How the UK could pay for its demographic “time-bomb”


by Nigel Stanley    
11:02 am - July 27th 2011

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Many of the headlines generated by the Office for Budget Responsibility’s recent report concentrated on the challenges of the demographic “timebomb” – the fact that we are living longer.

There will be undoubtedly be extra costs, but there is no need to give in to right wing calls to slash spending.

This is what the OBR chair Robert Chote said at the launch press conference:

Demographic trends are a key driver of our sustainability analysis, as they are of similar studies in other countries. Past increases in life expectancy and falls in fertility rates, combined with the demographic bulge created by the baby boom, mean the UK will have an ageing population. The fact that people are living longer, and longer in good health, is obviously welcome.

But an ageing population does create fiscal costs. Our analysis is based on the population projections produced every two years by the Office for National Statistics. The scenario of theirs that we use for our central projections has the proportion of the population aged 65 and over rising from 17 per cent this year to 26 per cent in 2061. It also has net inward migration averaging around half its recent levels over the long term.

I’ve constructed this chart from the data in the report to show their estimates of the various costs associated with ageing. (In this post I will make nothing of the declining share taken by public service pensions.)

ageing society costs as share of GDP

Our ageing society does have costs that will have to be met in the future. If spending on other areas does not fall, then either taxes will have to go up or spending on these areas cut back significantly over time.

But this worries the small-state right. As the Spectator blog says:

… it’s encouraging that the OBR is putting these projections into the public domain. The fiscal debate has, for too long, lacked the emphasis on the long-term … Rectifying that should encourage our politicians to concentrate on some of the choices facing them in the years ahead. Are they happy to countenance health spending at 10 per cent of GDP, or do they need to shift more treatments towards the private sector? Can they do more to curtail in rise in pension costs? And so on. “

But let’s think a bit more carefully about what the issue is here. There is common ground that we have an ageing society, and that this will result in extra costs. People who live longer will need more health care, pension payments and social care.

If they get this support, the question becomes whether this is best delivered by the public or private sector. In practice there is always likely to be a mixed economy for supporting the elderly. Most health care will be paid for by the NHS, while pensions will be a mix of state, occupational and private as now. Unpaid domestic labour by family carers will continue both to be vital and omitted from such charts.

There is a debate to be had about efficiency in different sectors – though not one progressives need shy away from as the NHS model is consistently shown to be one of the most efficient ways of delivering universal health care.

But the difference between the 2015 and 2060 OBR projections is less than the gap between UK and US spending on health care in 2009.

So the right doing little more than a restating of their opposition to collectively delivered public services.

Either they are saying the elderly simply shouldn’t get decent health care or access to social care or that it should be delivered inefficiently by the private sector in order to keep tax bills down even though it will still have to be paid for – and cost more.

It’s another example of the private for-profit hospital being seen as a source of economic growth and a dynamic economy, while a public hospital is a drag on the economy, even if they both carry out the same necessary function.

George Osborne can’t last for ever. By 2060 the economy will have significantly grown. It does not seem unreasonable to take a chunk of that growth as resources for providing support for people as they live longer.

But that will also require a shift away from the proceeds of growth being largely grabbed by the super-rich. Nor should we ignore the challenges of how best to raise the tax that will be needed, especially as some parts of the tax base are shrinking.

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About the author
Nigel Stanley is an occasional contributor to Liberal Conspiracy. He is the TUC’s Head of Campaigns and Communications. He's also at the ToUCstone blog.
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Reader comments


Your graph’s Y axis needs a label.

Nigel:

I know you probably didn’t choose the headline, but your article doesn’t really address it, apart from to say we will need to cut spending elsewhere and or raise taxes:

How the UK could pay for its demographic “time-bomb”

How would you find the extra 4-5% of (GDP? Public spending?) p/a over the decades while at the same time sustaining a huge annual deficit?

I don’t know why the comparison is always drawn with the US healthcare system, I don’t think it likely that the UK will ever move to such a regime .

A far better comparison would be with France where public and private hospitals compete for customers, who have the right to choose, with the majority of the funding comes from public health insurance. This system seems to offer better outcomes for healthcare and yet provides a good level of social security.

I think we should be seeing far more pragmatic approach from both the right and the left…!

@Rumbold

You are right that I didn’t choose the headline – and my original version at Touchstone was simply called “Paying for the Demographic Timebomb”.

My point is that these are costs that wil have to be met (unless the elderly are going to have a big decline in the quality of their life) whether it comes from tax or the private sector.

I don’t underestimate the challenge of doing this through tax, but, @EdS, I brought in the US example to show that societies can spend much more in the way of resources on something like health without collapsing – particularly if it’s foreseen and a gradual increase. (A comparison with France wouldn’t have made that point – that’s a separate debate.)

