UK – The government’s projections about the long-term costs of state pension provision is overly optimistic, with a gradual build-up of debt related to retirement provision likely by 2050 if current policy remains unchanged, warns Standard & Poor’s (S&P) in its latest report on demographic changes.
S&P says EU surveys suggest the UK will do better than its EU counterparts up until 2050 in controlling pension costs. However, Moritz Kraemer, a credit analyst at S&P, says this is based on unrealistic forecasts.
“The UK is expected to reach 2050 as a net creditor with a small government surplus. This is based on somewhat implausible assumptions, especially that the pension benefit ratio, already the EU’s lowest, will fall further by one half by 2050. It is also assumed that health spending will only increase by 1.5 percentage points of GDP in the same time-frame,” he comments.
S&P’s own predictions, assuming the UK’s public pension spending were to grow at the same rate as the EU average and health-care spending were to increase sufficiently to bring it into line with the EU median, show a different picture.
S&P’s simulation predicts that whilst the UK would still probably do better than most of the EU, the general government deficit would rise above the Maastricht Treaty’s ceiling of 3% of GDP during the 2030s and 2040s, and gross government debt would exceed the treaty’s 60% maximum by 2045.
However, S&P believes the government will act to avert this sort of problem occurring. “In practice, this potential deterioration is implausible, as we expect the UK – as well as its EU partners – to rise to the fiscal challenge posed by an aging population. Nevertheless, the S&P simulation highlights the potential for misplaced complacency on the strength of optimistic forecasts,” says Kraemer.