UK is Unprepared for an Ageing Society, Facing Increasing Costs and a Shrinking Tax Base

Successive governments have failed to focus on the issues raised by an ageing society. Raising the State Pension Age, which governments of all hues have tried, is not a solution as many people in their 50s and 60s leave the workforce much earlier. The Government must prioritise measures to incentivise people in their mid-50s to mid-60s to remain in or return to work.

Even higher levels of immigration, which may be too large for many voters, would not be sufficient to address the challenges an ageing UK faces. Efforts to raise fertility rates in other countries have largely failed and would likely fail here too.

Discussions about an ageing society, driven by both declining fertility and rising life expectancy, focus too much on the issues faced by old people today. In fact, the challenges will be felt most acutely by those who are young today. People born now and in the recent past stand to live much longer lives than previous generations, so they will need to retire later and save more to ensure they don’t run out of money in their later years. They will need to rethink their approach to life-course planning.

There is widespread ignorance of how much it costs to retire. The Government should consider an education campaign on this issue and find out if the UK’s financial services sector is suitably organised to provide for the population as it ages.

As part of the drive to increase the proportion of mid-50s to mid-60s who stay in work, the Government should look at the tax system and eliminate any cliff edges in public service pensions. As well as improving the UK’s fiscal position this will help prevent the expected increase in pensioner poverty if the age at which people stop working is not postponed. Measures are also needed to encourage more young people to enter the workforce.

These are among the conclusions of a new report, ‘Preparing for an ageing society’, published today by the cross-party House of Lords Economic Affairs Committee:

• The OBR forecasts that “on current policy settings” the fiscal challenges posed by an ageing society would push borrowing above 20 per cent and debt above 270 per cent of GDP by the early 2070s.
• The UK’s dependency ratio is forecast by the OBR to increase from 31 per cent to 47 per cent of the population over the next 50 years without major changes. This raises the challenge of funding state pensions, healthcare and the welfare costs of the older population from taxation raised on a reduced proportion of the population in employment.
• One of the factors that plays a role in determining people’s workforce participation is caring responsibilities. The crisis in adult social care, which the committee published a report on in 2019, remains a scandal and the committee urges the Government to address this urgently. However, the reality is an ageing population is likely to require more care workers, which inevitably means fewer workers available for other productive sectors of the economy.
• Age discrimination may also reduce the number of over 50s working, but the committee heard evidence that the most damaging form of age discrimination may be self-directed, with older workers operating under a mistaken impression of its extent and therefore limiting their own decisions.
• There is no evidence of systematic differences between older and younger workers as far as productivity is concerned in the majority of types of work.
• There is a growing gap between life expectancy and healthy life expectancy. The committee heard evidence that almost a quarter of people over 50 who leave work before they want to or should, do so because of unsupported health needs. The Government should set out the policies it has in place to narrow this gap, and the specific impacts it expects those policies to have.
• The Government response to the rise in the old-age dependency ratio seems primarily focused on improving productivity. The difficulties successive governments have had in raising productivity, as well as the scale of the fiscal challenge of an ageing society, mean that this cannot be the sole policy focus.

Lord Wood of Anfield, Chair of the House of Lords Economic Affairs Committee, said: “People are having fewer children and living longer and successive governments have simply not focused on the seismic effects a rapidly ageing population will have on our economy and society.

“Raising the state pension age, which saves the Government money, but increases pensioner poverty as many people have already stopped working by their sixties, is a red herring. Getting more people in their fifties and sixties to stay in or return to work is key.

“To successfully confront this challenge the approach to financial management of today’s and tomorrow’s young people will need to change. They will need, from a much earlier stage in their lives, to plan and prepare to work longer and save more.

“The lack of a published strategy or forum for discussion on this topic demonstrates that this serious, but long-term, issue is not be taken seriously enough. The Government needs to begin addressing the impact of ageing now so that all age groups can live better and longer lives.”