How significant is the macroeconomic impact of an ageing population?

The macroeconomic impact of an ageing population is both profound and multifaceted, affecting everything from labour markets and government spending to productivity and long-term growth. As life expectancy increases and birth rates decline in many parts of the world, including Australia, the proportion of retired people relative to the working-age population grows. Exacerbating this problem is age discrimination in the workforce which forces many people into underemployment earlier than they’d like, extending the impact of our ageing population.

As the population ages, the labour force shrinks. An ageing population means a smaller proportion of people in the workforce, which can reduce the overall labour supply. In Australia, 36% of our population is already aged over 50 with a 67% participation rate. People aged 50+ account for 6.2m workers, but less than 50% work in full-time positions.

As our population ages, within 15 years, people aged 50 – 59 years will be 15% greater by proportion of the working population whilst the proportion aged 35 – 50 years reduces by almost 10%.

With fewer people in the ‘traditional’ working-age group, economies may struggle to maintain productivity levels, leading to slower economic growth. This is reinforced by ageist views of people aged 50+ finding it more difficult to find employment. In our Voice of Experience survey amongst 1,150 Australians aged over 50, 53% reported being discriminated against when applying for a new job and just over 21% had been discriminated against by their current employer.

Ageism is simply discrimination against individuals based solely on their age. While more attention is given to discrimination against gender, race, and sexuality, by way of example, age-related prejudice —especially in the workplace—is frequently overlooked. Yet, its economic implications are profound.

A smaller labour pool can also increase competition for workers, potentially driving up wages. While this may be beneficial for workers in general, it could increase labour costs for businesses, leading to inflationary pressure.

But one of the biggest economic concerns of an ageing population is the increased demand for age-related social services, which can strain public finances. The Australian government is likely to face higher costs in areas such as aged pensions payments, healthcare and long-term aged care.

In addition, the ageing population tends to drive economic growth toward service-oriented sectors, like healthcare and financial services, rather than traditional manufacturing or high-tech industries. This shift can have long-term implications for the types of jobs available and the overall growth potential of an economy.

In Australia, Treasury has long recognised the economic challenges posed by an ageing population, and this issue is a central focus in its long-term planning, particularly through reports like the recent Intergenerational Report. Treasury's view emphasises both the direct economic impacts and the policy adjustments necessary to mitigate potential risks to Australia's long-term prosperity.

As outlined, Treasury highlights that the ageing population will result in a higher dependency ratio, meaning there will be fewer working-age individuals to support the growing number of retirees. As the proportion of the aged population increases, there will be a relative decline in the number of taxpayers compared to those drawing on public services and pensions. This imbalance could put significant pressure on public finances if not managed effectively and is exacerbated by discriminatory attitudes limiting opportunities for Australian’s aged 50+.

Treasury also notes that as the proportion of working-age individuals in the population declines, economic growth may slow unless productivity gains offset the shrinking workforce. Fewer people in the labour market could mean lower levels of economic output, and thus slower GDP growth over time. Australia’s traditionally strong economic growth has relied heavily on a growing labour force, often driven by immigration, which has recently created a strain on both housing and long-term inflation. However, with an ageing population, and changes to immigration policy, productivity growth will become the primary driver of economic performance.

The most recent Intergenerational Report outlines that Australia's labour force participation rate will decrease as the baby boomer generation retires. Treasury anticipates greater pressure on the cost of Australia's aged pension, particularly as more individuals qualify for the Age Pension. While Australia’s age pension is means-tested, with an ageing population, more people are likely to become eligible, potentially straining public finances.

Treasury has proposed several policy responses to manage the economic impact of an ageing population, not least encouraging longer workforce participation. Policies to extend working lives, such as increasing the retirement age and promoting flexible work arrangements for older Australians, can help maintain a larger workforce.

As life expectancy increases and retirement ages rise, many midlife adults are willing and able to work for longer. By embracing ‘older’ workers and creating age-inclusive policies, companies can tap into this demographic, allowing economies to grow with a more extensive and capable workforce.

For instance, companies that offer flexible work arrangements or phased retirement plans can help retain employees. These policies promote both productivity and a reduced need for government support, mitigating the economic costs of ageism.

The macroeconomic impact of an ageing population is significant, affecting labour markets, government spending, and long-term growth. While the challenges are daunting, there are also opportunities for innovation and policy reform that can mitigate these effects.

Both governments and organisations must adapt to the realities of an ageing population by embracing new technologies, reforming social systems, and fostering age-inclusive work environments to ensure sustainable economic growth.