A new OECD report has projected that workers may need to delay their retirements to preserve GDP growth as countries face growing demographic challenges.

The OECD (Organisation for Economic Co-operation and Development)’s 2025 Employment Outlook warned that ageing populations are set to worsen labour shortages and fiscal pressures amongst OECD countries.

“Population aging is set to lead to significant labour shortages and fiscal pressures. We estimate that, by 2060, the working-age population will decline by 8% in the OECD and annual public spending on pensions and health will rise by 3% of GDP,” OECD secretary-general Mathias Cormann said.

Without decisive policy action, the report warned that OECD countries “will face an unprecedented collapse of GDP per capita growth”, with a projected annual slowdown of 40 per cent by 2060.

This would see average annual GDP growth fall from 1 per cent in 2006-19, to 0.6 per cent in 2024-60.

The report found that the old age dependency ratio, which was 31 per cent in 2023, is set to climb to 52 per cent by 2060 among OECD countries.

In the absence of systemic reform, the OECD warned that this demographic trend could have stark implications for intergenerational equity, as the tax burden of supporting a growing older population is set to fall squarely on younger workers.

“Given the design of social protection systems in most OECD countries, increased calls on publicly financed support and services will need to be funded through the taxes and social security contributions of a shrinking working-age population,” the report said.

“This shift of resources, from current and future generations of workingage adults towards the dependent old-age population, has strong implications for intergenerational equity. Moreover, it will compound the existing inequalities in income and wealth across generations.”

As the Australian government explores the prospect of substantive tax reform at its upcoming productivity roundtable, intergenerational equity and the reality of an ageing population are likely to be pressing topics of discussion.

Ainslie van Onselen, chief executive of CA ANZ, has warned that our tax system is over-reliant on personal income tax.

“Our system is over-reliant on personal income tax, and that is unfairly punishing Australians also facing cost-of-living and housing pressures,” she warned.

Australia’s share of personal income tax revenue, at 51.6 per cent, is more than double the 2022 OECD average of 23.6 per cent.

According to the OECD, there are three main solutions to curb the structural labour shortages projected into the 2060s. These include boosting migration, increasing women's workforce participation, and keeping older workers in employment at higher rates.

“By reducing the rate of labour market departures by older workers to the level in the 10% of OECD countries with the lowest departure rates, the Outlook shows that OECD countries could significantly reduce the projected loss in GDP per capita growth from demographic ageing,” the OECD found.

Their modelling found that, in Australia, reducing the employment exit rate of older workers could boost annual GDP growth by just under 0.2 per cent.

Previous OECD research has projected that the average retirement age would increase from 64.4 years of age in 2022, to 66.3 years in 2066. In Australia, the average retirement age in 2022 was 64.8 years, ABS data indicated.

As the working population declines, the OECD added that countries would have to think seriously about boosting productivity growth in order to preserve living standards, including through the use of AI.

This is a timely finding for Australia, which has made productivity growth an area of policy focus after a decade of stagnation. The OECD underscored the importance of embarking on ambitious reform in the wake of these pressing demographic challenges.

“Ambitious policy action is needed to improve job opportunities for older workers, unlock the untapped labour market potential of women and young people, and revive productivity growth, including by ensuring that workers have the right skills to benefit from new AI tools,” Cormann said.