The catchily titled House of Lords Select Committee on Public Service and Demographic Change warned last week that Britain is woefully under-prepared for the rising number of elderly people. Regular readers of this blog will know that this is something I have been banging on about for ages.
Perhaps wisely, the Lords avoid any attempt to quantify the size of the problem in terms of its likely social and economic impact, instead referring to some of the same studies I have posted about on here, but the report contains a clear message. This sentence sums it up:
Unless preparing for the ageing society begins in earnest, we risk a manageable policy challenge becoming an unmanageable public service crisis.
Governments have, of course, known for years that the proportion of old people in the population was going to increase and that this would bring with it a number of problems:
- A smaller proportion of people paying taxes;
- A larger proportion of people dependent on state benefits;
- A greater number of people needing expensive care and social support;
- A smaller proportion of the population in work, reducing economic growth.
That was always going the be a challenge. The trouble is, a number of unforseen things happened to make the problem worse:
- The financial crisis reduced tax revenues and increased public debt;
- The economy went into the deepest recession for decades;
- The final salary pensions enjoyed by previous generations have been wound up leaving the next wave of pensioners badly prepared for retirement;
- A cohort of impoverished pensioners is likely to depress demand and growth even further;
- The high levels of economic growth enjoyed by western economies in the last half of the twentieth century are looking as though they may have been a historical blip.
All of which leaves us with an ageing, high debt, low growth society, piling ever-increasing costs onto over-stretched public service and welfare systems. As Edward Hugh said on A Fistful Of Euros, the financial crash couldn’t have come at a worse time for the Western economies:
The point to get is that it isn’t simply the level of debt that is the problem, it is the level of debt in the context of the implicit liabilities (in terms of health and pensions) which such population ageing represents, and the reduced growth outlook that having declining and ageing populations represents. Europe’s leaders are essentially in denial on the extent of this problem, and are putting all their eggs in the “structural reforms to raise trend growth” basket.
The Lords are right to avoid over-panicking but also right to warn that we have to start preparing for this now if we are to have a hope of managing it. This NIESR report reckons that the increased costs of ageing will start to bite sometime towards the end of this decade. The Local Government Association predicts that, at around the same time, public services will collapse as an increased amount of funding is eaten up by care for the elderly. Using OBR figures, PwC predicted that ageing costs would take up an extra 0.5 percent of GDP by 2020 and an extra 2.5 percent by 2030. Compared to some other projections, these figures are on the conservative side. If GDP growth continues to be low, then the more pessimistic predictions, closer to 4 percent of GDP, may be nearer the mark.
The Lords report presents a number of recommendations but it is very clear on the need for older people to work for longer.
All other things being equal, GDP (and GDP per capita) will be higher if there are more people in work. Conversely, if the proportion of the population not working increases, this reduces growth output. So for economic reasons it is desirable to encourage older people to consider working longer.
For a smaller proportion of working people to provide the economic growth and increased tax revenues needed would require a massive increase in productivity. According to McKinsey, productivity would have to increase 33 percent faster than it has in the last two decades. Unless we stumble across some new technology which drastically increases the productivity of the fewer people of working age, this is unlikely. The only other solution, therefore, is to change the definition of working age.
The Lords recommend an end to ‘cliff-edge’ retirement and a faster increase in the state pension age. The report doesn’t make a specific recommendation but cites Lord Turner’s suggestion that it should rise to 70 by 2030. That would mean that anyone born after 1965 would be expected to work until they were 70.
Is that so unreasonable? After all, the reason we are living longer is because we stay healthier for longer. 65-year-olds now don’t look like 65-year-olds did when pensions were first invented. Many of us are capable of working for longer. As the Lords’ report notes:
Working for longer would increase income from work, potentially increase savings, and reduce the time of dependence on those savings. Working for longer can often improve health and brings social and intellectual benefits. More people working for longer also help sustain economic growth and improve the country’s fiscal position.
As I have said before, given the UK’s fiscal position and its demographic challenges, it would be unreasonable for us to expect to retire at 65. It’s not often I agree with Frazer Nelson but his Spectator piece, celebrating the older worker, notes that the number of 65-70 year olds working has doubled over the last decade. To say, “These energetic over-65s will help pull Britain out of this recession” may be over-egging the argument a bit but, without them, economic growth will almost certainly be slower.
The Lords other key recommendation is a redesign of public services and especially health and social care, something else I have argued for ad nauseam on here.
The Government must set out the framework for radically transformed healthcare to care for our ageing population before the general election in 2015. All political parties should be expected to issue position papers on the future of health and social care within 18 months, and address these issues explicitly in their manifestos for the 2015 election.
Given that the pressure on public services will start to build during the next parliament, this isn’t unreasonable.
It goes on:
The Government elected in 2015 should, within six months, establish two commissions based on cross-party consultations: one to work with employers and financial services providers to examine how to improve pensions, savings and equity release, and one to analyse how the health and social care system and its funding should be changed to serve the needs of our ageing population. Both commissions should be required to report within 12 months and to make clear recommendations for urgent implementation. We also conclude that when political parties are working on their manifestos, they ought to consider the wider implications of the ageing society for the balance of responsibilities between individuals and the Government.
It’s a start because, as the report also notes, to-date, governments have pretty much avoided talking about the problem and have done very little to prepare for it.
It’s a problem that isn’t going to go away and, at the moment, all the indicators suggest that the impact of an ageing population on an already cash-strapped public sector will be worse than we had previously thought. The task for governments in the rest of this decade is to design the state that can deal with the twenties and thirties. The alternative is to do nothing and watch our public services slowly collapse.