As Australia’s population ages, the sustainability and fairness of the age pension system are increasingly important. Our research uses a statistical model to forecast demographic changes and assess how the pension age may need to adapt for long-term viability. The age pension supports many older Australians, making future planning crucial for economic stability and welfare equality.
We applied the Hamilton-Perry model for population projections at the state and territory levels, combining it with functional time series analysis to capture trends over time. This model requires minimal data, using only age- and sex-specific population counts from the two most recent censuses, which makes it practical and insightful even with limited demographic information.
Our forecasts estimate population dynamics for each Australian state and territory from 2022 to 2051, allowing us to calculate the old-age dependency ratio (OADR) as follows:
The old-age dependency ratio indicates the financial pressure on the working-age population to support retirees. A rising old-age dependency signifies an increased economic burden, potentially threatening the sustainability of the age pension system.
Modelling population growth and old-age dependency
Our research utilises population data from 1971 to 2021, sourced from the Australian Human Mortality Database, to forecast future population sizes using the Hamilton-Perry model. We projected the population for each state and territory and calculated the old-age dependency ratio to determine a sustainable pension age for Australia through 2051, aiming for an old-age dependency of approximately 23%.
To represent the population evolution from 1971 to 2021 more effectively, we combined the population counts from each state and territory and utilised rainbow plots in Figure 1 to display the total population sizes, with populations from the distant past shown in red and the most recent years in purple.
Figure 1: Rainbow plots of Australian female and male population sizes from 1971 to 2021 between ages 0 and 99 in single years of age, with the last age group being 100+
In recent years, Australia has experienced relatively stable birth and death rates. However, international migrants between the ages of 20 and 50 have significantly contributed to population growth and demographic changes.
We used an iterative method to establish a pension age that keeps the old-age dependency below the target threshold. Starting from the current pension age, we gradually increased it in our model. Additionally, we created prediction intervals through nonparametric bootstrapping to account for uncertainty in our projections.
Findings on population trends and pension sustainability
Australia’s aging population is likely to create significant financial pressure on the pension system unless reforms are implemented. Our projections indicate a demographic shift characterised by rising life expectancies, particularly in urban areas. Concurrently, the working-age population is growing slower than the older population, resulting in an increasing old-age dependency ratio. Data from different regions show that areas like the Northern Territory and Tasmania face more significant challenges due to lower life expectancies and increased remoteness, leading to lower lifetime pension incomes for their residents.
Figure 2: Total population for each state and territory
Figure 2 depicts the projected age-specific population sizes from 2022 to 2051, which highlights the regional disparities, particularly in New South Wales and Victoria. The rising proportion of older individuals are evident from the rainbow plots in Figure 3, where the black line represents the population pyramid for females and males in 2021. The rainbow lines represent simulated paths of the forecast population of females and males from 2022 to 2051.
Our forecasts indicate that gradually raising the pension age is necessary to sustain an old-age dependency rate of 23%. We suggest increments to 68 by 2025 and 69 by 2051 to balance the financial obligations between the working-age population and retirees.
Figure 3: Holdout and forecast population pyramids
Figure 4 underscores the importance of this forecast in ensuring the sustainability of the Australian pension system. The current pension age of 67 is expected to remain sustainable until 2025. However, to maintain sustainability until 2051, the pension age might have to be raised to 69, or in the worst-case scenario, to 69.5. The overall trend points to a necessary increase in the minimum pension age, with the optimal age projected to be 69.9 years in 2051 using the multivariate functional time series method, potentially reaching 70 years under the worst-case scenario.
Figure 4: The 30-year forecasts of the pension age scheme obtained from the multivariate functional time series method
Note: The mean age is represented by a solid line, the median age by a dotted line, and 95% pointwise prediction intervals are depicted as dashed lines.
Addressing regional disparities in pension welfare
Our study evaluates regional disparities in pension welfare distribution in Australia by comparing lifetime pension income across regions using life expectancy forecasts and predicted pension rates.
Results indicate that residents of the Northern Territory and Tasmania are expected to receive significantly lower pension benefits than those in New South Wales and Victoria, primarily due to differences in life expectancy and health services access. The uniform noncontributory pension scheme fails to account for varying living costs and healthcare access in urban versus rural areas. We recommend targeted support for disadvantaged residents to ensure fair pension benefit distribution.
We forecasted male and female populations using the Multivariate Functional Time Series method, highlighting their interconnected dynamics. The MFTS method provided a more comprehensive forecast with broader prediction intervals, capturing more significant uncertainty compared to univariate methods, which could aid in more nuanced pension planning.
Policy implications
Our research indicates that Australia’s pension system faces challenges without an increase in the pension age. We recommend a gradual rise to 69 by 2051 to ensure financial viability and support from the working population for retirees. To reduce inequalities in pension distribution, policies should be tailored to the unique demographic and socio-economic characteristics of different regions, especially disadvantaged areas like the Northern Territory and Tasmania.
We propose more flexible pension schemes, considering regional differences in cost of living, life expectancy, and healthcare access. Utilising localised data can help adapt the system to better serve all Australians.
Our modelling approach combines the Hamilton-Perry model with functional time series forecasting, allowing us to predict demographic changes effectively. In summary, significant reforms are necessary for sustainability and fairness in the context of the aging population. Addressing regional disparities will be crucial to ensuring equitable benefits from the system while supporting older people without overburdening the working-age population.
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