Federal

Old Money

Chad Satterlee rethinks the political economy of population ageing.

Governments around the world borrowed heavily to soften the blow of the global economic downturn that officially struck in late 2007. Creditors are now seeking assurance that their loans, used to finance rescue packages and stimulus programmes, will be paid back to them with interest.

In response, governments have been announcing controversial deficit reduction or ‘austerity’ measures designed to reduce expenditure, raise taxes, or both.

This gives rise to a central question. Who bears the costs of austerity? One only has to look at the acrimonious and at times violent demonstrations that continue to take place across the eurozone for the answer: lower-paid workers and their families, the unemployed, the infirm, students, and pensioners, through the imposition of ‘tough but necessary’ cuts to public services and social security.

What this means is that, on top of the enormous job losses, home foreclosures, reduced international trade and the rest, the mass of average people are now being asked to pick up the tab for bailing out the corporations whose investment decisions caused the crisis in the first place.

Among the many unpopular targets has been the pension age. In France, the Sarkozy government recently raised the age for full retirement benefits from 65 to 67. The plan’s initial announcement triggered transportation strikes that brought the country to a standstill and a series of nationwide protests attended by over two million people.

Similar tensions are growing in Ireland, where 10 billion euros is being appropriated from its National Pensions Reserve Fund to pay creditors.

What about postponing retirement benefits in Australia? Despite the relatively solid state of our economy, it seems we are heading in that direction. ‘Along with climate change’, Treasurer Wayne Swan recently declared, ‘[population ageing] is the most substantial challenge we face’.

A bold claim indeed. It’s hard to see how a bunch of extra retirees could possibly be in the same league as global warming and carbon pricing as an intergenerational dilemma.

Yet we are warned of a ‘demographic time bomb’ that will heavily burden future generations unless we take action now by increasing the retirement age, reining in spending on pensions and healthcare, and encouraging people to save up more to fund their own retirements. What are we to make of these claims?

The basic story in Australia is that the ratio of working age people to those aged 65 years and over is projected to decline from 5:1 now to around 3:1 by 2050. This is expected to result in an increase in total government expenditure on ageing, including pensions and healthcare, of around 4.75 per cent of GDP by 2050 — the equivalent of an additional $60 billion.

This sounds like a lot of money, but a bit of arithmetic reveals it is worth less than two week’s production of all goods and services in the Australian economy. That’s certainly not cause for concern by any stretch of the imagination.

Moreover, these projections assume that nothing changes. Once we allow for some minor flexibilities in the system, the costs start to look exceedingly manageable.

When Australia abolished death duties in 1979, it became the only Western nation without any kind of tax on accumulated wealth. The reintroduction of an inheritance tax, which is long overdue anyway, could yield around $1.5 billion a year. (Getting an adequate rate of return on our mineral wealth and levying a tax on capital gains of housing wouldn’t go amiss either.)

It would also be worth considering introducing a HECS style scheme whereby aged care costs become an impost on wealthy retirees’ assets; on the recipient of the care passing away, the scheme would be paid out of their estate.

Any or all of these measures would comfortably cover 4.75 per cent of GDP, without having to cut any essential services or benefits.

The second and far more important issue is the impact ageing will have on the productive capacity of the economy. There are only two possibilities. In the first case you’re in an economy with a surplus of labour (or with unemployment), in which case people retiring isn’t a problem at all since they’re making their jobs available for other people who wish to fill those jobs.

Alternatively you’re in an economy running under inflationary pressure, with more jobs than people to fill them. In that case, the price of labour should go up automatically, thereby enticing older people to work for longer since their wages would increase.

So in either case, the system should adjust without a great deal of disruption.

A genuine interest in enhancing productivity would entail a substantial increase in the human capital of the current younger generation, since they’re going to be the older generation later. It’s also obviously a bit too late to start increasing the skills of an 80 year old.

The only investment we can make today that will have a meaningful effect in 40 years’ time is in education and training. It’s rather ironic, then, that most of the austerity measures we are seeing around the world, purportedly designed to prepare societies for the future, are massively reducing expenditure in education.

We should also consider making continual employment more attractive for elderly people. Similar to mothers with children, the elderly will desire a greater availability of part-time work and fractional appointments. Age discrimination in the workforce should also be reduced.

As was noted previously, it only becomes an issue if the economy is such that there’s a shortage of labour. In that case, it becomes a lot easier for retired people to move back into the workforce on a 0.5 basis, or a 0.3 basis or whatever, and all of that is a productivity gain over complete retirement.

At this point, you could be forgiven for wondering whether population ageing really poses any challenge at all. It will involve a reasonably smooth market adjustment and a transfer of resources, but certainly not a massive transfer of resources. And compared with issues like global warming, it’s fairly trivial.

What about the politics of ageing? The so-called grey vote, of course, holds considerable political sway. The reason for this is not that seniors vastly outnumber young people, but because they are more likely to vote as a block in the way in which, for example, farmers do, since a lot of their income relies on public services and subsidies.

In other words, we might think of elderly people as single-issue voters; such voters tend to overwhelm general-issue voters. This has led some young people to charge the major political parties of populism by chasing the grey vote at the expense of their interests.

It’s difficult to tell how this will affect generations. While seniors are interested in the issues of most concern to them (pensions, healthcare, law and order and suchlike), they are also generally going to have an interest in the futures of their children and grandchildren.

Instead of seeing this as an intergenerational struggle, it would be a better reading to predict a split on class lines. That is, the well-to-do in older generations will resist the imposition of HECS style fees and an inheritance tax to fund their retirements, in order to hold as much of their estates as possible together to transfer to their children and grandchildren, who we can safely assume will be very supportive of this.

The well-to-do in younger generations will thus form an alliance with their older family members, and push for such measures as a reduction of pensions and public healthcare, and an increase in the retirement age.

Now if we are living longer, then people working for longer is, at first approximation, not an entirely bad idea. But calls by some commentators, including Tony Abbott, to lift the pension age to 70 should be firmly rejected.

The people who most rely on the pension are by and large those who have worked in arduous manual jobs most of their lives. Any increase in the pension age will hit these workers hardest because they tend to have comparatively smaller rises in life expectancy and die much earlier than the rich. Cuts to public services will also disproportionately affect this group.

This is precisely why so many people are taking to the streets in places like France.

In the event that we couldn’t get some form of tax on wealth, the costs of ageing may have to shift to active wage earners. Wages, however, are a big issue if you’re poor, as that’s all you’ve got. If you come from a background of wealth, and you stand to inherit wealth, wages aren’t so important.

Hence this is going to impact across classes differentially, more so than across generations. Alas, no one likes to talk about class issues these days — that’s a tad too radical. The rich least of all.

‘It’s an intergenerational challenge, it’s an economic challenge, it’s a social challenge and it goes to the core in the end of the type of country we want to be’. While Wayne Swan is wrong on the first two counts, he is certainly right that population ageing raises questions about the kind of society we want to live in.

Do we want to burden average people with higher taxes and deep cuts to public services while rich families continue to pass their wealth from one generation to another?

Or should those who were lucky enough to inherit fortunes they did nothing to deserve or earn contribute a portion of their wealth to compensate those who weren’t so lucky?

As the American and European masses increasingly discover that the ongoing economic crisis is further widening the gap between rich and poor through regressive austerity, we had better hope the answers are, respectively, ‘no’ and ‘yes’.

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