Cost of ageing population soars, now to surpass Medicare by 2028

Fertility rates has fallen from the baby boomer peak of 3.5 children per woman in the early 1960s to 1.8, which is below the replacement level needed to prevent the population from shrinking without migration.

The Budget Office found the number of people of retirement age for every 100 of working age is projected to increase from 21 to 29 by 2031 during “a unique period” as Australia’s largest generational cohort retires and the workforce shrinks by more than 600,000 workers.

Revenue is projected to fall by around $20 billion as a result, while spending is expected to increase by around $16 billion by 2028-29.

“This net effect is greater than the projected cost in that same year for any one of Medicare, the National Disability Insurance Scheme, Commonwealth funding for schools and hospitals, Family Tax Benefit or the Disability Support Pension – all of which are amongst the top 10 spending programs in the Commonwealth budget,” the Budget Office found.

Spending on the aged was not expected to surpass Medicare until 2031.

Government revenues are also expected to take a hit as more retirees draw down on their tax-free superannuation, a drain exacerbated by a planned increase to 12 per cent compulsory super from 2022.

Labor has pledged there “will be no more delays” to increasing the superannuation guarantee, while the Coalition remains open to stalling the increase from 9.5 per cent further in the midst of historically low wage growth.

“The increase in the superannuation guarantee to 12 per cent will likely lead to lower wage increases,” the Budget Office found in an assessment that is likely to be latched onto to attack Labor’s policy.

Although revenue is projected to fall by $20 billion as a result of ageing over the decade, total revenue is estimated to increase by $166 billion in real terms over the same period due to income growth, consumption and population.

That means aged care expenditure will grow from 0.9 per cent to 1.1 per cent of gross domestic product, while expenditure on the age pension is expected to grow in nominal terms to $72 billion in 2025–26 but not as a percentage of GDP

Both are expected to get a boost in Tuesday’s budget along with one-off payments such as a $75 per person hand-out to pensioners to help with rising energy costs.

Industry and analysts are predicting a further hit to the federal budget if the Morrison government’s royal commission into the aged care sector leads to higher standards and staffing ratios.

Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age.

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