If you’re an investor and you haven’t yet had the inclination to have a read of the 2015 Intergenerational Report, I strongly suggest you do.
Fortunately, the report is an easy read and many of the key concepts are helpfully explained with graphs which illuminate the key challenges facing the country over the next four decades.
When considering this information, your thoughts may turn to the composition of your portfolio and whether or not you have the ‘right’ mix of stocks to take advantage of what looks to be a harder budgetary situation for the Australian government between now and 2055.
Here are five key graphs from the report which I think every investor should know and think deeply about:
Total Australian Government spending and taxes by age (2009-10)
The above shows that the age group from about 25 to 62 contributes more to taxes than they receive in government-funded goods and services.
From about the age of 62 onwards though, contributions to the tax-base decline as this age group’s demand for government-funded goods increases.
Then there’s this:
Male and female life expectancy, 1905 to 2055
There are more of us … and we’re living longer.
Between 2014-15 and 2054-55, the proportion of the population aged over 65 will increase from around 3.6 million to 8.9 million, or from approximately 15% to 22.6% of the population.
One of the consequences for such an increase in the proportion of older Australians is best illustrated in the graph below:
Number of people aged from 15 to 64 relative to the number of people aged 65 and over
In 2014-15, there were 4.5 people aged 15 to 64 for every person aged 65 and over.
By 2054-55, this ratio is projected to fall to approximately 2.7 younger people to every older person in the above age categories.
What the three charts above imply is that there will be far fewer working people paying tax in the future compared to today.
As total Australian government spending increases …
Total Australian Government spending
… so falls the Australian government’s primary cash balance (the difference between the government’s cash receipts and cash expenditure, but excluding net interest payments and earnings from the government’s Future Fund):
Australian Government’s Primary Cash Balance
Chapter 2.2 in the Intergenerational Report states:
In the coming decades, all levels of government will face growing fiscal pressures as the population ages and expectations for greater government support of ageing-related programs increases.
The report assumes, in the long run, a constant tax-to-GDP ratio of 23.9 percent.
In my opinion, given the challenges of rising spending and reduced primary cash balances, constant levels of taxation within the economy may be a false assumption.
The ‘proposed policy’ trajectories for total government spending and its primary cash balance, illustrated in the two graphs immediately above, were based on announced policy (as taken to the 2014-15 Mid-Year Economic and Fiscal Outlook) and assumes all outstanding measures are implemented.
Given the partisan state of Australian politics today, you can pretty much dismiss the ‘proposed policy’ lines in both graphs above as fantasy!
No matter who you are, it’s my view that you’re going to need to strengthen your own household balance sheet by saving more.
Don’t worry, the whole Australian population won’t necessarily do this, so the prospects for businesses like Smiggle, owned by Premier Investments Limited (ASX: PMV), should continue to do well.
If you can then invest these savings methodically, regularly and wisely in the years ahead by buying some great long-duration investments that can hopefully one day replace your income, you should be able to live well regardless of what happens to government budgets.
From an article like this, you would think healthcare-related companies such as Ramsay Health Care Limited (ASX: RHC), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), and Pro Medicus Limited (ASX: PME) would be obvious, and they are. These companies though can quite rightly be considered expensive so your best bet is to buy shares in businesses like these in times of irrational market sell-offs.
Challenger Ltd (ASX: CGF) is well placed to capture business from the projected increase in over 65s and then there are the ASX stalwarts of Argo Investments Limited (ASX: ARG), Australian Foundation Investment Co.Ltd. (ASX: AFI) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which have satisfied conservative investors over many years with their steady returns.
Financial uncertainty is the name of the game and there are no guarantees to be had anywhere.
Despite the Intergenerational Report’s pessimistic projections, this is no time to cease being an investor. You’ll need to continue investing to ensure that the government’s attempts to get their own financial house in order don’t crimp your own dreams of achieving financial security in the years ahead.