Thursday, May 26, 2011

Baby boomers retiring. Is there really a crisis?

 This began as an out-take from my posting Bernard Salt is not a demographer.

In this, I mentioned how much Bernard Salt  relies on a demographic argument about the baby boomers, and noted that if valid, it would go far to prove his point: 

Salt claims the huge bulge of the baby boomers are now reaching retirement age. Their old-age pensions will overload the smaller generations that follow them into the workplace, producing a shortage of workers and a need to increase taxes.  Hence, he claims, at least for much of the next 20 years we will need to continue with high immigration.

 This is an argument that goes down very well in the business world, where Salt is a much loved speaker. Managing a company is a quarter to quarter, or a year to year, proposition. Few CEOs are much focussed on 20 years ahead, and most know they are unlikely to be still there in 20 years. An argument that gives them an excuse to go on demanding that government provide them with more customers and hence more profits, even if this means monstering the environment and driving up greenhouse emissions, for just another 20 years suits them fine.

And the argument that we must contend with an acute temporary spike in retirements and pensions is also convenient for Salt. It gets him off the sharp hook of Dick Smith's counter-argument: that bringing in more immigrants (so their taxes can pay the pensions of the existing population)  is "a giant Ponzi scheme". After all, migrants get old too.

But is Salt's claim true?  Here's how he puts it in his  Demographic outlook for the Australian Nation: Notes for an address to the Pacific Institute, 15 March 2011, admiringly quoted on Henry Thornton’s blog.

 Big Australia as his notes put it, “Shores up tax base - supports boomers in retirement”.
Skills Shortages:  The Australian nation passes through a fault line in 2011 when all of a sudden baby boomers born in 1946 exit the workforce at a faster rate than Generation Y can enter [Note that "can"; in a moment it will turn into an implied "will"] the workforce.  More exiters than enterers to the workforce means a slowdown in the rate of growth in the tax base. [If you read carefully, he's not actually saying the "tax base" won't grow.]  We have become addicted to a tax subsidised lifestyle. [This seems to be a confused reference to the high cost of modern infrastructure -- but Salt neglects to mention that, since 2% of infrastructure comes up for replacement each year, a 2% annual increase in population doubles our infrastructure bill.]  Also, baby boomers paid tax all their working lives but the government of the day didn’t provision for their retirement. [Perhaps because rapid population growth faced governments with impossible infrastructure bills.]  We have a short term retirement liability in this nation. [In fact it would be a very long-term one if we took Salt's advice, since few migrants bring superannuation with them.]

[Pardon my interpolated comments, but they do help to suggest how very flaky Salt's arguement is.]

This argument occurs repeatedly in Salt’s other articles. For instance “At least until the mid 2020s - in order to offset the impact of retiring baby boomers - Australia needs strong growth based on an average of 180,000 migrants a year.”

In an article called “Inconvenient Truth on Ageing”  in The Australian of 4 February 2010 “Demographer Bernard Salt” claimed the real problem the 2010 Inter-generational Report addresses is that “from 2011 onwards more baby boomers exit than Generation Ys enter the workforce.”

Salt's article doesn't make clear which demographic projection he is using that shows this will begin to be the case from 2011. Perhaps we are meant to take it on his own authority.

In January 2010 Salt told the Property Council,  in an article in urging them to be less “timid” in standing up for their own  interests (“Is the Property Council too timid?”):

My response throughout the frenzy [he means the 2009 “Big Australia” debate] was to calmly and rationally explain that this nation needs strong population growth to grow the tax base at a time when baby boomers are exiting the workforce.
We have no choice. Either we ask Generation X and Generation Y to pay more tax per capita, or we ask baby boomers to ease up in their demands in retirement.

Could I suggest that neither of these options will fly?  The only way to offset the impact of the baby bust next decade is to grow the tax base through immigration. That’s why we need a big Australia, at least in the short term. And, make no mistake, this trajectory is good news for the property industry.

Going nuclear, tight water restrictions, and abandoning “outdated notions” like “the garden State” are all according to Salt just a necessary price to pay for solving this crucial problem of the retiring baby boomers.

Indeed in an article in the Australian on 19 May 2011 he scolds Population Minister Tony Burke for not incorporating Salt’s pet theory into the government’s population strategy:

I was surprised to see scant regard in the report to the impact of the retirement of the baby-boomers generation. Oddly, this demographic faultline that affects the nation and others in this decade does not seem to have been a factor in the Sustainable Australia document.

Salt’s suggested remedy is — you guessed it — to continue growing Australia’s population at four to six times the average growth rate of advanced countries. (Not that he mentions that comparison -- or asks why other countries have not adopted his remedy.) In fact similar ideas were offered to a British parliamentary committee, but were rejected as special pleading. See Sir Andrew Green, “Devastating demolition of the case for mass immigration”.)

Similarly, in Australia the economic expert Dr Ben Spies-Butcher, dismisses such claims as false. See his  "The myth of the ageing ‘crisis’", The Conversation, April 26 2011. He says "It is true that the [Treasury] reports predict a deficit in the future. However, much of this is unrelated to ageing. The biggest growth in spending is in health, and most of this is related to technology, not demographics." He adds "Given the imprecision of the estimates, the current figures do not suggest any evidence that there will ever be any deficit due to population ageing".

