glenn stevens : finance and the ageing population address by mr glenn stevens, deputy governor of the reserve bank of australia, at the financial planning association of australia limited, gold coast, australia, 16 november 2005. * * * there has been much talk about the phenomenon of population ageing in recent years. some of the figures, on their face, are stark. as a result of declining fertility, and rising longevity, the median age of the world's population is increasing by about three months each year. 1 in australia, whereas today there are about five people of'working age'for every person over 65 years, by mid century there will be just over two, according to abs population projections. 2 assuming all other things unchanged, that implies a substantial impact on the rate of growth of per capita national income, and on the proportion of national income required to sustain the non - working part of the population. that, in turn, would raise thorny issues of income distribution and require careful management of the policies which affect that distribution. whether such an assumption – that all other things remain unchanged – should be made is another thing altogether. indeed, if we know anything about economic behaviour at all, it is that everything else won't remain constant in the face of such profound changes in society's age structure ( forecasts of which, themselves, assume that recent fertility rates persist, even though we know that fertility rates have varied a lot, in both directions, in the past eighty years ). individuals, markets and economies will adjust to these changes. i would like to explore some of the possible adjustment issues today. much of the discussion of the ageing issue to date in australia has been about the impact on government budgets ( a lot of which seems to come via the health system, rather than solely through age - specific payments per se ). those matters are important, but surely there will be counterpart issues for private financial markets. in addressing a group of financial planners, it would seem appropriate at least to pose some of those questions, even if we cannot provide many of the answers. what is ageing and why does it occur? in popular discussion we often hear about the ageing'baby boomers '. this generation – those born between 1946 and about 1965 – is getting close to retirement. indeed, some members of the leading edge of this cohort have presumably started retirement over the past few years, and many more will be thinking about it in the next few years. there has

simply, work in the more normal sense of that word. retirement ages will tend naturally to rise in the future as people realise that they need more resources for their lengthening lives. financial planners can probably assist that natural, and inevitable, development by giving appropriate advice. as time goes by, i think that we will see a world in which later retirement is more feasible than it might have been in the past, because the demographic changes occurring themselves mean that an excess supply of labour, common from 1970 to 2000, will more than likely give way to excess demand for labour in the future. surely firms are going to find it to their advantage to keep their older employees, and will need to offer effective inducements to them in order to do so. so while people will need to be productive for longer in order to adjust to longer life expectancy, it will hopefully be not only more feasible, but also more rewarding, for them to expend their energies in that fashion. second, because increasing longevity will likely mean an ever - increasing focus on the adequacy of assets, rates of return ( and, one trusts, risk ), it surely follows that there will also be more attention paid to the fee structure of the service providers in the funds management and advising businesses. for fund managers, the era of high nominal yields on many assets disguised the fee structure – just as high inflation distorted a great many price signals in the economy. when yields are lower, and people have a keener appreciation of the importance of the earnings on their savings, fees are more visible. those offering advice, who usually ( and rightly ) point out to people the power of compound interest, 5 / 6 will surely see people concerned about that power being weakened through a long flow of commissions. one can easily imagine the fees for financial advice and managing funds being of more community interest than the fees on bank accounts. this will be a challenge for the industry. conclusion the phenomenon of ageing is one of the key long - run developments our society faces. to the extent that it reflects greater longevity, there is no reason to fear it ( though of course declining fertility, if it proceeded far enough, would bring much bigger concerns ). we simply need to adjust to it. to date much discussion has, understandably, been focussed on the impacts on government finances. as important as they are, participants in private financial markets should also take an interest. financial arrangements will be able to adapt to the needs of