I have a piece in today’s Guardian, written before the release of the Intergenerational Report and making the case that the intergenerational equity problem, as it was conceived in the 1980s and 1990s has already been resolved. Key quote
The resolution of the intergenerational fiscal problem was a major public policy achievement of the reform era of the 1980s and 1990s. But a political class still fixated on the most ideological version of the reform agenda, in which cutting public spending is desirable in and out of season has refused to drop the club of intergenerational equity. The idea that (very modest) budget deficits and public debt levels constitute “robbing our children” remains a staple in calls for “reform”.
Having seen the IGR, there’s a single statistical choice that shows the entire exercise to be worthless. The key issue in all this is whether changes in our demographic structure will create an unreasonable fiscal burden. The Report chooses to summarise this by reference to what it calls the “dependency ratio”, defined as the ratio of people aged over 65 to those aged 15-64.
In what kind of world would this make sense? Essentially, one in which
* Children aged 14 and under cost nothing to raise and required no public expenditure on schools, daycare etc
* Children leave school at 15. After this, they not only support themselves, but contribute to the support of those over 65
* People retire become eligible for age pensions at 65
The first of these assumptions is obviously silly, but it has become more so over time as the cost of raising children and of school education has risen steadily, outstripping growth in average incomes. As regards schools, back in the 1960s the standard class size was 40 (at least in SA where I went to school), and there were hardly any ancillary staff. Since then, the staff-student ratio would have doubled
The second assumption was broadly accurate in the 1960s, when measures like this were introduced. But it’s totally out date today, when high school completion is the norm and some post-secondary education is expected
The third assumption is particularly striking. The IGR is all about the supposed burden of age pensions, but they neglect to mention that the pension age will be 67 in 2023, and will almost certainly increase further after that.
The reason for this silliness is obvious. If children and increased retirement ages are taken into account, the dependency ratio in 2050 will be very similar to that in the 1960s, which we managed with ease.
I’ve accused the IGR of reflecting the dead hand of the reform ideology of the 1980s, but it seems as if their thinking really belongs in the 1960s, when Abbot was in school and Hockey in nappies. That’s one kind of intergenerationalism, I guess.
John Quiggin 
The IGR is going to be used to justify a big Australia, if it hasn’t already. The thinking will go, if children are really expensive—thus diminishing the birth rate—then import people of prime working age to fill the gap. This is the relentless pattern of thinking which our politicians have, which the Murdoch MSM parrots ad nauseum, and it is essentially flawed. Apart from relying on a very narrow cause-and-effect argument, one in which feedbacks are ignored, the thinking is confined to the economic effects alone, i.e. excluding environmental changes (including ecological and urban-physical and urban-sociological) and simply failing to acknowledge that people might want some say in avoiding deleterious changes to their quality of living circumstances. Who wants to live in a sea of cheap, nasty, cramped hi-rise buildings? I’m not saying that is where we are headed, but it is a possibility: witness some of the examples in big Asian cities now, or the UK of the 60’s, 70’s and 80’s of the 20th century, or the USA of the 70’s and 80’s. In 20 years I seen the size of apartments shrink quite significantly without commensurate drop in relative price. The simple fact is that so long as you can say 2 br apt (for example), you get the benefit of the two bedrooms in terms of rent received, but the occupants are in a diminished quality living space when compared to same 20 or so years ago.
Actually, I’m surprised that the right wingers haven’t used the argument that changes in technology will enable older people to be supported with ease. For example, fully autonomous cleaners, self-driving vehicles, remote robotic surgery, and all those other wonderful Jetson gadgets which were meant to make life easier.
“Robbing our children” also focuses narrowly on money, and on monetised or commodified aspects of our economy. Does the IGR say anything at all about inter-generational equity and the environment? What costs of inaction on climate change (to name just one issue) will be borne by future generations?
