A Post-Hobbesian Society – The implications of living longer

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University of Tasmania

13 April 2011

Every so often our society experiences a seismic shift that shakes the political, economic and social foundations, and profoundly changes the nation. In the mid 1940s a young generation scarred by the Great Depression and exhausted by the war effort demanded across the West a new social compact that would provide them with “social security” – a new term that now means something rather different. Twenty-five years later, their children demanded a social dividend from the post-war economic prosperity leading to a profound shift in how we viewed gender, race, sexuality and relationships.

Australia – along with most of the rest of the world - is undergoing a shift at least as consequential – that of ageing. While the process of ageing is somewhat slower than those other examples, its impact will be pervasive, profound and enduring – to paraphrase the United Nations. And Australians are awake to it.

In late 2010, the King’s College in the UK published research conducted by Ipsos MORI across 8 countries, including more than 1000 Australians. Among other questions, the survey asked respondents to name the two or three greatest challenges facing their country. The economy and climate change unsurprisingly featured highly for all countries. More surprisingly, some 31% of Australians nominated ‘ageing’ as one of those challenges – the fourth highest response for Australians after climate change, the economy and mental health. Of the countries surveyed, only China returned a higher response on ageing (35%), while comparable groups appear far less concerned – Great Britain at 20% and the United States at 7% for example.

The ageing of a population is driven essentially by lower fertility rates and longer life expectancy, though it will also be influenced by immigration policy. It is not a new policy challenge – indeed, the first United Nations report on population ageing was published in 1956. But we are entering a period in Australia where the process will begin to accelerate. This decade is the time for us to prepare for a profoundly different social and economic fabric.

Unlike the two social shifts I mentioned at the beginning of my remarks, ageing is not the product of popular opinion. While the supply side elements of population - fertility and immigration - are flexible, the major driver of ageing – longer life expectancy – is thankfully not able to be reversed by a bad Newspoll. The way we manage the transition to an older society will, however, be influenced by popular opinion. My guess is that the larger focus of Australian respondents to the Kings College survey on ageing is connected to the economic picture presented by Treasury’s Intergenerational Reports. As important as that element of the shift undoubtedly is, there are other elements that also need to be a part of the national debate. While there are significant challenges we face in maintaining our living standards with an older population, there are great opportunities as well. The debate in Australia has perhaps not focused enough on those opportunities. Thomas Hobbes famously and rather depressingly described the life of a human as “solitary, poor, nasty, brutish and short”. And such has been the lot of most men and women since the day we crawled out of the cave. In the developed world at least, that all changed last century.

One hundred years ago, at about the time when Andrew Fisher was introducing the Age Pension to Australia, the average life expectancy for men was 55 years old and for women was 59. The greatest cause of premature death at the time was infectious diseases like tuberculosis, influenza and more. As late as the 1920s, Brisbane experienced a bout of the plague.

The first half of the 20th century saw a dramatic decline in the number of deaths caused by infectious disease, impacting most significantly on the mortality rate of children aged 0-4 years who, 100 years ago, accounted for a quarter of all deaths (compared to a figure today of 1%). This dramatic change grew largely out of public health and disease control measures, but was accelerated by the mid-century discovery of antibiotics (particularly penicillin) and the post-war program of childhood vaccination.

Not easily deterred, the Grim Reaper moved from the declining fields of infectious disease to the circulatory system; in particular, cardio-vascular disease. From the end of World War One to about 1970, the death rate from circulatory disease for males in particular more than doubled, partly through a greater consumption of animal fats, but overwhelmingly because of the ubiquity of smoking. In the 1950s and 1960s, three quarters of Australian men smoked, prematurely killing thousands of the greatest generation who had grown up in the Depression and survived the battlefields of World War Two. That lifestyle, glamorously immortalised in the series Mad Men, was the major health challenge of the second half of the 20th century; a challenge Australia has met relatively well. The huge decline in smoking and improvements in diet and physical activity have seen deaths by circulatory disease decline by about three quarters for males and two thirds for females since the late 1960s.

Over the course of the last century, average life expectancy increased by more than 20 years. The most significant driver of the ageing of our population is the success of public health policy and medical research over that period. And that is something that should be celebrated.

