With the number of people over the age of 75 projected to double in the next 50 years, can Britain afford its pensioners of the future? Private provision, says David Smith, isn't the whole solution.
A man from Mars, or even Margate, looking at Britain and the other advanced economies would not take too long to come to two conclusions. The first is that these places cannot be too bad because the people are living longer. The second fact, perhaps puzzling to our stranger, is that they are retiring earlier. The combination of these two effects has raised a worrying question: will we be able to afford the pensioners of the future?
That we are living longer is indisputable. Earlier this year came the news of a 120-year-old Frenchwoman, Jeanne Calment, whose main concession to old age was giving up smoking at the age of 117. We also had the case of 93-year-old Bill Lampard of Southampton, who sadly died just five months after his 40 year-old wife gave birth to a daughter.
Such longevity is exceptional. The average life-span in Britain for children born now is 73 for men and 78.5 for women. But more and more of us are living long enough to enjoy a decent retirement. Projections from the Office of Population Censuses and Surveys suggest that the number of people over the age of 75 will double from four million to nearly eight million over the next 50 years, within a fairly static overall population. And Britain is not alone in this. In fact the evidence is that longevity is increasing at a slightly faster rate elsewhere in the industrialised world. The march of the oldies is in full swing.
European Commission projections (see chart, above) show that the old-age dependency ratio - the number of people over the age of 65 as a percentage of those in the 'working' 15-64 age group - is on course to rise from 21.4% in Europe now, to 42.8% by the year 2040. In Britain the projected rise is slightly less dramatic, from 23.5% to 39.1%.
Leave aside the question of whether, with more young people staying on longer in education, or unable to find work, it is appropriate any more to regard 15-64 as the working age population. Leave aside, too, the fact that, in spite of a planned equalisation of the state retirement age of 65 in Britain (for women pensionable age is currently 60) the effective age of retirement is coming down. This is because, during a period of corporate rationalisation, a popular way of reducing the headcount has, and will continue to be, offering employees early retirement.
The economic problem of an ageing population has long been identified. Put simply, it is the question of how to order things so that a smaller active population can support a growing number of dependents. A recent report, The Pension Time Bomb in Europe, by the Federal Trust, says: 'Without radical changes, maintaining levels of benefits provided by pay-as-you-go schemes in line with present expectations will impose a burden on future generations of taxpayers which is likely to prove unacceptable, will worsen the competitiveness of industry, and will harm the prospects for employment and for the economy as a whole.'
This is the challenge. Unless the burden of state pensions can be reduced, demographic changes will cause increasing resentment, and a lack of incentive, among workers.
The solution is plain. The Federal Trust's recommendations for radical change concentrated on liberalising pensions throughout Europe, making it easier for individuals to provide for themselves, and easing the burden on the state.
Few would argue with this. It chimes in well with the ambitions of British government ministers such as Michael Portillo and Peter Lilley who would love, if politics and public finances allowed, to switch to a situation where young people entering the workforce opted out of the state pension altogether. (The political difficulties of doing this are obvious; the financial problem is that it would create a social security shortfall during the long period when these opt-outs were passing through the workforce).
It is unfortunate, in this context, that private pensions have had such a bad press. From the Maxwell scandal through to the mis-selling of personal pensions, the environment has not been one in which it has been easy to encourage a further substantial shift towards private provision. This is in spite of the fact that the benefits of such provision are obvious: the biggest gap between the haves and have-nots in Britain is emerging among those of retirement age. We have seen, over the last 30 years, the phenomenon of the well-off pensioner, usually from having been in a good occupational pension scheme. In contrast, those relying on the basic state pension alone have become progressively poorer. Its value, in relation to average earnings, has declined.
So despite the bad publicity, private provision is the thing, and is essential to our economic future. There is, however, an additional factor which would make private pension provision more problematical and, if anything, increases the need for a state pension safety net.
This is our old enemy - job security. If it really is the case, as Kenneth Clarke, has opined, that people will have to get used to the idea of three or four changes in their lifetime, interspersed with periods of unemployment, will it be possible, in such an environment, for the bulk of the population to provide adequately for their retirement? The pensions industry has adjusted to the idea of more frequent job changes, and portability is firmly established. But what about a situation in which people are 'resting' for longer periods than in the past. One obvious consequence is that individuals will have to make a higher level of pension contribution when they are working, and the system adjusted to allow them to. The pensions time bomb will continue to provide us with headaches.
David Smith is economics editor of the Sunday Times.