Introduction
This paper examines the question of how to deal with the consequences of population
ageing resulting from a large decline in fertility, coupled with significant advances in
the technology of medical care, that Australia in common with all other developed
countries has experienced over the last four or five decades. Population ageing
necessarily increases the Aged Dependency Ratio (ADR), the number of retirees per
person of working age, while the advances in medical technology, in making available
major improvements in the scope and quality of medical care, have increased per
capita health care costs. Since the aged have an above average demand for health
services, the combined effect appears to be an increasing strain on the ability of the
working generation to finance pensions and health services for the aged. The
Australian Government has produced two reports, Intergenerational Report 2002-03
(IGR1) and Intergenerational Report 2007 (IGR2) that highlight the rising burden on
future working-age generations of the projected rise in the ADR over the next four
decades.1
The proposed solutions focus on privatisation. The policy response to the rising cost
of pensions has centred on measures to increase contributions to superannuation, with
the aim of partially replacing reliance on the non-contributory, income-tested Pay-As-
You-Go (PAYG) aged pension by private saving for retirement as the ADR rises.
There has also been strong support for the expansion of private health insurance and
private provision of hospital services. These solutions tend to be presented as self-
evidently essential, without discussion of the fundamental issues concerning insurance
market failure, transactions costs and the social allocation of risk, that are important
reasons for the existence of the publicly funded systems they are intended to replace.
This paper first presents in Section 2 an alternative perspective on the economic
effects of population ageing. The remainder of the paper then argues that not only is
the economic case for privatisation of pensions and the relevant insurance systems
unsubstantiated, but there are alternative policies aimed at the system of income
1 See Australian Government (2002, 2007).