As I indicated earlier, the other major driver of a population’s average age profile is the total fertility rate – the average number of children each woman bears during her reproductive lifetime. As we all know, the replacement rate is 2.1, a rate not seen in Australia since Gough Whitlam was Prime Minister – though I don’t understand anyone to be seeking to draw a causal connection between the Dismissal and declining fertility.

Over the course of the last century, there were three significant drops in Australia’s fertility rate. First, in the 1930s when the Great Depression caused Australians to delay having a family, the rate dropped to 2.1. The baby boom took the rate to a peak of 3.5 in 1961 before the introduction of the pill then caused a large decline in births. A third large drop took place in the 1970s.

Australia’s fertility rate bottomed out at 1.73 in 2001, but has grown steadily since then. It peaked at 1.97 in 2008, but dropped slightly in 2009 to 1.90 – time will tell whether that latest result was a temporary response to the economic uncertainty created by the Global Financial Crisis. Policy settings like paid parental leave, a legislated right to request flexible work arrangements and a higher childcare rebate paid on time – all policies introduced by this Government – should keep Australia’s fertility rate well above comparable countries.

The major economic impact of a change in the age profile of a country is seen through the general dependency ratio – the ratio of working age people (15-64 year olds) to the rest (children and older people). For the past 20 years, the percentage of Australians of working age has remained steady at about 67%. Over that same period, though, Australia’s median age – the age at which half the population is younger and half is older – has increased by about 5 years to 37 years of age. A stable percentage of working age Australians has masked a shift in population share from children to older people.

Australia’s median age is about the same as in the United States and New Zealand. Western Europe and the UK have a median age a little over 40 with Japan just shy of 45. But Australia’s low fertility rate in the 1990s will see our median age accelerate from 37 to 40 by 2015 – a larger increase in that period than any of those other countries.

It’s at that end of the age spectrum that Treasury is measuring the dependency ratio – that is, the ratio of working age Australians to those aged over 65. When I was born (in 1970), there were about 7.5 working age Australians for each over 65. Today, it’s about 5, and if I reach 80 (in 2050), it will be about 2.5. From their current share at about 13%, over 65 year olds will constitute about 23% of Australia’s population by 2050; an increase in absolute terms from around 3 million to almost 9 million. An even faster increase in population share will be from the cohort aged over 85, a group expected to number about 1.8 million by 2050. Unlike the past 20 years, the increase in population share of over 65’s to 2050 will mainly come off the working age group rather than children. As a result, there will be proportionally fewer taxpayers to fund an increased demand in various age-related services. This, as you know, has focused many minds in Treasury and Finance.

The Commonwealth’s spending on older Australians largely falls into the area of pensions, aged care and health, the latter obviously covering all ages but climbing rapidly after 65. Currently, health and aged care make up about one quarter of all Commonwealth spending; by 2050, that figure will be closer to half. Commonwealth spending in these three areas is projected to increase from around 7.5% of GDP to over 12.5%. In today’s dollars, that’s an increase of around $60-70 billion per year. And those increases will coincide with a shrinking of the taxpayer base.

The Commonwealth is already seized of the need to start to exercise the direct levers it has to prepare the nation for this big economic shift. A significant foundation – not often recognised for its long-term benefit – is the Government’s fiscal strategy.

The Government’s fiscal strategy has two elements. First, we have committed to keeping the tax as a share of the economy on average below the level we inherited in 2007 of 23.6%. Secondly, we have committed to capping annual real spending growth to 2% when the economy is growing above trend, until we are back in surplus, and to maintaining spending disclipline beyond that. That compares, for example, to annual real spending growth during the last term of the Howard government of 3.6% on average.

As the 2010 Intergenerational Report shows, the Government’s fiscal strategy plays a significant role in delaying - by almost a decade - the point at which the Federal Budget will structurally fall into deficit through the revenue and spending impacts of ageing. Treasury still forecasts a structural and growing deficit from about 2030, but that extra ten years will be critical to making appropriate adjustments.

The second critical lever the Government holds is policy around retirement incomes. This is an area where Australia has done better than any country I can name in balancing fairness and sustainability.

