The affordability of pensions and how they are to be funded must be looked at in the light of the nation’s long-term economic and social objectives. In this context, the terms ‘support’ and ‘dependence’ are used and measured in an unhelpful way that incorrectly assumes a one-way relationship. The elderly are depicted as dependent ‘takers’, but they also support the economy and society through paying taxes and voluntary activities.
Instead of looking at the ‘old age support ratio’ policymakers should focus on the ‘total economic support ratio’, which relates the number of people who are working to the numbers not working. This was 0.48 in 2003 and is projected to decline to 0.45 by 2041. At this point it will be almost the same as it was in 1961.
Analyses of the savings gap are flawed, as they ignore government and corporate savings and cross-border capital flows. In any case, the only savings that will contribute to the creation of future wealth are those which are directed into productive investment.
There is also a failure to distinguish between pension savings and other savings. The UK has more wealth in the form of pension savings than the rest of Europe put together, but it is unevenly distributed. There are strong barriers to overcome, such as the loss of trust in the financial services industry and the existence of means testing, if those who can afford to save are to be persuaded to save more.
In principle, housing assets could be an alternative to investing in a pension fund. However, a house valued at more than £330,000 would secure an income of only £100 per week. In addition, more than a quarter of the adult population do not own a house.
Much store is also placed on people retiring later. However, many people will both wish and be able to work longer. What is uncertain is what the level of demand for older workers will be.
The main factor affecting our ability to afford an ageing population without the erosion of living standards is the impact of rising productivity. At a mere 1.75% productivity growth per year, by 2045, the average British worker will be about twice as productive as today, while the number and share of over 64s grows by less than 50%. Whatever the funding arrangements for pensions, the prosperity of the country and its ability to afford pensions that provide a reasonable standard of living will be a function of the wealth creating capability of people in work.
An Agenda for Change
There is no ageing crisis. As a society we can afford to grow old. Rising productivity can outweigh any negative impact on living standards arising from an ageing population.
The question then is how can purchasing power be transferred to an increasing number of retired persons in ways that are both politically acceptable and economically efficient? This will depend on how ‘retired’ they are, the level of their financial needs and the courage and vision of politicians and their advisers. There is a growing consensus, among expert groups, favouring a universal taxation-funded state pension. To achieve this would call for the ending of means testing.
Most of the energy and discussions about the implications of an ageing population could be better spent on helping to ensure a strong economic foundation for wealth creation into the future and continuing to focus on creating flexibility in the approach to retirement.
The 2004 Restoring Trust inquiry recommended the creation of a forum for self-regulation for the financial services industry, supported by an overarching ‘statement of principles’ to help restore trust. The establishment of a Financial Services Forum is a move in the right direction but needs further development, including standards and targets on which the industry agrees to be judged.
It is impossible to forecast accurately what society will look like in 30 to 40 years when ageing might peak in Britain. It is therefore dangerous to draw up a pensions regime now that supposedly anticipates how society might look like around 2045. Instead, we should make reasonable estimates for the next five years and begin learning about adapting to the increase in ageing. We can repeat the process each quinquennium thereafter.