Mature-age labour force participation: Trends, barriers, incentives, and future potential

Abstract

The fiscal challenges of population ageing can be tackled in a number of ways. These include investing in capital and productivity of the smaller workforce, greater saving for retirement, higher migration, an active population policy, reducing benefits for the old, and/or encouraging and enabling them to work longer. This briefing focuses on the latter. It presents historical and international precedents for higher mature-age labour force participation rates in Australia, summarising available data as well as looking at the public policy response so far and the potential for further intervention. Executive Summary The fiscal challenges of population ageing can be tackled in a number of ways. These include investing in capital and productivity of the smaller workforce, greater saving for retirement, higher migration, an active population policy, reducing benefits for the old, and/or encouraging and enabling them to work longer. This briefing focuses on the latter. It presents historical and international precedents for higher mature-age labour force participation rates in Australia, summarising available data as well as looking at the public policy response so far and the potential for further intervention. The economic case for higher mature-age labour force participation is strong. A five percentage point increase to participation rates of 50-69 year olds is projected to be worth 2.4% of GDP in 2050. If all inactive people aged 55 and over who say they want to work did so, the participation rate for that group would increase six percentage points – also worth 2.4% of GDP. And if Australia had the same mature- age participation as New Zealand, GDP in 2012 would be 4% higher. The Australian Government has undertaken a number of measures to resolve ongoing barriers to employment for older Australians, but important issues remain. Institutional barriers to mature-age participation, resulting from the carrots and sticks that make up the tax, benefit and retirement income system, can be more amenable to policy intervention than those relating to barriers such as health and education. There is also evidence (e.g., from New Zealand) that changing system parameters relating to eligibility age can help. Yet it seems that too little thought has gone into the operation of eligibility ages in Australia. While pension age is increasing from 65 to 67, the eligibility age for Super will remain low, increasing from 55 to 60. At the same time, the age at which Super benefits are tax-free will remain at 60. In the absence of harmonisation of all eligibility ages, there is a case that the tax-free age be increased to 62, moving with the pension age, or to 65, moving with the Super access age. The briefing contextualises the discussion by making use of historic and international benchmarks. A set of scenarios is used to demonstrate the compositional effect of ageing and mature-age participation rates on total participation rates in the long term. Keeping all else equal, ageing would result in a 5 percentage point fall in total participation rates by 2050. If instead Australia were to achieve the higher mature- age rates seen in New Zealand, the fall would be only 2 percentage points.

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