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The Budget Blow-out: Why the Environment Will Win Over Aged Care Published : March 29, 2012 in Knowledge@Australian School of Business

The Budget Blow-out: Why the Environment Will Win Over Aged Care The No Carbon Tax rallies in Canberra in 2011 were dominated by the over-50s. Soon after the second rowdy gathering last August, senior citizens led a noisy protest outside federal transport minister Anthony Albanese's electoral office in Marrickville, Sydney. And, in a more subdued anti-carbon tax gathering outside federal parliament in late March once again the faces of mature-age generation predominated.

Ageing Australia has been on the march with a clear message that opposes government environmental protection. All eyes are now on the May federal budget as it decides spending priorities on two of the most pressing issues of the early 21st century – climate change and aged care.

The world's population is getting older and people are living longer, not only in developed nations such as Australia. Globally, there exists a clear tension between young and old over government spending. Crucially, the younger generation supports environmental care while retirees prefer spending on pensions and healthcare.

A model of the interaction between ageing populations and environmental spending developed by Adeline Tubb, a researcher at the Australian School of Business who studies the effects of demographic changes on society, reveals two opposing effects: Ageing increases the proportion of elderly individuals in the population and consequently heightens political pressure for the public planner to tilt the composition of spending away from environmental maintenance and towards elderly care. Simultaneously, ageing increases the younger generation's demand for environmental expenditure since increased longevity implies a higher return from such investment. Working people and the under-65s see increasing longevity as a good reason to invest in keeping the environment healthy – because they are going to be around longer to enjoy it.

As policymakers seek to maximise the welfare expected for the lifetimes of both generations, Tubb finds the latter effect – the increased preference for environmental care expenditure – will overwhelm the preferences of the older generation for aged care and lower environmental expenditure. Using UN figures for nearly 50 countries, Tubb shows that spending more on the environment is the path taken by most governments. 

"I was testing the relationship between demographics and government environmental spending to determine the policy implications," says Tubb. "With population ageing there should be pressure to divest money from environmental spending. But my conclusion suggests that, if the public planner seeks to maximise the welfare of the majority, public spending (on the environment) will be maintained."

Countries are resisting the welfare demands of baby boomers (born between 1946 and 1964), whose numbers give them the power to push for more care and transfer payments to services for the ageing at the expense of other budget priorities, such as the environment. In the lead-up to the 2012 federal budget, the Greens party – which holds the balance of power in Australia's federal parliament – has been putting the heat on the government to maintain and expand environmental protection, such as carbon pricing.

In tandem, the National Aged Care Alliance has been campaigning for budget money to "fix the system today so it can provide all of us with the choice, quality and dignity we deserve as we age". It wants funds to implement the expensive, far-reaching reforms recommended by the 2011 Productivity Commission report Caring for Older Australians. Neither the Gillard government nor the opposition has officially responded to the report or committed to its recommendations. Included in the alliance's pre-budget lobbying is a poll it commissioned showing four out of five Australians believe the nation is not spending enough on care services required by an ageing population. According to the poll, more than two-thirds would forgo a budget surplus to pay for reforms in aged care. "Most Australians know that the demographic time bomb is ticking," says Ian Yates, chairman of the Council on the Ageing (COTA).

Ageing Implications

For a decade the United Nations (UN) has been warning of an irreversible trend of population ageing as pre-industrial societies with high levels of fertility and mortality eventually transit to developed economies with low fertility and mortality. This demographic transition has profound social, political and economic implications. Socially, population ageing affects health and healthcare, family composition, housing and migration. For Australian men aged 65 to 74, the average cost of their pharmaceutical benefits is 18 times men aged 15 to 24, according to former treasurer Peter Costello, who commissioned the Intergenerational Report on preparing Australia for this demographic change. The Productivity Commission estimates the cost of caring for Australia's ageing population presents a looming fiscal gap of as much as A$2000 billion.

At the same time, the alarming pace of climate change poses the other significant public policy challenge. "Though the requirement for immediate and sustained investment in climate change mitigation is well understood, the impact of population ageing on government environmental expenditure has been ignored," notes Tubb's paper, Does Population Ageing Affect Government Environmental Expenditure?, which won the 2011 Committee for Economic Development of Australia (CEDA) prize for excellence in economics and public policy.

However, just what role an ageing population will play in public affairs is unclear. John Stirton of polling agency Nielsen regularly runs polls for the Sydney Morning Herald newspaper and observes that people grow conservative as they age. "The emissions trading scheme caused much more opposition from older than younger voters, generally speaking – consistent in all states and in everything we have done," he says.

Yet it can depend on what's being measured. A study last year of Australian attitudes to climate change conducted by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) found there was a only very weak correlation (.082) between age and belief in climate change, with older people more likely to believe that climate change is happening than younger people. Income was unrelated to belief in climate change, however, there was a statistically significant, but small, association between gender and belief in climate change, with women more likely to believe it was happening than men.

