What happens when the pensions run out?

My late father-in-law used to joke about the pensioners jugging up in the pubs and clubs of South Wales. He reckoned the old folk drank more than the youngsters. It certainly seemed that way last time I was in his local Wetherspoons just before noon on a Tuesday lunchtime and found the place full of sixty- and seventy-somethings tucking into pub lunches.

A CEBR report for Saga, published last month, found that the over 50s account for a greater share of household spending than they did a decade ago.

And, as my father-in-law would have predicted, their share of spending on eating out and boozing has risen the most.

The over 50s are only one third of the population but they do more than their fair share of drinking, travelling and eating out.

Research in 2012 by the Intergenerational Foundation found similar patterns. Leisure spending by pensioners has risen considerably over the last ten to fifteen years.

Change in spending on theatre and cinema tickets 2001-2010

Change in spending on foreign travel 1999-2011

Change in spending on eating out 2000-2010

Of course, some of this increase is due to the fact that there are more older people now than there were a decade ago. Numbers alone can’t account for all of it through. The over-50s went from 33.3 to 34.7 percent of the population between 2001 and 2011. The proportion of the over-65s increased from 15.9 to 16.4 percent. (See the 2011 Census.) Much of the rise in spending among older age groups is due to accumulated wealth and generous pensions.

I touched on this when The Economist called time on Britain’s old industrial towns last year. I have no firm data for this but I reckon pensioner spending is one of the reasons why some of these towns have avoided economic collapse. Many of the old industrial areas have a high proportion of retired people. Their money is keeping these places afloat.

Percentage of retired people by local authority

Source: ONS Census Data

In a sense, the industries that once sustained these towns are still present, in the form of their pension funds. As my father-in-law explained, in his part of South Wales. many of his contemporaries had pensions from the government, the old public bodies, such as the National Coal Board and British Rail, or the big industrials, like Ford, BOC and British Steel. The young people pulling pints, running around with plates of food and packing shopping bags were kept in work by the generous spending of the active retirees.

Pension funds based on the individual and corporate prosperity of the boom years have been sustaining former workers long after the industries that created that wealth disappeared.

But what will happen when these pensioners die or become too infirm to spend and are replaced by the next wave of retirees?

Many of the aforementioned companies have closed their final salary pension schemes; British Steel in 2009, BOC in 2011 and Ford in 2012. Despite closing its final salary pension over a decade ago, BT is facing a rising pensions deficit. Even the solid John Lewis  is having to cut back on entitlements as its pension deficit rises.

According to the Department for Work and Pensions, the number of people in defined benefit schemes has more than halved over the past two decades. Over the next decade, fewer people will retire with the generous pensions that previous generations enjoyed.

DWP projections suggest that the amount paid out be defined benefit pension schemes will start to fall sometime around now and will decline steadily over the next few decades.

It is extremely unlikely that the defined contribution schemes will pay out anywhere near as much as the old defined benefit schemes. A recent study by Bath University found that the shift to defined contribution schemes will leave many people  with insufficient funds for retirement. In January, a Policy Exchange paper warned of a pensions time bomb as the number of over 65s rises while the funding for their retirement falls. There will be a lot more old people but a lot less pension money to go round.

Falling pensioner spending is going to be a problem for the whole economy, especially one so reliant on consumer spending, but it will hit some areas particularly hard. Most of us now accept that we will have to work beyond what we now consider to be normal retirement age. But that assumes that there are jobs available. If pensioner spending is preventing economic collapse in the old industrial towns, what happens when that spending stops? Instead of ordering food and booze in Wetherspoons, the over 65s will be competing with the young people for the bar jobs.

Generous pensions are the afterglow of our old industries. Once they are gone, some places may struggle to keep the lights on.