This article was contributed by MSc Governance, Economics and Public Policy student Thomas Boulton. He argues that increases to the State Pension age are sensible, but daring solutions are needed to safeguard pensioners’ living standards and address fiscal deficit.
Photo by Anukrati Omar on Unsplash
In 2017, Theresa May attempted to introduce legislation that would have meant the value of an elderly person’s house was taken into account when measuring their eligibility for state funded care. This would have meant many more people having to pay for their own care. The backlash and subsequent backtracking almost cost May the position of Prime Minister. These events serve as an excellent foreshadowing of the likely problems policy makers will face this century. Data on public finances, forecasts in the UK dependency ratio and declining birth rates globally illustrate the emergent need to recognise the threat that demographic aging poses, and that traditional solutions will not be available.
Why we may have to work longer
Put simply, we are living longer, and old age is expensive to the exchequer. Over the last 40 years, life expectancy has increased at a faster rate than the average working life. As a result, the average number of years of retirement a person enjoys has almost tripled, from 5 years 10 months in 1980, to a peak of 16 years in 2014, and 15 years and 5 months in 2018, which comprises almost 25% of their adult life. Whilst nobody would want to begrudge someone a long and happy retirement, the impact retirement has on public finances cannot be ignored. With longer life expectancy, the length of a person’s life at which they are a net contributor to overall public finances begins to diminish.
Source: ONS
At the age of 68, the average person ceases to be a net contributor as a result of retiring and paying less tax, compounded by increased health and welfare spending when they reach their 70s.
Hard choices
Increasing the retirement age alone will not plug the gap. Life expectancy is forecast to continue rising in the UK. More significantly, demographic aging trends suggest increasing the retirement age may not have a significant impact, even if the electorate were to regard the idea of working longer as tolerable.
Source: OECD
Whether we choose to stick to a retirement period of just over 15 years, as in 2018, or maintain that a quarter of our adult lives be spent in retirement, people born in 1990 could still expect to be working in 2060. However, this would only leave public finances a little better off than they are now, given the forecast in the old-age dependency ratio.
Source: ONS
Birth rates and net migration
One straightforward solution to the dependency ratio is to increase the number of people in the country between the ages of 22-68. Easier said than done. Birth rates are in decline both in the UK and in all of the countries where the UK’s migrant workers have historically originated. This should leave today’s policy makers wondering where tomorrow’s migrant workers will come from.
Source: World Bank
Private pensions and productivity
One recent policy success has been the institution and uptake of workplace pensions, which will mean many fewer people will be reliant on the state pension. The possibility of withdrawing the state pension for those with large private pensions, and other benefits such as free TV licences may be politically tolerable, if framed in a redistributive way. Other than that, policy makers will have to find ways of ensuring tax receipts can increase, while also enabling higher birth rates. Given the further deterioration of public finances post pandemic, the solutions will have to be creative, and implemented more urgently than foreseen by Theresa May. Above all, they will have to be put forward to the public much more convincingly.
