negative interest rates are commonplace with most central banks forecasting little chance of these returning to more "normal" levels.

Perhaps we should think of the high interest rates from 1970 to 2010 as abnormal?

Even before the COVID-19 recession, government debts across most developed nations were rising rapidly. Population ageing lowers per capita tax revenue and increases per capita government expenditure. Government debt is increasingly being held by central banks which is effectively increasing the money supply, yet there is little sign of inflation. Population ageing is deflationary.

So what should be done? The Government will tell us its plan in the 2021 Intergenerational Report to be published in May 2021.

But here is some advice from a 1937 lecture titled Some Economic Consequences of a Declining Population by John Maynard Keynes, who said:

'... with a stationary population we shall … be absolutely dependent for the maintenance of prosperity and civil peace on policies of increasing consumption by a more equal distribution of incomes.'

Thomas Piketty says if returns on capital such as through the stock market or superannuation continue to exceed economic growth, inequality will rise further — resulting in further weakening of aggregate demand.

But what would Keynes’ advice mean in practice? Firstly, the Government must decide whether it wants to continue to suppress wage growth, increase casualisation and turn a blind eye to worker exploitation or it wants the strong wage growth it always assumes in its own Budget Papers but never delivers. 

It cannot continue have a foot in both camps.

The wage portion of GDP in Australia is one of the lowest in the developed world and that must be addressed. Even the most short-sighted employers will eventually recognise that their workers are also their customers.

Secondly, Government must keep front of mind the challenges of an ageing population rather than ignore this as it did in its 2019 Budget. By 2030, we will have another million retirees in the population. Costs of health services, aged care and the age pension will rise significantly unless the Government wants Australia to go down the American road.

Slow economic growth will reduce growth in per capita revenue, especially if the tax system continues to heavily favours rich retirees. Budget management will require both the tax and expenditure side to be addressed. Making wildly optimistic assumptions about economic and productivity growth leading to continuing growth in budget surpluses, even while delivering massive tax cuts to high income earners, is not a solution.

Finally, using immigration to continue to slow the rate of ageing is an important policy lever as assumed by Treasury. But assumptions are not enough. Immigration policy must be well designed and implemented.

There has been little evidence of that in recent years.

Dr Abul Rizvi is an Independent Australia columnist and a former Deputy Secretary of the Department of Immigration. You can follow Abul on Twitter @RizviAbul.

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