Autumn statement: Full employment matters more than pension age

Andrew Harrop

This morning news greets us once again of demographic doom. The chancellor has announced that young people must work till their 70s to save us from national crisis. Hundreds of billions of pounds are at stake.

We’ve heard it all before. It’s charts like this that are meant to terrify us: Figure 1 shows the ‘dependency ratio’ from the 1970s until the 22nd century, as it’s usually defined: the proportion of adults aged under 65, compared to all adults.

Source: Labour Force Survey; ONS population projections

 

Scary stuff, it would seem: lots of old people and not enough workers. But, hold on. There’s nothing new about this transition; it’s not a crisis; and we’re already adjusting. Here’s a second graph, which tells a very different story. Figure 2 shows what you might call the ‘real’ dependency ratio – the proportion of adults in work, relative to all adults.

Source: Labour Force Survey

It shows that that despite the huge increase in life expectancy in the last 100 years, the share of adults in work has hardly budged. The economic cycle explains pretty much all the change and the long term trend is flat, or perhaps even upward.

Our task as a nation is to continue to keep this ratio steady. Increasing the pension age a little is one part of the story, but only one. It is much more important to push up levels of employment across every stage of life: by returning to full employment from 16 to pension age; and encouraging more people to work after pension age too.

Things have gone pretty well over the last 100 years, but the challenge of keeping the ‘real’ dependency ratio stable is about to get a lot harder: Figure 1 shows a big kink from now until the late 2030s; the effect of the post-war baby boom entering retirement. It means we’ll need to work flat out on creating more jobs.

So it’s puzzling to hear that the chancellor is to use his Autumn Statement to make an announcement about the direction of the pension age after the late 2030s. By then the demographic outlook will be more benign, as Figure 1 shows. His first priority should be a full employment strategy for the next 25 years.

The check-list for preventing a decline in the dependency ratio should look something like this:

  • Reduce the number of households without work
  • Support young people to make a positive start in the labour market
  • Help more women to stay in work once they become mothers
  • Remove barriers stopping people working for as long as they want to

It’s not that I’m against raising the pension age from the late 2030s; it’s just not relevant to the pressing economic and fiscal challenges we’ll face over the next two decades.

A year ago, in evidence to the House of Lords Committee on Public Service and Demographic Change I proposed two criteria for reviewing the pension age:

  • State Pension Age should rise when the life expectancy of a man reaching pension age is expected to account for more than 30 per cent of his adult life
  • State Pension Age should rise to avoid the proportion of adults receiving a pension exceeding 25 per cent

So, fine, let the Treasury put in place a system for reviewing pension ages. But don’t let it distract from the real struggle: the fight for full employment over the next 25 years.

3 Comments:

  1. Brendan Caffrey

    I agree that full employment for the next 25 years is important for all our futures.

    However, this demand for full employment is a dream only today. Firstly there can never be full employment due to illness, prison sentences, those living on their parents wealth; whether it is aristocratic wealth or more recently from the City. Further there is still a massive difference for full employment as between men and women, young and old, black and white.

    Finally, there is the perspective of potential employers. Their propensity to engage in full employment depends on so many factors national and international. Basically in hard times there is a shift from risk in employing new workers.

    Shifting all of this requires so much government effort in supporting research and development; further and higher education; and mental and physical health resources.

    Brendan Caffrey.

    Reply
  2. Anthony Sperryn

    There is one thing that sticks out like a sore thumb in the chancellor’s announcement. That is that there may well be different life expectancy rates according to occupation, location of residence and other factors (just see how the motor insurance companies differentiate).

    It may, therefore, be monstrously unfair to have a common retirement age which the rich might be able to take in their stride, but which others may have a struggle to survive to, possibly existing on means-tested benefits once they are umemployable.

    Reply
  3. Will

    Hi Andrew,

    I fully agree. Another take on the ‘dependency ratio’ is this paper, which takes the proportion of the population with a life expectancy of more than 15 years as the numerator (essentially the ‘potential’ dependency ratio, I guess) http://www.bmj.com/content/347/bmj.f6598

    In terms of the rising state pension age, and tying in with the early action arguments you make in the 2030 Vision paper, is there a way to make a rising state pension age dependent on falling health inequality, making the pension system fairer and forcing government’s hand on investment in public health? I’ve written a bit about that here http://www.community-links.org/linksuk/?p=4145

    Thanks
    Will

    Reply
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