Forecasts Down Through The Ages

Forecasts are always fraught with danger. The longer the time frame the more susceptible forecasts will be to wide variations in the range of possible outcomes. Which makes the Federal Government’s Intergenerational Report (IGR) such a fascinating exercise given it is trying to forecast what Australia will look like four decades hence.

The government of the day is required to produce the IGR every five years and its scope is to look at population trends, workforce participation and the productivity level of our economy.

The aim of the report is to promote community discussion about long-term government policy settings with a focus on intergenerational fairness.

The value of the IGR is clearly in the broad brush strokes it paints rather than the precision of its forecasts.

Demographics in so many ways define our destiny as a community and the demographic trends that this and the three previous reports have charted are clear.

The Australian population will be larger – around 40 million souls by 2055 – and much older with almost 5% or nearly 2 million people being aged 85 and over.

The good news is that average life expectancy at birth is forecast to continue to rise so that by 2055 men and women can look forward to lives spanning 95 to 96 years.

Not so positive is that as the population ages the workforce participation rate will slide. Where in 1975 there were more than seven people of working age (defined as 15-64) for every person aged 65 and over, by 2055 there will be less than three.

That has major implications for our productivity growth – not surprisingly it is expected to slow – but also for high cost budget items like the funding of the health system and the age pension.

The latest IGR will certainly inform and provoke debate around key policy settings within the tax system, the superannuation system and health services. Superannuation comes in for special mention in the report – in particular how as account balances grow, the implication for the Government will be reduced reliance on payments made through the age pension.

The report makes the point that the Government is "considering improving the way in which the superannuation system transforms savings into retirement income streams".

While the report is about macro demographic and economic trends considered from an individual investor’s perspective there are some interesting – and at times conflicting – messages.

For a start the growing importance of the super system in meeting some of the challenges of the future and – as an investor – making sure you are saving enough for what is likely to be a longer period in retirement.

The paradox that is likely to emerge through the tax white paper discussion later in the year is that the super system’s generous tax concessions are likely to come under heavy scrutiny as the Government looks to improve the budget position.

The risk for investors is that the rules governing super will continue to change.

The irony for the Government is that while they need people to save more for their retirement to reduce reliance on the age pension the more they change the rules governing super and the more they undermine confidence in the system overall.

The major demographic trend of an ageing population is a significant challenge for Australia whether you look out 10, 20 or 40 years.

The superannuation system can provide a compelling answer to at least some of those challenges but it needs a period of policy stability that – like the Government’s latest report – truly spans this and the next generations.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.