Increasing migration and fertility rates will push Australia's population to 35 million by 2049 - around 7 million more than previous estimates released just two years ago, Treasurer Wayne Swan says.

The Government says its third intergenerational report will show the country's population is expected to grow by 65 per cent by the year 2049.

Speaking today in Sydney Mr Swan said the rising population was one of the biggest economic challenges facing the nation.

He said the number of young people and people of working age was expected to increase by 45 per cent over the next 40 years, but the number of people over 65 was set to double.

For every person now over 65 there are five Australians of working age but in 40 years time that will drop to 2.7 Australians.

"These are some of the facts that illustrate just how big a challenge population is when it comes to the Australian economy," he said.

"It is arguably one of two of our greatest economic challenges along with climate change."

The Treasury Department has made the dramatic upward revision in its third intergenerational report which will be released in full before the next Federal Budget. The previous report was released only two years ago.

Mr Swan says Australia's fertility rate is now at 1.9 births per woman - a level which has not been seen since the 1980s.

This, combined with increasing numbers of migrants, who also tend to be younger, will contribute to the larger-than-expected increase.

"The larger projected population poses a whole raft of policy challenges and opportunities, quite apart from the age structure," he said.

"Careful environmental and infrastructure planning will be required to support this population."

It is forecast that by 2049 people over 65 will make up 22 per cent of the population, compared to around 13 per cent today.

"What Australia has to do is face this challenge fairly and squarley and that's why we're putting forward an intergenerational report," Mr swan said.

Mr Swan has also used his speech to launch the new Australian Institute for Population Ageing Research, which will examine the impacts of the ageing population on the economy, society and environment.

"There's never been a more pressing need to bring together academia, Government and industry to consider the impacts of population ageing," he said.

A new longevity index, which will measure the cost of retirement, has also been launched and will be published quarterly.

Australia's population is now at just under 22 million according to the Australian Bureau of Statistics.

In this year's Budget the Government gave pensioners a $33 rise but also flagged that it would increase the pension age to 67 by 2023.

Social researcher Mark McCrindle says new cities need to be created to accommodate the booming population.

"We've doubled since 1963 and the cities have doubled in size as well," he said.

"Now we're going to almost double again by mid-century, but the cities can't double because there's just not the ability to concentrate that mass in.

"So the only way to continue to build our population is if we create new cities or grow some of those smaller regions, so there really does need to be a new plan."

Labor backbencher Kelvin Thomson says the projected forecast will have a "catastrophic" effect on the environment and has called for immigration levels to be cut.

"It's now time for population reform. We are sleepwalking into an environmental disaster," he said.

"Australia is blessed in the quality of life that we have and I believe that we have an obligation to pass onto our children an environment and a country in as good a condition as the one our parents left to us."