Why the old-age dependency ratio matters

The Australian Treasury last month released the 2023 Intergenerational Report, just two years after the last one in 2021, which projects the outlook for the Australian economy over the next 40 years.

The report looks at a number of factors to help budget for our future. Those factors include health spending, climate change impact and workforce numbers. It also includes and uses a measurement that some say is now outdated, known as the ‘old-age dependency ratio’.

Used in all Intergenerational Reports since the first in 2002, the old-age dependency ratio is simply the number of people aged 65 or over per 100 people of working age. Convention and tradition, defines ‘working age’ as between 15 and 64.

This number is then used to make economic predictions, and to craft policies based on those predictions. If you’ve been listening to any of those predictions, it’s that the ratio of people ‘too old’ to work and those of working age is growing, and that spells trouble for the economy.

But that age range is now outdated, and the economic doom and gloom overblown, according to one of Australia’s leading actuaries, and he is calling for change. He says more older Aussies are working longer than ever and are not the economic burden they are made out to be.

David Knox, senior partner and senior actuary at Mercer Australia, says that age range no longer reflects reality.

“The measurement of our future ageing population needs to be more dynamic than the use of static ratios,” he says.

“It must recognise that there are likely to be ongoing changes in the labour force and life expectencies.”

The problem with the current old-age dependency ratio

Those words come from Mercer’s own report, written by Mr Knox, Recalculating Australia’s Ageing Population.

To support the case for change, he highlights issues with both sides of the ratio. First, he believes the bottom half of the ratio (the denominator) shouldn’t use the number of Australians of working age.

Rather, it should use the number of Australians aged 15-64 that are actually in the workforce. “Many of these individuals [aged 15-64] are not in the workforce due to a range of reasons,” Dr Knox says.

Second, the top half of the ratio should allow for the significant increase in the Australians over 65 still working.

In 2006, only 1.99 per cent of the total labour force was aged over 65. By 2022, that figure had risen to 4.94 per cent, and shows no signs of slowing down. “This trend is expected to continue in future years,” Dr Knox says.

Given that life expectancy in Australia continues to rise, it’s hard to argue with that assertion.

Why is this a problem?

The purpose of the Intergenerational Report is twofold – to project the outlook of the economy and use those projections to improve public policy settings. However, basing the report on inaccurate data will likely comprise the quality of those improvements.

That includes inaccuracies in the old-age dependency ratio.

Adjusting both sides of the equation reveals a measurable change in ratio. Using the traditional calculation, the ratio (number of working age persons for every person aged 65-plus) decreased from 6.6 in 1982 to 3.8 in 2022.

Dr Knox’s method shows the decrease has been much slower, going from 4.5 in 1982 to 3.0 in 2022.

To many, these numbers will mean little, but they convey important information to policymakers. Given that those in the workforce will be contributing to at least some of the living costs of those who are not, accuracy matters.

Occasionally, some news is good news

Dr Knox suggests one further adjustment to the old-age dependency ratio – a gradual increase from 65 to the upper end of the workforce range.

Doing so will not only further enhance accuracy, he says, but also delivers some rare good news. The greater number of Australians over 65 working will likely help, rather than hinder the economy.

In conclusion, Dr Knox says: “Mercer does not deny that Australia’s population is ageing. That is a fact, but the consequences are not as alarming as some would suggest.”

In a world seemingly full of alarming news, that makes a welcome change.

Do you expect to be working beyond age 65? Is that an attractive proposition to you? Why not share your thoughts in the comments section below?

Also read: How to embrace ageing positively

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