As societies become richer many of the things their citizens desire are best provided collectively as there are diminishing returns on the benefits we get from individual consumption (though I’m not a hair-shirt puritan about that). If that is right you would expect the amount we spend on collective goods (whether provided publically or privately through insurance or other means of burden sharing) to grow.

@Phil Hunt is right. Apologies that I missed off that the y-axis maps the share of GDP, though I think that’s clear from the text.

5. Charles Wheeler

“Either they are saying the elderly simply shouldn’t get decent health care or access to social care or that it should be delivered inefficiently by the private sector in order to keep tax bills down even though it will still have to be paid for – and cost more.”

This is the nub of the issue. Unless the right are to call for mass euthanasia, the costs of an ageing population will have to be met from national income. Empirical evidence shows that public provision is more efficient at providing health and social care, but neoliberals reject the redistributive aspect of public provision – the wealthy would rather pay a premium for their own healthcare than subsidise others. However, with the rise in inequality – which has accelerated since the banking collapse – many more people will simply not have the resources to provide for their own care through the private sector.

It is worth noting that much of the increase in longevity has little to do with technological advances aimed at keeping the elderly alive, and much more to do with the eradication of diseases that formerly claimed many in childhood, plus advances in hygiene and sanitation and improvements in diet for those now living into their 80s and 90s – a factor that will deteriorate with the rise in obesity, making simple extrapolations from the past into the future unreliable.

It is also the case that while the post-war ‘baby boom’ will lead to a greater dependency ratio for that generation of pensioners, the arithmetic will improve as the baby boomers die off – and only the state can adjust for this kind of intergenerational ‘hump’ in the demographic road. The private sector, with its emphasis on individual provision, can never accommodate these longer term trends.

N.B. Phil Mullan’s ‘Imaginary Timebomb’ offers an interesting corrective to the current doom-mongers, pointing out how our economy has already adjusted to huge demographic changes since 1911 (including a sixfold increase in over-65s) despite two world wars and a major depression, and suggests that the economic implications have been greatly exaggerated for political purposes.

6. Paul Fisher

Did labour have the right idea? not an expert or anything, just that if today’s worker’s pay for today’s elderly, (as well as health, and welfare, and so on), maybe we need an injection of young enthusiastic immigrants, but perhaps we went wrong before, (ecconomically speaking), allowing too many family member’s to stay (as we’d have to support them at extra cost).

Nigel:

Thanks for clearing that up- it makes more sense that way. The US healthcare system is under massive pressure as well though. I am glad to see that you are open to a bit of reform/innovation in bodies like the NHS; we have a lot to learn from places like India, where frugal engineering allows them to deliver quality care (in some areas ) for a fraction of the cost.

http://www.economist.com/node/18833589

Do you think state/public sector pensions should always be linked to life expectancy? If not, what is the alternative?

How about getting rid of our stupid border controls to create freedom of movement for the thousands upon thousands of eager young immigrants desperate to come and work to support us in our old age?

Go into a hospital and look around and wonder how it would keep running without so many incredibly hard-working young foreign-born British men and women.

We could do something like Singapore’s forced savings where people retire with some means to support themselves rather than relying on inter-generational transfers. I know, it is too radical expecting people to save for their retirement.

” Nor should we ignore the challenges of how best to raise the tax that will be needed, especially as some parts of the tax base are shrinking. ”

Umm, we could tax the actual people who are old. Only kidding, too radical.

10. Charlieman

@8. Tyrannyofthemajority: “How about getting rid of our stupid border controls to create freedom of movement for the thousands upon thousands of eager young immigrants desperate to come and work to support us in our old age?”

Thankfully, immigration rules permit care and health workers to enter the UK. They are here, we need to maintain the flow and we need to be more appreciative.

What most worries me is the common disrespect for other migrant workers. I want those workers to stay in the UK, to raise their families in the UK. People with get up and go are valuable. And if the UK treats them like shit, they’ll get up and go somewhere else.

11. Charlieman

@9. Richard W: “Umm, we could tax the actual people who are old.”

I’m planning to take my savings with me. It’ll be based on the KLF million pound bonfire on a remote island, featuring me with £6.33 in small change in my pockets in a coffin at the municipal crematorium.

Alternatively, we could tax people who are dead.

12. Leon Wolfson

@3 – If we’re picking health models, I like the .nl one.

@9 – Right, and we too could be a small totalitarian state!

