It is predicted that a perfect storm is coming, where longer life expectancy and lower birth rates will converge with ballooning national debts and globalisation.
The likely result? More pressure on a smaller number of working age people to service the debt and fund welfare, healthcare and education for both the young and old in society.
This in turn would create increased competition for their skills and talents – not just between employers but between countries.
The dependency ratio
Governments and economists use the dependency ratio to determine the proportion of the population not in the workforce (typically people aged 0 to 14 and over the age of 65) who are dependent on people of working age. The dependency ratio describes this situation in figures.
Currently, every 100 working age people (typically between 20 and 64 years old) in the Organisation for Economic Co-operation and Development (OECD) are supporting a total of 65 people aged under 15 or over 65 through the tax they pay.1
But by 2050 – without adjusting for employment participation levels and unemployment rates – these same 100 workers are projected to be supporting 90 people.2
One of the key reasons this dependency ratio is set to rise is that people are living longer and healthier lives.
Governments have started to try to address this through measures such as increasing the retirement age and tightening the rules around who is eligible for the age pension, but in their report Intergenerational Theft, AMP Capital concludes that these actions fall a long way short of what is likely to be needed.
The big challenge is to generate enough tax from those 100 workers to provide for the 90 people dependent upon them, while also leaving the workers with enough money to provide for themselves.
How will this affect Australia?
The Australian Government outlined the situation locally in the 2015 Intergenerational Report Australia in 2055.
By 2055, life expectancy at birth is projected to be 95.1 years for Australian men and 96.6 years for Australian women, compared with the current 91.5 and 93.6 years,respectively.3
It is projected the number of Australians aged 65 and over in 2055 will have doubled since 2015, and there will be around 40,000 people aged over 100.4
Improvements in health mean older Australians are more likely to remain active for longer, and they’ll need to be encouraged to stay at work.
Encouraging women to stay or return to work will also be important to increase workforce participation.
What does it mean for my business?
Businesses should continue to embrace diversity and flexibility to accommodate both women and older workers but may face challenges as governments look to lure the most talented workers from other countries.
Obviously, a lot more goes into choosing where to live than the income tax rate, but those countries that can attract a greater skilled workforce may be increasingly attractive to workers as they may be able to lower taxes as their dependency ratio lowers.
Meanwhile, countries unable to attract workers run the risk of losing their own workforce as the tax burden on their workers increases.
Businesses may face challenges in attracting and keeping good staff, and AMP Capital concludes that they may need to make some significant changes in this new environment.
“There are already volumes of information on how to attract and retain key talent but, as skilled labour becomes scarce and more choosey, the need to actually follow through on the thought bubbles becomes a lot more real,” the AMP Capital report says.
“When labour chooses states first, the cost to attract talent is less about bean bags and biscuits and much more about having a presence in the right locations.”
They predict that the world’s current financial, cultural, and political centres will be best placed to continue to attract global talent.
In light of this, businesses should think carefully about where they are located and how they can differentiate themselves – both to attract talent and encourage workers to stay – in order to be well positioned for the generational change challenges that lay ahead.