Australia is blessed by the decision of the Hawke and Keating Governments, the union movement and many far-sighted employers to create a universal “defined contribution” superannuation system for all Australian workers. With more than $1.3 trillion in individual accounts, compulsory super will deliver millions of Australian workers a solid lump sum on retirement, while at the same time making a major contribution to national savings and buttressing the public finances. It is enormously unfortunate that the newly elected Howard Government quashed the increase in the Super Guarantee Contribution that Keating had written in from 9% to 15%. Superannuation experts have consistently stressed that a decent retirement income from super requires a contribution somewhere between 12 and 15% of salary.

That’s why the Government is committed to lifting the Super Guarantee Contribution from 9% to 12% as part of its plans to invest the proceeds from the Minerals Resources Rent Tax.

For Labor, this reform is unfinished business. We are convinced that the Howard Government’s decision to reverse the proposed increase to 15% was short-sighted and wrong. Though 15 years later than we had hoped, the Government is strongly committed to this reform.

The most significant contribution from the Commonwealth to retirement incomes policy, though, is the age pension. Now more than 100 years old and a proud legacy of the Fisher Labor Government, the age pension is a centrepiece of the Commonwealth Government’s social services program.

The Gillard Government has already implemented major changes to the age pension – including the largest ever increase to the single pension, locking it in at two-thirds of the couples rate and lifting its relationship with average earnings from 25% to 27%. We also made important changes to the capacity of pensioners to work for wages.

The Government has moved to align the qualifying age more closely with modern reality. The qualifying age of 65 was set by the Fisher Government when men had an average life expectancy in their 50s. We think a sensible balance is to give notice of an increase in the qualifying age to 67. That increase will be phased in at a rate of 6 months every 2 years from 2017 to 2023. While this decision has been met with some controversy, it is a sensible reflection of the difference in capacity of people in their 60s today compared to their forebears a century ago.

The government’s health and aged care reform agendas are also focused on long-term sustainability, as well as a more immediate improvement in the quality of service provided to Australians.

Minister Roxon has committed to lifting our effort in health promotion. As things stand, only about 2% of the nation’s $100 billion annual expenditure on health is spent preventing people getting sick in the first place – and most of that is spent on immunisations. The new Preventative Health Agency will drive cross-portfolio programs directed at keeping Australians healthier, with programs delivered in schools, workplaces and local communities across the country. Under the Government’s first Preventative Health Agreement with the States in 2008, many of the local programs focused on keeping older Australians healthy through walking groups and such like – not only a chance to stay physically active, but an important way to make social connections as well.

The centrepiece of Nicola Roxon’s health reform agenda is the strengthening of Australia’s primary care capacity – providing patients with care and treatment in the community and, as far as possible, keeping them out of hospital. Medicare Locals, a key recommendation of the Health and Hospitals Reform Commission, will play a coordinating role; in linking up GPs and other primary care professionals; in managing a patient’s discharge from hospital; and in coordinating health promotion programs in their community. All this rests on a huge expansion in the health workforce following the cap on GP training numbers kept in place during the Abbott years as Health Minister.

Building links between aged care and the health and hospitals system is a strong focus of the Government’s health reforms. Much is made of the so called ‘bed block’ in hospitals by older Australians who have nowhere else suitable to go. And we know that some 23,000 hospital admissions occur every year from aged care facilities that could be quite adequately managed ‘in situ’ by a primary care professional – if one was available.
Improving that interface – and modernising the aged care sector more generally – has been identified by the Prime Minister as a priority for this term of government. As many of you would know, the Productivity Commission is currently considering submissions on its draft Report on “Caring for Older Australians” with a final report due in June. While not pre-empting what might come from the Commission’s Final Report, there are three broad principles that will guide the Government’s approach to this task. First, older Australians have earned the right to be able to access the care and support that is appropriate to their needs, when they need it. Secondly, older Australians deserve greater choice and control over their care arrangements than the system currently gives them. And thirdly, funding arrangements for aged care must be fair and they must be sustainable – both for older Australians themselves, and for the broader community.

The Government expressly asked the Commission for reform options with an eye not to the next five years, but to the next twenty. In many ways, the planets are aligned for a sensible and constructive community debate about future aged care arrangements – and I’m looking forward to playing a role in that debate.

The last significant policy lever held by the Government to assist the economic transition to an older population is the productivity and participation agenda.