As a baby boomer, I am heartily sick of the repeated efforts of a bunch of lazy journalists to play the blame game. People of my generation are not uniformly wealthy. Inequality, indeed iniquity, can be seen within generations. Some people used to call this “class”. What about those who rob everyone else by refusing to pay their share of taxes? My parents, who lived through depression and war, taught us fairness and frugality, and gave us a sense of social justice. We were not always good students, but I can say we were not taught “greed”. To be fair, I note that some commentators now refer to “rich baby boomers”, which might allow for the fact that there are some poor ones, too.
Now let’s talk about inequality between men and women, and between white people and Indigenous people, and ask some questions about how we deal with a whole range of inequalities, and iniquities, in our society.
I’m very glad you’ve mentioned that issue which everyone else seems to ignore – the cost of producing and raising children. There are not only the educational costs but also medical ones – pre-natal facilities, obstetric facilities, vaccination programs, etc. I’ve often wondered whether the average cost of supporting an elderly person throughout their later years would be any greater than the cost of producing the next generation. Has anyone actually worked this out?
The other question I can’t find an answer to is how many people will actually require the aged pension by 2055? Of course there will be more old people but surely, due to compulsory super, a great many more of them will be fully or partially self-supporting. There may well be more people on some sort of aged pension support, I wouldn’t actually know, but I’d guess there’d be a lot fewer on a full or substantial pension. It seems to me that the overall cost to the taxpayer should be declining not increasing. But the truism that the ageing population is going to be a crippling burden seems to be universally accepted and repeated. I’d be really interested to hear your thoughts and/or learn some facts.
I think they’re just assuming we’ll all be sending our children to private schools and using private hospitals. That’s not going to cost the public a cent excepting the obvious private health insurance rebate and funding to private schools.
@Irrregular Perhaps, but tax cuts, ostensibly to drive more capital into the private sector, costs the public.
As for projecting anything 40 years into the future, one would expect at least a set of scenarios under alternative assumptions.
The category name is spot on, IMHO.
As someone once said, making predictions is hard, especially about he future. 😉
See also Peter Martin’s piece on the idiocy of some of the assumptions (Fairfax, not paywalled). Perhaps the report is not driven by the dead hand of 1980s reform policy, but some rather more live hands….
@Donald Oats
“In 20 years I seen the size of apartments shrink quite significantly without commensurate drop in relative price.”
Clearly, we need a new kind of facility – the Geriatric Residential Mall – we oldies could work in the shops (it’s not onerous!), selling burgers and cardigans to each other, with individual sleeping cubicles clustered at one end, next to the hospital – and a crematorium at the other end.
We’d never need to leave the aircon, and young people wouldn’t be offended by the unattractive sight of their drooling, doddering elders.
Treasury predictions for one year ahead seem to fluctuate so wildly within 12 months, one has to take thirty five year predictions with huge dollops of salt, particularly when based on a frightened Government’s dodgy as assumptions …
@Flann O’Brien
Well, you’re a fine one to talk about the future, aren’t ye’ now? Who constructed the cruelest of presents for his serfs. And what does de Selby have to say about climate change? Too much ‘canned darkness, I resume:
Now, there’s your man for you.
JQ said:-
But that is not how the report defines the dependancy ratio. In Table 1.2 the footnote says:-
In other words contrary to the statement by JQ the ratio as defined in the report does include those under 15 as being dependents.
Further more this definition does not seem to be used as some sort of Abbott government hang over from the 1960 but rather because this is how the UN reports the data for international comparison purposes.
Maybe the age range for dependent children should be a bit longer but in terms of international and temporal comparisons I would not expect such a change to significantly alter the conclusions. Although if they had entirely ommitted children as dependents then JQ would have a point.
I have not read the entire report but I did do a search for the word “dependancy” and could not find any alternate definition for “dependency ratio” so for now I’m just assuming JQ made a mistake. Happy to be corrected if I’ve over looked something.
@Juanita Hardy
“The cost of (raising) two children to the age of 21 is about $800,000, Ben Phillips, a NATSEM researcher said.” – ABC website.
