Reality check on the costs of ageing
It would be unwise to deny that population ageing will produce significant fiscal pressures on governments around the world, not least the UK. The Office for Budget Responsibility projects age-related public spending to rise from 21.3 per cent to 26.3 per cent of GDP per year, between 2016/17 and 2061/62.
The problem is the kind of assumptions that these figures lead to, namely that the state pension age needs to rise, to automatically reduce the ‘old age dependency ratio’, i.e. the number of people of working age supporting people in retirement. Firstly, the bulk of age-related spending increases will be on healthcare; I don’t quite see how compelling people to work for longer before they become entitled to the state pension minimises health spending pressures . In fact, it might increase these pressures.
Secondly, increasing the state pension age might artificially reduce the old age dependency ratio by increasing, statistically speaking, the working-age population – but this does not mean it actually increases the working population. Any money saved on state pension expenditure would be partially offset by increases in expenditure on out-of-work benefits, for those individuals in a limbo zone, too old for work but too young to retire.
This is why an important report released this week by the International Longevity Centre calls for the adoption and publication of ‘labour market adjusted dependency ratios’. As the report points out:
Labour market adjusted ratios… could help governments better understand the impact employment policies have on dealing with the costs of ageing. They take account of the fact that the old age dependency ratio does not capture the fact that many people of working age are actually not working. Governments could usefully measure and publish labour market adjusted dependency ratios to aid decision making on policy interventions which might help mitigate the cost of our ageing society.
Women and people at risk of social exclusion are more likely to be unemployed than others; it will be important that governments explore ways of helping people in vulnerable groups to access and remain the labour market. Governments might wish to look at ways of helping women with children to be able to remain in the workforce, through development of child-care programmes and work with employers to ensure fathers can contribute more to raising children and women are not penalised for taking career breaks.
The UK’s old age dependency ratio in 2010 was 0.28: for every working-age person, there were 0.28 people in retirement age. But with an employment rate of somewhere between 70 and 75 per cent in recent years, by my estimates this would give a labour market adjusted old age dependency ratio closer to 0.4. (Although we should recognise the limitations of any dependency ratio calculation, given that may people that are in work are also benefit claimants, an inconvenient truth too often downplayed by the government).
When you look at dependency ratios in this way, the more obvious and sustainable solution quickly appears to be increasing employment rates among the current working-age population, not trying to increase the size of working-age population through adjusting benefit entitlement ages. Indeed, it is workers approaching retirement that should be our main focus, alongside the groups identified in the ILC report. Statistics released today by DWP remind us that the employment rate for people aged 50-64 is 66 per cent, compared to 80 per cent for 25-49 year olds. The TUC’s own analysis of the Labour Force Survey found that, in the age group five years from current state pension ages, the employment rate is below 60 per cent – and the vast majority of those out-of-work are economically inactive rather than seeking work, because of the prevalence of ill-health and disability in this group.
This, alongside persistent inequalities in life expectancy, is why increasing state pension age would be inequitable. But perhaps even more importantly, despite the lazy assumption that delaying retirement is necessary due to population ageing, by focusing on this narrow objective at the expense of increasing employment rates among the current working-age population, we put at risk our ability to meet the costs of an ageing society in a far more effective way.