Except, we already do have a direct equivalent to the CPF. It’s called NI. Except the CPF can also be used for certain housing costs, can be withdrawn if you emigrate and is far more limited in many ways (it will only support you for ~25 years, and the health portion is a limited account as well)

The high CFP rates are also a major factor in how late most people in Singapore have to work, as the funds are invested, but earn very low rates.

@11 – To be fair, with the abolishment of the retirement age, we *should* be charging NI to post-pension-age people.

13. Richard W

12. Leon Wolfson

” Right, and we too could be a small totalitarian state! ”

That outperforms us in virtually every measure

” Except, we already do have a direct equivalent to the CPF. It’s called NI. ”

Except, there are no savings in the NI fund. It relies on inter-generational transfers from the young to the old. We could call it the UK Madoff fund.

14. Charlieman

Apologies for intervening between an argument amongst the “boys”, Richard and Leon. On previous occasions on LC, the Singapore model for national insurance has been discussed. Just tell us about it again, from the basics.

15. Charlieman

@12. Leon Wolfson: “To be fair, with the abolishment of the retirement age, we *should* be charging NI to post-pension-age people.”

Abolition of retirement age is pushing the argument a bit. What is “retirement age”? It changes; but all of those voluntary pension payments that I have made, pension planning it is called, what is to be made of them? Of course, it is money in a pension pot that is more likely to accrue value than my ISA.

There is a man on the street philosophical argument why pensions should not be taxed. “I paid tax to create this pension pot, and I should not be taxed again.” Multiple layers of taxation are normal; the definition of Value Added Tax suffices. But if you perceive that pensions are taxable, you will lose the popular argument.

16. Leon Wolfson

Sorry, not clear enough on my part- If you’re WORKING past pensionable age, you shouldn’t be exempt, as you are today, from paying NI on that.

You still benefit from claiming the pension later…

@13 – Yes. It does “outperform” the United Kingdom in general. It’s a city-state, one of the largest ports in the world, a financial hub and has underdeveloped neighbours. Now, let’s compare it with London, shall we? Oh, Greater London is at $66,000.00, Singapore $62,000.00. Maybe London should declare independence.

Oh right, Madoff. Because people will stop being born. Hmm, want to explain your master plan to poison all the kids or something? NI also isn’t at risk from the stock market crashing, as is the CPF (which, again, has very low growth rates).

16. Leon Wolfson

Yes, it is a city-state that can’t be legitimately compared to the UK. However, I was only using their performance in response to your dismissal of them as a totalitarian state. I guess the moral is that the UK should decentralise into small totalitarian units.

Any fund is at risk of the stock market crashing if they are not well invested and hedged. Including of course the UK Treasury, who appear to have a rather large deficit in their accounts. That is what happens when you are like the government long only everything. People will not stop being born. However, there is nothing ethical about inter-generational transfers of taking from the young and giving to the old regardless of their need. Especially when those young will have to pay in transfers for the bulge in the population pyramid. Moreover, the people in the bulge did not have to equally pay for a bulge when they were taxpayers.

18. Leon Wolfson

Demographic bulges happen. And guess what? Because Singapore’s system is based on market returns, it’s vulnerable to not only demographic bulges (in a different fashion) but stock market movements, right up to retirement – you can’t take higher risks younger and less later, you get the same very low return, at best, and are always at risk. I remain entirely unconvinced of the merits of their system.

(Again, their actual retirement age is VERY high because of the CPF!)

And you only *think* I’m kidding about London declaring independence *maniac grin*
(Sorry, so fun to play with the heads of certain people I know who also read this site)

19. schumpeter

Saving for one’s retirement is still an intergenerational transfer. One is relying on the working younger generations to borrow money from you and to pay you as interest, rent or dividends – these are where all retirement income comes from.

I have saved for my retirement which looks as if it will be enforced earlier than I wish, because there is great hostility to older people working in my field.

At the same time, my retirement income looks to be much reduced because younger people do not wish to borrow so much or at rates they paid some years ago.

It ought to be a matter of great rejoicing that people are living longer – and the expectation should be that they will be economically active longer too. However, it’s not to difficult to see that the political right will aim to discreetly use “the market” to reduce the life expectancy of those who don’t have property or adequate savings.


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  1. Liberal Conspiracy

    How the UK could pay for its demographic "time-bomb" http://bit.ly/o6QBd2

  2. Bethany Lane

    How the UK could pay for its demographic “time-bomb” | Liberal Conspiracy http://t.co/lClcJ7m via @libcon

  3. Graeme Robertson

    How the UK could pay for its demographic "time-bomb" http://bit.ly/o6QBd2

  4. Stephe Meloy

    How the UK could pay for its demographic "time-bomb" http://bit.ly/o6QBd2





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