So there you have it: $400,000 per child.
I actually think it will now be about $500,000 per child in 2015 dollars for a child born in 2015.
@TerjeP
The plain fact of the matter today is that with all costs considered plus youth unemployment and continuance in studies a more realistic youth dependency ratio would be from conception to the end of the 20th year which runs close to 21 years.
At the other end, with the economy in the toilet, your chances of being employed over 60 are not good.
No argument on that point.
Table A2:
(b) The dependency ratio refers to the number of people of traditional working age (15-64) for every person over 65. These figures use year average population numbers rather than end of year population
Pr Q said:
Just the other day I was going over the Total Dependency Ratio (TDR) in the context of another issue – immigration – which, like Intergenerational Equity, is also subject to the same mountain of lies, bait-and-switch and immumeracy that one now routinely associates with any issue dear to the hearts of liberals Left- and Right-.
Liberals have been using the bogeyman of Baby Boomer ageing for a generation to push their pet obsessions: roll-back of the welfare state entitlements and a boosting immigration way. Of course they forget that society has managed to support large numbers of dependents since Adam was a boy: they are called children.
We are routinely told that immigration has to be ramped up to an annual rate of one per cent to pay for the retiring baby boomers. As if immigrants don’t age and retire too. Likewise we are told that we will have to dismantle the welfare state to cut the expenditure cloth to fit the tax suit. As if the current tax rate was an immutable law of nature.
According to Id “the TDR is calculated by adding together the percentage of children (aged under 15 years), and the older population (aged 65+), dividing that percentage by the working-age population (aged 15-64 years), multiplying that percentage by 100 so the ratio is expressed as the number of ‘dependents’ per 100 people aged 15-64 years. The higher the dependency ratio, the more people who are not of working age, and fewer who are in the labour force (and paying taxes).”
The graph shows that AUS’s TDR troughed in 1940 at 46%, at the tail end of the Depression, and peaked in 1960 at 64% during the middle of the greatest spurt in economic growth in AUSs history. This suggests that the TDR is dependent on economic growth and not the other way around. As usual liberals get the arrow of causation ass-backwards.
Its also worth noting that the TDRs understated the degreee of economic dependency in the post-War era. Up until the eighties nearly 1/4 of the working age population were stay-at-home mothers. And you could throw in the huge number of working age men (in excess of 100,000) who were dependent veterans convalescing from the wounds suffered duing two World Wars against fascism and two regional wars against communism.
I’m old enough to remember going to the MCG finals during the early seventies and seeing row after row of Great War veterans propped up in their rickety old wheel chairs, rugged up in tartan blankets with their mutilitated fingers and eyes covered in leather patches. They had been dependents for most of the 20thC, poor devils.
Pr Q said:
The Intergenerational Equity issue only becomes a problem if one generation fails to reproduce and re-house itself. This has been happening over the past generation mainly because of the spectacular rise in land prices which depresses home ownsership and fertility. But I don’t see Hockey hitting the hustings ramping up public concern about massive immigration and absentee Asian property investors forcing the younger generation of Australians into a rootless life of childlessness and homelessness.
More generally the L/NP scare campaign over the long term fiscal sustainability of the welfare state is a bit of a joke given their failure to act on climate change, the economic costs of which will make the annual pension bill look like small change. And don’t get me started on the rise of the robots which will pretty much spell The End of Economics (TM).
Liberalism was, once upon a time, a progressive philosophy. But it has ossified into a rigid dogma upheld by a corrupt establishment.
Does the IGR examine the impacts from climate change, things like shoreline erosion, building damage and flood damage, worse droughts, etc? After all, these impacts are economic and are intergenerational, i.e. our parents and ourselves have created the global warming scenario, visiting that sin upon our children, and should we live long enough, ourselves in our dotage.
Everybody is forgeting dependency ratio of CEOs/management salaries and benefits to working people i.e. those that work directly in production and services.
