Is the age pension in Australia sustainable and fair? Evidence from forecasting the old-age dependency ratio using the Hamilton-Perry model

Abstract

The age pension aims to assist eligible elderly Australians who meet specific age and residency criteria in maintaining basic living standards. In designing efficient pension systems, government policymakers seek to satisfy the expectations of the overall aging population in Australia. However, the population’s unique demographic characteristics at the state and territory level are often overlooked due to the lack of available data. We use the Hamilton-Perry model, which requires minimum input, to model and forecast the evolution of age-specific populations at the state and territory level. We also integrate the obtained sub-national demographic information to determine sustainable pension ages up to 2051. We also investigate pension welfare distribution in all states and territories to identify the disadvantaged residents under the current pension system. Using the sub-national mortality data for Australia from 1971 to 2021 obtained from AHMD (2023), we implement the Hamilton-Perry model with the help of functional time series forecasting techniques. With the forecasts of age-specific population sizes for each state and territory, we compute the old age dependency ratio to determine the nationwide sustainable pension age.