A smaller workforce will inevitably dampen overall growth in the economy. It is critical, therefore, that we be able to extract more value from projected economic activity. As has been documented, Australia’s productivity growth dropped off markedly in the past decade – compared to the substantial productivity improvements made in the 1990s on the back of the Hawke-Keating economic reforms and a burgeoning IT revolution. Treasury’s projections are predicated on productivity growth over the next 40 years of 1.5% per annum. Were we able to achieve a figure of 2% - and the 1990s average was 2.1% - the Australian economy would be 15% bigger in 2050 with an extra $16,000 extra GDP per person.

The Gillard Government – and Julia Gillard personally – has focused since 2007 on the building blocks of higher productivity; better economic infrastructure – modernising our rail, roads and ports; high-speed broadband; and a strong education and skills agenda.

The Prime Minister has also spoken often about the importance of boosting workplace participation – a priority today as the second mining boom exerts pressure on our labour market, but especially critical in coming years. While Australia performs well overall in workforce participation, we compare relatively poorly with other OECD nations in participation rates for women of child bearing age and for mature age workers.
It is clear that a supportive work environment for such women boosts fertility and improves participation. The Gillard Government has worked hard to improve that environment by finally introducing paid parental leave, by making child care more affordable though a huge boost in the child care rebate; and by legislating a right to request flexible work arrangements – a provision still new in Australia, but which had a significant impact on the UK. We’re confident these settings will increase female participation.

All of these things that the Government is able to do are critically important, but in and of themselves, they are not enough. The ageing of Australia’s population is a profound social shift which requires an equally profound shift in society’s mindset about age. The ageing of our population is not a problem or an inconvenience, as some economic analysis simplistically suggests. It is an historical achievement that humanity has strived for over centuries. The idea that an Australian might now be entitled to expect that – after they’ve finished raising their family and the peak years of their career – they will have an extended period of healthy, relatively carefree life – free to smell the roses – is an achievement that should be celebrated. Too often, older Australians tell me that they’re made by our society to feel like a burden rather than a resource – an outsider rather than someone who has spent a long life raising a family, paying taxes and building the nation.

Beyond the odd, glib phrase like “50 is the new 40”, we’ve not been very successful at harnessing as a community the capacity of our older Australians today to continue to contribute. The truth is that the average 65 year old today is more roundly educated, much wealthier and vastly healthier than their parents. While reaching that age has entitled you perhaps not to be required to continue to contribute to society through work or other community service, we should encourage and welcome a continuing contribution.

And that will require a vastly different approach to mature age workforce participation than we’ve had up until now. The Government recognises the need for fresh thinking in this area with Wayne Swan appointing a Taskforce headed by Everald Compton to advise the Government. In part, the Government is able to create incentives (or remove disincentives) to work by allowing pensioners to keep more of their pension and more of their wage when they do so. And we’ve done just that with the Work Bonus introduced in the first term of our Government.

But we’ve also got to develop a more flexible culture in individual workplaces - for older workers to remain employed, but to be able to scale back their intensity. This challenge goes beyond simply moving to part-time work. More challengingly, it will also require us to think about ways in which workers can start to step back down the career ladder. In many respects, the Australian work culture has no reverse gear. Ricky Ponting is an exception, but by and large, we expect you to move up the ladder and then out. If we don’t change that mindset, older workers will simply move out as they get sick of the demands of senior responsibilities and as younger workers exert pressure for their turn at promotion.

Continuing participation poses different challenges for older workers in physically demanding work. These workers are entitled to an opportunity to move to other areas that match their physical capacity.

Provided we’re able to manage the various challenges I have outlined – and I have great confidence that we will – this period of our history represents a wonderful liberation of the individual. Australians can now look forward to a healthy and productive period of later life; finally, some time to smell the roses. We already see it happening as our highways and camping grounds become filled with grey nomads in their RV’s – with grandparents playing important roles in the early years of their grandchildren. Our business, education and community lives will benefit enormously from the contribution older Australians can make through mentoring and volunteering. We will be well-advised to expand those opportunities – not only for its own sake, but also to avoid the alarming prospect of millions of healthy older Australians with nothing to do! In spite of all those challenges, I’m confident that the ageing of Australia will see us become a more thoughtful and considered nation with a richer civil society. But, if nothing else, it’s a hell of a lot better than the alternative!

Ends