At a glance
- Every five years, the Australian Treasury releases its Intergenerational Report, which is based on current economic and social indicators.
- The latest report makes projections of slower GDP and population growth, as well as a maturing superannuation system that could drive higher retirement savings over the next 40 years.
- While the report highlights challenges, it also notes the resilience displayed by the economy during the pandemic.
By Richard Webb
The 2021 Intergenerational Report is a detailed, five-yearly snapshot of Australia that also forecasts where the current trends are going to take us based on economic and sociological indicators, such as taxation revenue, unemployment, inflation and fertility rates. The most recent report presents a generally upbeat view of Australia’s future, but there are challenges as well.
How will the tax system support us?
According to the report, the economy is expected to grow at a slower rate over the next 40 years than it has in the past. Real GDP per person is expected to grow at an average annual rate of 1.5 per cent, down from the past 40-year average rate of 1.6 per cent.
Population growth is also slowing down, with Australia expected to reach a population of 38.8 million in 2060-2061. This is likely to be due to a reduced migration intake, as well as a declining fertility rate.
These factors, as well as a general increase in life expectancy, mean that Australians aged 65 or over will likely make up 23 per cent of the population by 2060-2061. One key metric, which reflects the ratio of working age Australians to those aged 65 or over, will fall substantially from 4.0 to 2.7 by 2061.
This fall in the number of working Australians – the bulk of Australia’s taxpayers – highlights a potential problem, namely will Australia’s retirees be adequately supported by the taxpayers?
According to the report, the national budget will remain in deficit well into the future, meaning that government debt is likely to provide part of the answer. However, with interest rates trending downwards for the foreseeable future, this may be less of a problem than it was in the past.
How will we support ourselves?
Despite housing affordability being considered part of the third pillar of retirement savings, there is little commentary on it in the report. This does not assist with understanding how much accumulated superannuation will be used to retire household debt. However, the report does make a number of other interesting points regarding retirement.
By 2060-2061, it is expected that Australians will retire with a median superannuation balance of A$460,000, as compared to A$125,000 today. This higher balance is likely due to the maturing superannuation system, which will see the superannuation guarantee increased to 12 per cent from 1 July 2025, meaning that Australians retiring in 2060-2061 will have had 35 years of the higher mandatory contribution rate.
This may mean a more comfortable life for retired Australians. However, the lower dependency rate should immediately worry Australians planning on retiring in 2060-2061, unless more is done to ensure they have access to financial advice.
More efficient ways of providing financial advice will need to be found, since a genuine shortage of financial advisers is looming.
Between now and then, competing policy needs may position superannuation as something of a “golden goose” – will more retirement savings be opened up to pay for housing, for instance? The importance of a policy statement such as a legislated objective of superannuation will ensure that retirement savings are actually kept for retirement.
How do we plan for the next pandemic?
Many commentators have noted that during the pandemic, the contingency planning across various sectors in Australia was not as good as it could have been, with lack of preparedness attributed by some to a function of government.
The report notes that the country’s economic performance during the COVID-19 pandemic is a validation of the Australian economy’s resilience. The report also highlights that COVID-19 has “not displaced” pre-existing demographic, technological and other trends in Australia’s long-term outlook.
Importantly, the financial sector will play an increasing role in pricing climate risk as part of the efficient allocation of capital. The report notes that the financial sector would likely wear the cost of extreme weather events and other natural disasters as the result of climate change.
Other risks include debt, the growing demand for aged care and healthcare from an ageing population, as well as the increased need for technological improvement.
How do we improve?
Over the past 30 years, productivity improvements in Australia have led to over 80 per cent of growth in real per-person gross national income. This is highlighted as a key issue in Australia’s decline in assumed annual real gross GDP increases over the next 40 years, to 2.6 per cent from 3.0 per cent.
Although the report highlights that governments will need to take the lead in building innovation and technological advancement, it is individuals and businesses that will need to use such improvements to enhance Australia’s productivity growth.
Despite challenges posed by the COVID-19 pandemic, the move towards remote working may have been the impetus for productivity gains seen through successful measures such as teleconferencing, remote collaboration and the ability to network remotely.
Going forward, trusted advisers will need to ensure that these changes are accurately measured and improved upon, and that provisions are made for future economic shocks. In response, the ability for the system to support retirees and for retirees to support themselves will also improve.