What about dependency ratio before women entered employment workforce on large scale before 70′?
I am sure these radicals had the same panic ratio to those that panicked about dependency when Socialy Security was being implemented for the first time.
What is being forgot that by implementing SS the demand for jobs was created. This new distribution of money to senior was a source of new Agregate Demand for people to be employed and earn. This IG transfer system was the prime mover of progress and prosperity in post WWII period. Everything adjusted to new growth trend that was achieved by instituting this SS system of IG transfer. And prices adjusted over time to not cut real income from employed returning it to levels before starting SS.
By introducing IG transfers /dependency, prosperity of working population was not reduced, it was enhanced and raised. It is a paradox, isn’t it? No, that is what fiat money is for.
And now they want to destroy such great achievement of understanding such paradoxes and using it to great benefit to all. They want to destroy free lunch, figurativly and literally.
Let alone not to forget about productivity and incoming robot revolution where all production is becoming almost free.
Now the question of distribution of almost free products and services are coming into question just as during Great Depression.
The answer to present GFC is the same as the answer to Great Depression, because they, TPTB, returned us to the same conditions as before GD.
The problem is not that we won’t be able to look after the elderly in the future, its that “we” want the workers to be elsewhere, building luxury houses, serving drinks at cocktail parties, driving limousines, making us ristrettos. And that is a choice we make through our tax rates.
The Dependency Ratio also doesn’t take into account women’s participation. So the ratio was better in the 1950s even though women stopped work when they married, or in the 1920s when women weren’t allowed to work in many fields.
If you rejig the measure to take into account the composition of the workforce and the actual dynamics of work and child-rearing, it pretty quickly becomes obvious that declining birthrates are simply a workforce reallocation issue.
Furthermore, most of the future demographic trends of a country are locked in by the current demographic structure. Once fertility rates drop below the “replacement” bogeyman level, it’s 50 years of constant natalism to reverse the increase in the dependency ratio, because of that demographic momentum. The idea that having one for mum, one for dad and one for Costello is going to reverse the problem even within a generation is simply wrong. But it will throw gender relations back 20 years or so, which is why conservatives love it …
Haiku – you’re right. Also table B2. I’m not sure why they would have two different definitions within the same document. Maybe it’s just a clerical error with the footnote? Or maybe as JQ suggests they are using a deeply flawed assumption. Does anybody know anybody in treasury who can check this out?
If the government were serious about IG issues, they would do the following:
* Not embark on frequent ill-timed and counter-productive public servant purges. What a great way to avoid sudden drops in tax receipts and drops in consumer spending, and higher loan defaults, and higher use of social services (assuming anyone can actually qualify now).
* Think about how to encourage businesses to employ post 48yo people, instead of disguising the middle-aged unemployed by high immigration rates of more desirable (i.e. younger) workers.
* Cease and desist with this ridiculous HECS debt scheme. The loans have become so large, it must have some material effect on later life, especially in terms of available cash for consumer spending.
* Make cities much more bike and small vehicle oriented, reducing cost of roads, and freeing up ground for uses other than as expensive peakhour parking lots. Less money spent on building roads, more money for some other beneficial purpose.
* Reduce incarceration rates, and provide good access to education for those in the prison system. If a lack of education is a factor in criminal activity, then get them educated while doing time.
* Have a (cheap) mobile locum service, with a despatcher system. This would almost certainly reduce the burden on emergency departments, as one of the major reasons people end up in ED with non-severe injury/illness is that they cannot get access to a doctor in a hurry. It can take me a week to get into see my doctor, which immediately makes them useless if I need a medical certificate for my employer on the day of injury/illness.
* Deal with asylum seekers, however they arrive here, on Australian soil, expeditiously, without prejudice. It would be a hell of a lot cheaper than mandatory detention off-shore.
* Cut negative gearing of real estate.
* Ditch baby bonuses and all that malarky, and have childcare facilities co-located with schools.
