Sections

Crisis! What crisis?

The current debate about pensions and about how society can best adapt to an ageing population is distorted by the belief that ageing is a huge economic and social problem, leading to a sense of crisis. Yet the population will not age overnight and we have some 20 years to learn how to cope – 20 years in which to defuse the so-called demographic time bomb.
A recent study by an inter-disciplinary research team at the independent think tank Tomorrow’s Company* argues that in reality there is no ageing crisis. As a society we can afford to grow old. Their report challenges some of the assumptions that have been built into the debate up to now and puts the case for a shift in thinking to lay the foundation for a fresh approach to pensions.
The fundamental reason why ageing populations are affordable in developed countries is that rising productivity consistently outweighs any potential negative impact on improving living standards arising from an increase in the proportion of elderly non-workers.
Most of the energy and discussion about the implications of an ageing population would be better spent on helping ensure a strong basis for wealth creation into the future. Greater prosperity can both allow everyone’s living standards to improve and also allow society to adjust to any challenges it may face in the years ahead, including funding relatively higher levels of retirement income above what may be possible in the immediate future. At a mere 1.75% productivity growth per year by 2045, an average British worker will be about twice as productive as today. In other words, a doubling of new value and resources being produced, while the ratio of over 64s to the rest of the population grows by less than 20%.
The particular demographic statistic that has helped create a sense of crisis and which has been major stumbling block to a clear understanding of the size of the problem has been the so called old age support ratio. This is the ratio between the population of working age (16-64) and the numbers 65 or over.
In 2003 there were 4.1 people of working age for every person over state pensionable age; it is projected that by 2041 there will be only 2.36 people of working age for every pensioner – a fall of 42% in the ratio.
However, this statistic ignores the fact that some 9m people of working age do not work and are dependent on taxation for their incomes. As was pointed out by the Economic Policy Committee of the European Commission in 2001 the key variable is not so much the old age support ratio as the balance between economically active and inactive persons – the economic support ratio.
Using the economic support ratio, which simply relates the numbers of people actually working to the rest of the population, serves to dampen fears of a crisis. This ratio was 0.92 of a worker for every dependent in 2003 and is projected to be 0.80 by 2041 a fall of only 13%. Incidentally the ratio was less favourable in the past. It was 0.72 in 1981.
We should also bear in mind that not all old people are in need of ‘support’. The latest figures, for 2002/2003 show that the top 20% of retired households in terms of disposable income paid £8,392 (e12,482)in taxes and received £7,557 in pension and benefits from the taxpayer (some of which, such as the disability living allowance were not age related)

Another factor creating a sense of crisis has been the references to a huge savings gap – a ‘black hole’ variously estimated at £27bn and some £50bn. However, the problem is not so much that as a nation we are not saving enough. It is rather that half the population have substantial savings and the other half have very little. Only 44% of 16 to 64 year olds have a private pension. There are many reasons for this state of affairs, the most important being that people on low incomes cannot afford to save; they are aware that if they do so they will be penalised by means testing when they retire; the decline in the number of defined benefit schemes; and there is still widespread distrust of the financial services industry.
Saving for retirement is not like putting loaves into the freezer to be consumed later. It mainly involves purchasing bits of paper issued by
companies or the government. This does not in itself ensure an adequate level of investment in the future of the economy. Its main impact is to drive up the prices of shares and bonds – to levels that ultimately prove unsustainable, as last happened in 2000. The point is that the only savings that will help us pay for future pensions are those that are channelled into productive investments in capital goods or in R & D. These saving will come mainly from corporate profits. All future pensions, whether funded or pay-as-you-go will have to be paid for out of the goods and services produced by future generations.
One of the options being considered by the Pensions Commission is that the average retirement age will need to rise.
It is almost certainly the case that as longevity and health improve, or for social reasons, many people will both wish and be able to work longer.

Many older workers have skills, experience and attributes that are beneficial to an employer and to the economy as a whole. For example, reliability, flexibility, fewer days off, understanding customer needs and politeness.
What is uncertain is what the level of demand for older workers will be given continuing growth in productivity.
Given that in the UK today there
are some 500,000 job vacancies, a
level consistent with the normal rate
of churn as people change jobs, it is
difficult to see where a significant
number of jobs for older people would come from unless economic circumstances and job opportunities change radically.
There would be little point in raising state pensionable age to 67 or 70 if most people were unable to find employment up to that age. They would become unemployed and claim benefits that would be more costly to administer than the more straightforward state pension.
Similarly if jobs were to be created in the public sector primarily to provide employment for people aged 65 to 70, the cost to the taxpayer would be considerably greater than the cost of providing the same number of people with a state pension.
Tomorrow’s Company supports the growing consensus calling for a universal taxpayer-funded state pension based on citizenship.
This would remove the deterrent to saving created by means testing, would greatly improve the position of women, would give the poorest people in our society a firm promise of a degree of security in old age. It would have the important virtue of simplicity, both in administration, leading to lower costs, and in terms of being understood by the public.
The ageing of the population is an ongoing process of which we are aware and we have some 30-40 years to take the action that will prevent damage to society and the economy. We are not in a crisis situation; providing the UK can maintain the rate of productivity growth achieved over the past 20 or so years the fact that the percentage of old people in the population is rising need not adversely affect living standards.
*The ageing population, pensions and wealth creation. Tomorrow’s Company October 2005.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

Begin Your Search Here