Yahoo Finance How the aging population is a creaking liability for working population
Good news derailed Theresa May’s manifesto launch. She might not have seen it that way – it is rare for any party to abandon a manifesto pledge just four days after its announcement and U-turns of this nature are embarrassing for a sitting Prime Minister with a reputation as a stickler for detail. But none the less, the social care debacle is the result of some exceptionally good news.
Britons are living longer lives than ever before. In almost every way, that is a joy. The main difficulty comes in deciding how to finance elements of that longevity. In this case “the dementia tax” refers to one of the many terrible illnesses of old age, one which results in extensive care needs and expensive bills.
Social care is part of a wider package of the costs for an ageing population.
Chronic illnesses leave patients straddling the boundary between the National Health Service and council care budgets. Diseases of old age are often hard to cure and costly to manage.
Pensions are another problem. It is a common misconception that benefits paid after retirement are funded by payments made by those pensioners when they were in work. In fact, they are largely paid for out of taxation from the current workforce. As the population ages, each worker’s taxes have to support more pensioners – a difficult position to sustain.
To understand the scale of the challenge, by 2039 the Office for National Statistics expects that the number of people aged 75 and over will have risen by 89pc to 9.9 million.
The number aged 85 or over will have more than doubled to 3.6 million while the number of centenarians will rise almost six-fold to 83,000. One in 12 of the population will be 80 or over.
Contrast this with the initial position when the state pension was introduced in 1909. Intended to aid the very oldest in the country, it gave weekly payments to those aged 70 or older at a time when the average man died at 59 and the average woman at 63. From the Forties, the pension was given out at 60 for women and 65 for men – when men could expect to survive into their late 60s and women into their early 70s. Now, the average death takes place in a person’s 80s.
Yet the state pension age is only gradually rising, edging up to 66 by 2020 for men and women, then to 67 by 2028. The number of people eligible to receive a state pension will rise 33pc, from 12.4 million in 2014 to 16.5 million by 2039. At the same time the number of people of working age will increase by only 11pc to 44.6 million.
In 2014 there were 310 pensioners to every 1,000 people of working age. After a brief fall when the retirement age hits 66, it will rise once more to 370 in 2039, the ONS estimates.
This places a burden on the working population. Last year state pensions cost £108bn, a rise of 25pc since 2010-11 as the population aged and the triple lock forced up spending levels.
The Office for Budget Responsibility’s long-term forecasts estimate that will rise from 5pc of GDP in 2021-22 to 7.1pc of GDP in 2066-67 due to the population ageing.
Healthcare costs are even more expensive than pensions, as older Brits spend longer stretches of retirement in ill-health. On OBR forecasts, spending on health will rise from 6.9pc of GDP in 2021-22 to 12.6pc in 2066-67, accounting for one pound in every eight spent in the economy.
In the process, funding these extra costs is forecast to push government spending to extraordinary new levels.
This year the Government will spend the equivalent of 39.9pc of GDP. In 20 years’ time that will hit 43.5pc, the OBR believes.
Government spending will smash through the 50pc level in the 2050s, and hit 54.4pc at the end of the OBR’s current forecasts in 2066-67.
In that context the social care budget looks relatively small, at 1.1pc of GDP in 2021-22 – though it is set to double to 2pc of GDP in 2066-67 on the OBR’s numbers.
Solutions are hard to come by, as old age income and care needs to be paid for by someone, whether privately or publicly, and reductions in provision are unpalatable when pensioners have anticipated a certain standard of living for decades.
Given the challenge is based on demographics, looking at changing the shape of the population is one option.
But it is difficult to achieve.
“For countries with a demographics problem, spotting it is one thing, but trying to tackle it is a much harder task. Given the slow moving nature of populations and the many explanatory factors – birth rates, mortality rates, fertility rates and migration – it is hard to affect both the population size and composition quickly,” said HSBC economist James Pomeroy in a report which studied population changes across the globe.
“Policy has to be planned years in advance, as someone born today will not enter the workforce for 15 to 20 years. The domestic solutions of productivity increases, greater participation and raising fertility appear to be ineffective over the short to medium term.”
Higher migration might be a quicker solution, as ready-made adults can move to the UK quickly – and, indeed, are keen to do so.
Immigrants tend to be of working age and so fund the state rather than removing government resources.
However, the Government is currently moving in the opposite direction with a target to reduce net immigration to below 100,000 per year.
If that goal is met, the population would age more quickly and the financial position become even more severe. On ONS forecasts of annual net immigration of 105,000, the old age dependency ratio worsens to 383 pensioners per thousand Brits of working age by 2039, compared to 370 in its central forecast or – with net immigration of 265,000 per year – 357.
Even then the higher level of migration does not stop the gradual ageing of the population, merely slowing the pace.
Additionally, the Centre for Business and Economic Research (CEBR) last week warned that hitting that migration target could reduce potential GDP by as much as 3pc over the next decade, denting the Government’s ability to finance extra spending.
Other solutions include reducing benefits.
The retirement age is being gradually increased, but is running up against some political opposition and is nowhere close to matching the rise in life expectancy.
Theresa May has promised a “double lock” to increase pensions in line with the higher of inflation or average wages each year – scrapping the third element which had been a promise of raising pensions by a minimum of 2.5pc if neither wages nor prices grew at that level.
This slows the pace of expenditure growth, but only just. The Institute for Fiscal Studies still expects pensions to rise to almost 7pc of GDP over the next 50 years under the double lock, rather than just over 7pc with the triple lock.
Politically these are exceptionally tough challenges – with an electoral cycle of five years, a challenge which grows gradually over decades is easy to ignore, postponing serious tax rises or spending cuts into future parliaments.
“Having too large a share of the population of retirement age will influence government spending, partly for political reasons,” says Pomeroy’s report. “With large shares of the electorate in the over-65 age range, there is an incentive for government policy to favour them, be it in terms of fiscal spending or choices for investment.”
The UK has avoided a reckoning in part because of relatively high immigration which delays the population’s ageing.
But that reckoning is still on the way, and U-turns on brand new social care policies will only make it harder for the UK to have a sensible discussion on how to plan for the inevitable.
