At the same time as our political discourse has become increasingly tactical rather than strategic, short-term rather than long-term, a political juggernaut is heading our way that cannot be avoided. The issue of generational imbalance has been much talked about, yet we seem no closer to resolving the complex problem is that it represents.
Let’s begin with the demographic reality. Within 20 years, nearly a quarter of the UK population will be aged 65 or over, with people now spending an average of seven years longer in retirement than they were in the 1970s .Coupled with projected increases in life expectancy, the age dependency ratio (the number of pensioners per 1,000 people of working age) will increase from 300 today (which has been a stable average since the 1970s) to almost 500 in 2051.
Put another way, we currently have three workers contributing to national insurance for every one person receiving a pension. In the next 40 years, this will change to two workers for every pensioner. This immediately leads us into politically difficult territory.
The choices are stark. If we are to maintain the same levels of pensions and benefits that we currently enjoy, extended to a larger retired population, then we will require a larger workforce. If we maintain the same levels of pension and benefit support with a smaller workforce, then they will be required to pay penal rates of taxation. If we choose to have a smaller workforce without penal rates of taxation, then the levels of support will have to fall.
There are a range of policy options that would diminish the size of the problem – raising the retirement age in line with life expectancy, encouraging those above the retirement age to work for longer, encouraging more women into the labour market or attracting more workers into the economy through immigration. It is likely that a combination of these will be used, although importing foreign workers, who then accrue pension rights of their own, will only push the problem into the long grass.
All of this would be difficult enough if we were beginning from a position of fiscal neutrality. But we are not. As I pointed out in a speech to the IEA this week, our national debt has increased from around £960 billion in 2010 to over £1600 billion today. This means we are paying around £50 billion per year in debt interest alone, requiring an additional £1900 in tax from every taxpayer in the country.
Our social compact has functioned in this country because each generation has been willing to carry -the burden of retirement for those who went before them. We should not blindly assume that this will continue without question. Some of the costs associated with an increasingly elderly population will be non-discretionary and unavoidable. For example, multiple morbidity, which is costly, will put an ever increasing strain on healthcare provision. I do not believe that any generation will be unwilling to foot the bills for the medical care of its elderly citizens – that would truly represent a catastrophic breakdown in our society.
But will this be true for other areas of expenditure such as pensions and benefits? We have to face up to the fact that not only is the retired population increasing, but it is also increasingly affluent. Many of those now reaching retirement age have benefited from assets, particularly housing assets, which have increased enormously in value over the years. Younger people, by contrast, are hit with the dual problem of the diminished availability for housing and the high cost of getting onto the housing ladder because of the capital costs.
This undoubtedly produces an element of frustration. Add to this the enormous amount of debt being passed on to the next generation and they will effectively ask themselves the question “why should I pay for the benefits for the previous generation and the debts that they have run up for the services they have already enjoyed? On top of this I am being asked to pay for my own future benefits that I am by no means sure I will ever receive”.
All of this should bring us to a number of unavoidable conclusions. The first is that we must continue, and if possible, accelerate, fiscal consolidation. It is quite unacceptable that the debts of a more affluent generation should be landed on a less affluent one. The next is that we must find ways of allowing more young people a chance to get on the property ladder, preferably by a combination of increasing supply and reducing costs, something that is likely to happen to an extent as interest rates rise back to normal levels.
We must also look at future pension costs and pension benefits. Of course, it is fair to say that we made a number of manifesto commitments and we must honour them in this Parliament. I agree with that. We must, however, not aggravate the problem by leaving a legacy debt, such as that created by the pensions triple lock which will create both an increasing and recurring cost in the future and we must be willing to consider means testing at least some pensioner benefits so that we are not taxing young families at higher rates of tax than they would otherwise pay to subsidise those who have much more money than they do. It is not simply a question of fairness, but of avoiding unnecessary intergenerational strains with all the social problems that this could generate.