The latest intergenerational report shows people will be living longer over the next 40 years but must be prepared to work longer.

Australia's growth and prosperity will suffer unless more older people and women are encouraged into the workforce and government spending is brought under control.

But Treasurer Joe Hockey insists the "best years are ahead of us".

Mr Hockey on Thursday released the latest Intergenerational Report - a five yearly review of Australia's economic direction and the state of the budget spanning 40 years to 2055.

"It is fantastic that Australians are living longer and healthier lives but we need to address these demographic changes," he said.

"If we don't do something, we risk reducing our available workforce, impacting negatively on growth and prosperity, and our income will come under increasing pressure.

"Doing nothing is not an option."

Despite the challenges, the report projects economic growth of 2.8 per cent a year on average over the next four decades.

This would deliver an annual income rise for the average Australian from $66,400 today to $117,300 by 2055.

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