Three Economic Myths about Ageing: Participation, Immigration and Infrastructure

Leith van Onselen and I were commissioned by the Sustainable Australia Party’s Victorian branch to examine the causes and implications of population ageing in Australia, and whether maintaining a high immigration program is a worthwhile policy response.

Below is a summary of our report:

Overview

Population ageing due to longevity is one of the greatest successes of the modern era. However, it is widely thought to dramatically reduce workforce participation and overall output resulting in significant economic costs.

This widely held view is wrong. Ageing countries have higher economic growth and the improved health and longevity of older people increases their economic contribution.

High immigration is also thought to combat population ageing and be a remedy for these non-existent costs of ageing.

This is wrong. Low immigration can affect the age structure by helping to stabilise the population, but high immigration has almost no long-run effect besides increasing the total population level. This creates bigger problems in the future.

It is also widely thought that simply investing in infrastructure will accommodate high immigration and population growth at little cost.

This too is wrong.

Diseconomies of scale are a feature of rapid infrastructure expansion due to (1) the need to retrofit built-up cities, (2) the dilution of irreplaceable natural resources, and (3) the scale of investment relative to the stock of infrastructure.

This ageing-immigration-infrastructure story is wrong on all three of its major points. Population ageing should be seen as the successful result of improvements in medical and health practices that have improved longevity and fostered a long-lived and economically productive society.

Key Research Findings

• Population ageing is a successful result of efforts to improve longevity.
• Countries with older populations maintain high workforce participation, are more productive, and grow faster economically.
• Ageing does not lower workforce participation in general. Since 2012 there have been more full-time workers aged over 65 than under 20.
• Low net immigration of between 50-80,000 permanent migrants per year can alter the age structure over the long-term by stabilising the population.
• Low net immigration increases GDP per capita and wage growth.
• High net immigration above this 50-80,000 amount has almost no additional effect on changing the age structure and simply increases the total population.
• Most of the increase in permanent migration since the early 2000s has been through the skilled migration program.
• This program primarily benefits the migrants themselves and increases wage competition for other workers.
• A focus on skilled immigration fosters a “brain drain” from developing countries, reducing human welfare.
• There is a real economic cost to high population growth due to the diseconomies of scale inherent in rapid infrastructure expansion.
• There is a real cost from environmental degradation due to development to accommodate much higher populations.
• The high costs of population growth are often ignored, as immigration policy is a federal matter, while infrastructure provision is predominantly a state and council matter.
• Population growth in general dilutes ownership of our environmental endowments, mineral wealth, fisheries, wildlife, and national parks.
• The political capital and resource devoted to managing high growth have an opportunity cost in terms of solving other social problems such as homelessness, indigenous disadvantage, mental health, and other social services.

Policy Recommendations:

• Reframe ageing as the economic success story that it is.
• Reframe immigration as an environmental and ethical choice, not an economic necessity.
• Lower overall net immigration to the 50-80,000 range by mainly targeting skilled visas. This can largely be achieved by increasing the minimum salary for skilled migrants to 150% of the average full-time salary, or $129,900. This desirable net immigration range can be achieved while having a slightly higher permanent intake of around 80-90,000 per year, as permanent departures will reduce the net effect while still maintaining the optimal target range.
• Adopt systems for infrastructure planning and provision that clarify the expected cost of new public and essential services, and ensure upgrades keep pace with city growth for the benefit of existing and new residents.

Key charts:

The Full report is downloadable here.