* Remove the chaplaincy program, and put that into childcare facilities.
* Actually continue to fund research instead of using it as the plaything and blackmail tool of a politician from SA.
* Increase marginal tax rates, and find ways of ensuring Mr 400 to 1 (CEO’s salary+benefits cf the janitor’s wage) actually pay the tax rate and not a miniscule effective rate.
* Study how other countries manage—or not—with this basic question of the changing demography of society.
* Factor AGW (aka climate change) into the equation, and plan for future impacts accordingly.
[Damn insomnia…]
John, I agree with your point that any of these types of measures should actually reflect reality (e.g. the actual pension age, etc). I wouldn’t be surprised if the metrics used in the IGR were simply the traditional ones that have been used previously and in many places – either for comparability (a bit odd), inertia, or laziness (possible).
Really, the calculations should be redone in a way that better reflects reality.
ABC news told us last night that there were 5 workers for each old person in the 1970s, now there are 3, soon there will be 2 ( or some such figures). Since we are considerably wealthier now than in the 70s (more than 5/3 times), clearly we shall be even wealthier in the future! I’m sure this argument will convince Abbott and co., every time I hear them I am reminded of the old philosophy joke “how do I know what I mean until I hear what I say?”
Thanks for the O’Brien reference jungney!
If the “working age definition” was shifted to 20-70 rather than 15-65 it would accomodate JQ’s points, but probably not really change the numbers very much. The key statistics are longevity and birth and immigration rates.
The working age against which you count the dependents needs to be better: but that wasn’t JQ’s only, or dominant, point. He said you have to count the dependent young as well as the dependent old – and if you do so there turns out not to be a huge swing.
Terje has acknowledged this; Nevil Kingston-Brown should do the same.
Of course it really changes the numbers. And it really changes them very much.
Then there’s the unmentioned problem – how many actually work depends on ending the nostrum of ‘necessary unemployment’ that isn’t a spur to growth, just the mechanism for cutting the wage share and funding transfer of power and wealth to the already powerful and already wealthy.
Close but not quite. I’ve said the report includes conflicting definitions and the problem may just be a clerical error in one of the footnotes. But it could also be that the report actually does have the flaw as described by JQ. At this point I’m still on the fence as to which class of problem this is.
So many factors could change between now and the time when the IGR projects out to, 2055, that all the projections are meaningless anyway even if the parameters assumed now did seem well defined and reasonable (which they don’t anyway).
1. What will climate change do to the world by 2055?
2. What will Limits to Growth do to the world by 2055?
3. What will geopolitical events and wars etc. do to the world by 2055?
4. Will a nation to north of us invade us by 2055?
5. Will limited or general nuclear war have happened by 2055?
6. Will a major flu pandemic comparable to Spanish Flu 1918 happen before 2055?
7. Will some other great disease pandemic happen before 2055?
8. Will a major world wide economic depression occur before 2055?
Although it is hard to say what major negative black swan event will happen by 2055, the chances seem high (I would say 50% at least) that some major negative black swan event will happen before 2055. It is even possible, though less likely I think, that a major positive black swan event could happen before 2055. Projecting current trends out that far is “beyond ridiculous” as the saying goes.
Correction, I should have said:
“Projecting current demographic and economic trends out that far is “beyond ridiculous”.
Donald Oats said it all. Just a giant Ponzi Scheme, to echo down through the ages, like rattling chains on a cold Elsinor night.
Use and abuse of economics.. a cause for the most myopic, arcane, self serving and least visonary thinking of all; no wonder it is called the “Dismal Science
Presumably that will change as the population ages.
@Ron E Joggles
I’ve already used a big texta to write “THIS SPOT RESERVED FOR MR D OATS FROM 2025 ONWARDS” on a big cardboard box, and put it under the Torrens River bridge: that is an investment in my future.
Cardboard City: building better futures.
