Population ageing, taxation, pensions and health costs, CHERE Working Paper 2007/10

more costly than a retiree,⁷ the period from 1961 to 2007 should have seen a
significant rise in output per capita due to demographic change alone. Thus, the lower
TDR over this period should have provided the resources necessary to offset any fall
in output per capita up to 2047. In other words, the period should have seen
additional saving and higher tax receipts from a larger tax base as sources of finance
for productivity-improving investments, such as in education, health and
infrastructure. Provided the resources released by a declining fertility rate have been
used for these purposes, there can be no reason to anticipate an “ageing crisis” with
the leveling out of the fertility rate to 2047.⁸

The central thesis of this paper is that a range of government policies have led to the
creation of a potential ageing crisis by inhibiting the efficient reallocation of female
labour from the home to the market as fertility has declined.⁹ Our analysis focuses on
family support policies that create large effective tax burdens on female labour supply
by means testing the support on family income, and on the second income. Examples
include Family Tax Benefit Part A and Part B, the Medicare Levy and the Medicare
Safety Net under which benefits depend on eligibility for Family Tax Benefit Part A.

In the following section we show how policies of this kind, in combination with a
poorly developed and costly childcare system, make it very difficult for married
women to work in the market when they have young children. In Section 4 we go on
to present evidence of a negative impact on female labour supply across the lifecycle.
We then show that there is a strong positive relationship between female labour
supply, household saving, the purchase of private health insurance and private
spending on health generally. Thus, on the one hand the government provides
subsidies to encourage saving for retirement and the purchase of private health
insurance and, on the other, puts in place a tax and family support system that has
strong negative effects on both. The section provides a brief critique of these policies,
and of the move towards privatisation. A concluding comment is contained in Section
5.

⁷ For an analysis of child costs in a lifecycle framework, see Apps and Rees (2003).

⁸ If fertility rises significantly, then of course the cost of dependency per working-aged individual could
rise significantly.

⁹ It is also of interest to note that a number of studies argue that policies that have a negative effect on
female labour also reduce fertility.

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