 BUT ---  the crucial problem is that Bernard Salt, the man jumping up and down about this huge demographic “problem” is not a demographer, and may not understand some basic points about demography.

Yes, the baby boom represented a maximum bulge in the birthrate per woman (or per couple) but not necessarily in the total number of children born!

In the USA for instance, it is well known that both Generation X (the children of the baby boomers) and Generation Y (their grandchildren) are larger “cohorts” than the Baby Boomers.  I have not been able to find evidence (and have not seen Salt produce evidence) that it is significantly different here in Australia.

So he may be making a simple mistake in demography. If so, it is one that I dissected (before I had ever heard of Bernard Salt)  in a 1995 talk on “The Replacement Rate Fallacy”   for Radio National’s Ockham’s Razor.

In this talk, to clarify the issues for those with no head for demographic abstractions, I told the story of my maternal grandparents’ family. Their four children all became parents during the baby boom, and averaged 5 children each, producing 20 children in all.

But we 20 baby boomers were more moderate. We averaged only 2.6 children each, producing (with our spouses) 52 children in all – a smaller birthrate, but a larger generation. And the next generation, if those 52 people average 1.9 children each (the current Australian average) will also be larger than our generation.

To put the point in more general form, Dr Katharine Betts of Swinburne University commented recently on the Australian Population forum:
It is often said (by Salt and others) that the Australian labour force faces an unusual and one-off shock through the retirement of the baby boomers: people born between 1946 and 1964.
For the purposes of this note I’m redefining them as those born between 1946 and 1965, and thus aged 45 to 64 in June 2010. This is because the ABS publishes the data in five year age-groups and redefining the boomers in this way makes the arithmetic easier.
When you hear about the wave of boomer retirements it’s easy to imagine a great bulge working its way through the population pyramid, and then swamping the pension system. But it’s not a great bulge. Twenty five per cent of the population was aged 45 to 64 in June 2010. The cohort coming after them of those aged 25 to 44 made up 28.5 per cent, and those aged 5 to 24 made up 26.5 per cent.
So now that we have moved into the demographic transition (low birth rates and low death rates) it’s normal to have a population pyramid with relatively straight sides, and any block of people in an age group which includes a twenty-year age span will include around 25 per cent of the population. I attach a table with the relevant data.

 And the pain for Bernard Salt’s absurd argument doesn’t just end there. For one thing, the boomers are not all going to retire in a block. Many will work on well past age 65; but many others have already retired, and quite a lot of them as much as a decade ago.

For instance, most of my age cohort at the Australian National University in Canberra went into the Commonwealth Public Service and were semi-compulsorily retired at age 54 years and 11 months – because the public service has too many employees, and the younger ones were cheaper than the older. 

Just as importantly, the workplace is not some passive tunnel that workers enter and leave at a rate determined by the turnover of the generations. Employers actively select and hire people when and as they need them. 

And despite ambit claims by some employers who would like a surplus of workers to select among, there is little evidence that workers rather than jobs are in short supply.  (Ask anyone who has a teenage child trying to find work. Or who is trying to get re-employed in middle age. It's hard to get so much as a job interview for anyone over 35.) That's why Julia Gillard and co. were chanting "Jobs, jobs, jobs" before the last election.

The whole claim that there aren’t enough workers to replace the retiring baby boomers has been trounced by the Australia Institute’s recent calculation showing that Australia’s real unemployment rate is more like 15% -- or even 20% if you add a further 5% who would like full-time work but can only find part-time. In an age of computers,automation, and gigantic mining and construction machinery, it’s no surprise that jobs are not plentiful -- although big emplyers keep pretending the reverse.

In March this year (2011) 17.6 per cent of young Australians (aged 15-19) were recorded as unemployed, compared to 13.3 per cent in March 2008. As Dr Betts remarks, this looks less like a growing shortage of young entrants to the labour market than a growing "longage".

Mind you, the very notion that working years are 15 to 64 (on which Salt bases his calculations) is pretty absurd. 20 to 64+ would be more like it today, and with retirement age being increased towards 70,   20 to 69 may soon be the figure. 

Citing the traditional 15 to 64 exaggerates the proportion of the population that is too old to work, while greatly minimising the proportion that is too young. And of course all such calculations become academic when we can't, as at present, employ all those in their working years. A bread-winner out of work often means a whole family on social security, and is far more expensive than a person on the old age pension.

To complete the rout of this absurd argument, Jane O’Sullivan provides credible evidence that the alleged costs of pensions etc for this aging population of baby boomers are about one thirtieth, that’s right, one thirtieth of the infrastructure costs of the migration program that Bernard Salt proposes as a financial remedy for the problem. “Can we really be so stupid?”, she asks.

  (For further refutation of Salt’s varied and tendentious arguments for population growth see Sheila Newman’s Bernard Salt page at CanDoBetter.)

Conclusion: Salt’s arguments for Big Australia are often based on dubious demography. Many, like this one, scarcely deserve discussion until some real demographer can be found to endorse them, rather than to dismiss them as one of the world’s most senior demographers appears to have done.  See Dr Joseph Chamie's analysis of what he calls Ponzi Demography.

This argument began as a side-issue in the posting Bernard Salt is not a demographer, to which you might wish to return. 

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