It seems to me that the question of gov’t deficits is secondary at best to this question. Suppose, for example, that all of the retirees are rich. If there are not enough workers to supply their needs, what good do their riches do? And if there are enough workers to supply the needs of the retirees and everyone else, then why condemn the elderly to poverty?
And what about productivity? If productivity increases as much as the dependency ratio, what is the problem?
I’m in the middle of reading The Imaginary Time Bomb: Why An Ageing Population Is Not A Social Problem, by Phil Mullan, published in 2000.
Most of the points made in the book have already been made here (and most of the points made here are also made in the book), so I won’t repeat them, but as those points are supported with more extensive analysis and documentation in the book I thought it might interest some people.
TerjeP (and others) – re the ‘conflicting definitions’:
It is perfectly routine to have multiple different definitions of dependency ratios, just like their are different definitions of life expectency (period vs. cohort as the most obvious example). Traditionally, definitions have been as follows – same as on Wikipedia:
Total Dependency Ratio: young (0-14) + old (65+) / working age (15-64)
Aged Dependency Ratio: old / working age
Child Dependency Ratio: young / working age
As I understand it, John’s point is two-fold (as ChrisH indicates). First, the IGR focuses almost exclusively on the aged dependency ratio, when the Total Dependency Ratio is more realistic and important in terms of ‘fiscal pressures’.
Second, the 15-64 range is arguably old fashioned. I think the argument to increase the bottom to 20 is stronger than for moving the top to 70 (do I hear 75?), but this is a judgment call.
As for JQ’s claim about what that would mean for total dependency ratios compared with the 1960s, using ABS data, a demographic model (MoDEM 2.0) and assumptions/data as consistent as I could* with IGR:
TDR
1960s (avg): 1.62
2015: 1.96
2055: 1.50
Custom (20-69 / (0-19 + 70+)) TDR
1960s (avg): 1.29
2015: 1.85
2055: 1.47
So total dependency ratios will be slightly ‘worse’ than the 60s using the traditional definition, but no way near as dramatic as the typical ‘4.7 to 2.7’
spinstory.Using the custom definition, things will be ‘better’ than the 1960s. Why? The Child Dependency Ratio bottomed out in the 60s with the boomer babies. (It’s always the Boomers’ fault.) However, it will be worse than at any time since the 1980s, and a roughly 20 per cent fall from today.
There is no doubt there will be impacts from demographic change – but it is far from a ‘crisis’.
* I used IGR assumptions for NOM, TFR and life expectancy. I couldn’t find its data on age profiles for NOM and TFR, but based these on PC’s 2013 report (updated for more recent NOM data), which Treasury might have done too. These slight potential differences would have minimal effect.
My thoughts are that extrapolating current demographic and economic trends out to 2055 for Australia or any other country is an exercise fraught with many pitfalls. The notion that smooth growth and smooth development will continue from 2015 to 2055 is a very heroic assumption. This is the case when we face the limits to growth on multiple fronts;
(1) Overpopulation (exceeding sustainable ecological footprint).
(2) Climate change.
(3) Loss of Biodiversity.
(4) Disruption of the Phosphorus and Nitrogen Cycles.
(5) Inadequate access to clean fresh water (exponential increase in this problem).
(6) Ocean acidification and dying oceans.
(7) Pollution in all its forms.
(8) Ozone depletion (this problem might be arrested for now but ozone levels are still low)
(9) Over-fishing.
(10) De-forestation.
There are many more problems which could be added to this list. There are plenty of signs that the entire ecological web of life on the planet is becoming seriously de-stabilised. It is also clear that weather patterns are becoming seriously altered for the worse (more extremes of drought and flood). Other possibilities for rupture or tipping-points exist from changes in ocean currents to methane clathrate releases (already commencing the tundra of Russia and Canada).
Instead of worrying about hypothetical demographic trends which might well be catastrophically interrupted and altered, we need to worry about the potential catastrophic biosphere events which science advises us are not just probable but highly probable with many intial effects due well before 2055. Indeed, many effects are already occuring now.