Australia's demographic changes and your finances

The Intergenerational Report released last month has already made significant waves around the country, outlining the demographic changes that Australia is likely to see over the next 40 years. Commentators have been falling over each other to explain the implications these shifts will have for their chosen industries. 

While these developments can sound monumental and significant in the abstract, it can be difficult to grasp how such trends affect the ordinary consumer in tangible ways. What’s the connection between a bigger population and your savings account?

In fact, if the Intergenerational Report is correct, its predictions could have a marked impact on your financial situation. We’ll try help you make sense of it all.

More housing, lower prices

There are a number of reasons why house prices seem so huge right now: Plenty of investor activity, issues with the availability of land and the affordability of home loans spurred on by low interest rates, just to name a few. Another is a widely reported undersupply of homes — 228,000, according to the Australian Housing and Urban Research Institute. With Australia’s population growing, this means more buyers clamouring for less property, driving up prices.

With this in mind, the Intergenerational Report’s prediction of a 39.7 million-strong population by 2054/55 would seem to be more bad news. However, it may have the opposite effect if it ends up spurring on housing construction. Numerous housing industry bodies used the report’s release to call for more homes to be built, such as Master Builders Australia CEO Wilhelm Harnisch and the Housing Industry Association’s (HIA) Chief Executive of  Industry Policy and Media Graham Wolfe.

This growing pressure to add more housing supply is likely to increased construction activity, and an increase in stock could well bring prices down to a level easier on the home loan calculator. As HIA Senior Economist Shane Garrett said in an April 1 statement: “A steady pipeline of new homes represents the most effective solution to alleviating housing affordability pressures.”

Get used to living longer

Of course, it’s not all mortgages and home deposits. Your superannuation and savings are also likely to be impacted by future demographic changes, with Australians expected to continue living longer than ever. For those born in 2054-55, life expectancy is predicted to be 95.1 years for men and 96.6 years for women. 

While this is not the average for those who are alive today, it does indicate that life expectancies are generally growing, which means your retirement savings are likely to become increasingly stretched. This is particularly the case if living costs continue to rise. Since last quarter, the Association of Superannuation Funds of Australia’s (ASFA) retirement standard — the income needed for retirement — slightly increased.

Some Australians are already looking beyond super to fund their retirement. ING Direct found in a recent survey that Australians believe super will contribute to only 35.8 percent of their nest egg, and are looking toward their inheritance or property to make up the rest. In order to have a secure retirement down the track, it may be time to start thinking about an investment fund now.

A precarious age distribution

The consequence — at least partly — of this longer life expectancy is a larger proportion of older Australians. According to the Intergenerational Report there will be approximately 40,000 people aged over 100 in 40 years, and 2 million Australians aged 85 or over. To put that into perspective, 40 years prior to today, there were 122 Australians aged over 100 and 80,000 aged 85 or over. 

Experts have long been warning that a higher ratio of elderly to younger Australians will put an increasing strain on public services, which could have one of two outcomes:

The working population is taxed more in order to continue funding public services such as the Age Pension.
The services are reduced or cut, in order to alleviate funding pressures

Whatever, the case it points to the importance of taking out a savings account calculator and creating a workable budget for your retirement goals now, rather than leaving it to the last minute. Pauline Vamos, ASFA CEO, said as much. 

“[The report] shows how important it is to accumulate as much superannuation and private savings as you can,” she said. 

“Government finances will continue to be under pressure over the coming decades, and the best way to protect yourself against future policy changes is to start saving now for the retirement you want.”

With planning and discipline, you can set yourself up to be ready for any demographic shifts, whether good or bad.

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