Whether the CSIRO survey will impact funding allocations is not clear, says Ben Newell, a psychology professor at the University of New South Wales. "But I think one needs to be careful in concluding that older people are less interested or more likely to 'deny' climate change per se," he says.

Environmental Motivations

What people say, what they do and what they are prepared to pay for are not the same thing. Environmental psychologists point out that pro-environmental behaviour is spurred by a combination of self-interest and pro-social motives. Numerous studies have found that individuals' behaviour is often inconsistent with their professed environmental awareness and concern. On average an individual's support for environmental protection expenditure is inversely related to their age. One study actually specifies that each 10-year increase in age is associated with a 2% decline in the probability that an individual would be willing to pay higher prices to protect the environment. For instance, the degree to which Americans are willing to incur higher petrol prices, or to pay for improved air quality or wetland preservation declines with age, various surveys show. Environmental knowledge and awareness does not change this.

Tubb argues that important public policy implications arise when these results are considered together with the demographic trend of population ageing. "In particular, if older individuals exhibit declining willingness to pay for environmental care and diminishing support for government environmental protection expenditure relative to alternate avenues of public expenditure – such as healthcare – population ageing may cause public funds to be diverted away from environmental expenditure and towards elderly care," she says.

The UN warned that population ageing may induce changes in the political sphere. Yet the relationship between age and voting is disputed and it's complicated by the influence of the era in which people have grown up. Those whose formative years were during the 1930s depression are more likely to be conservative than baby boomers from the swinging '60s.

Nielsen's Stirton sees a change in attitudes coming as more baby boomers – now aged between 48 and 66 – retire. "They may break down the conservatism. They are culturally very different from the previous generation born during the war, the 1930s and earlier," Stirton says. "But it's complex – they may be progressive on social issues, but not on economic issues. Older people tend to have more wealth and want to hang onto it and not take risks, and can be economically conservative. [But just] as science moved on when the older generation died, and the new generation accepted the Copernican Revolution (in the 1500s), so [it could be] with our society."

Michael Sherris, a professor of Actuarial Studies at the Australian School of Business, cautions that political actions are complex and involve many factors. Sometimes a simpler framework that provides an explanation may also not include other quite valid explanations. "The older generation may prefer environmental expenditures because they care about their children's and grandchildren's future. There is always a trade-off and it's just how much you are prepared to give up in consumption for these other benefits," Sherris points out.

Yet an overall age effect has been shown in US electorates – the older the voters, the less MPs support environmental causes. This suits Tubb's hypothesis that as the median voter ages, the demographic shift may heighten political pressure to tilt the composition of social spending in favour of the elderly at the expense of environmental care. Analyses of political surveys and voting patterns do show a negative impact of age on support for US Government environmental protection expenditure. "Governments seek not simply to maximise net social benefits, but also to accommodate the preferences of competing interest groups and the median voter," argues Tubb. "So the ageing of the median voter may have a significant impact on environmental protection policy."

Ageing, Not Greening

Tubb's theoretical model assumes there is a tension between what a government with a fixed budget can spend on either environmental quality or elder care. Any environmental spending now will only benefit environmental quality in the future, by which time older people won't be around to enjoy it, so clearly they will support spending on transfer payments which benefit them now. "Of course, this assumes that older people have no altruistic motive for supporting environmental spending – but again, many studies have consistently shown that as people age they become less and less likely to support environmental spending," Tubb says.

In Tubb's model, workers and retirees, who both value environmental quality and consumption in youth and old age, diverge in their policy preferences. Since the workers and the retirees want different policies, the outcome is determined through the political process. Political parties converge in platforms that try to maximise the best outcome for the whole electorate. Yet, since the old are always the minority, the policy preferences of the older generation will, therefore, have no impact on political outcomes if age is the only determinant of policy choices.

The model is backed empirically by government environmental expenditure data for 47 low, middle and high-income countries of various social, political and institutional differences between 1970-2007. For about 95% of the countries in this sample, which was sourced from the UN, increases in longevity positively impact on environmental protection expenditure. Tubb found the demand for public spending on the environment is positively related to per-capita income beyond a threshold of about US$20,000 (calculated at 1990 rates).

"This an economy-wide result, so when a country's average income per person rises above that threshold level, national governments are more likely to spend public funds on the environment – so the amount of government environmental expenditure tends to rise with average income," says Tubb. "This result is quite intuitive, since citizens as a whole tend to demand a better quality environment when the country (and its citizens, on average) becomes more prosperous."

The empirical data also shows that although the proportion of individuals in the population aged 65 years and over negatively affects public spending on the environment, this effect is counteracted by the positive impact of increases in longevity and the proportion of the population aged between 15 and 64 years.

Elisabetta Magnani, an economics professor at the Australian School of Business, says research is trying to understand what synergies and obstacles may emerge with population ageing and environmental change. "One factor is pushing spending on the environment up, another down. There is a net effect shown here. Ultimately, it is clear that population ageing may not be such an obstacle to government investment in environmental protection," she concludes.

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