The Ageing Population, Pensions and Wealth Creation A report by Tomorrow’s Company

There is no ageing crisis  As a society we can afford to grow old.  At a mere 1.75 per cent productivity growth per year by 2045, an average British worker will be about twice as productive as today. In other words, a doubling of new value and resources being produced, while the ratio of over 64s to the rest of the population grows by less than 20 per cent.

Support ratios  The particular demographic statistic that has helped create a sense of crisis is the old age support ratio.  This is the ratio between the population of working age (16-64) and the numbers 65 or over.  In 2003 there were 4.1 people of working age for every person over state pensionable age; by 2041 there will be only 2.36 people of working age for every pensioner – a fall of 42%.

The economic support ratio  The key variable is not so much the old age support ratio as the balance between economically active and inactive persons – the economic support ratio.  This ratio was 0.92 of a worker for every dependent in 2003 and is projected to be 0.80 by a fall of only 13%.  Incidentally the ratio was less favourable in the past. It was 0.72 in 1981.

Not all old people need ‘support’ In 2002/3 the top 20 per cent of retired households in terms of disposable income paid £8,392 in taxes and received £7,557 in pension and benefits from the taxpayer (some of which, such as the disability living allowance were not age related).

The savings gap  Another factor creating a sense of crisis has been the references to a huge savings gap – a ‘black hole’ variously estimated at £27billion and some £50 billion.  However, the problem is not so much that as a nation we are not saving enough. It is rather that half the population have substantial savings and the other half have very little. Only 44% of 16 to 64 year olds have a private pension.

Why people are not saving  Low incomes leave no margin for saving  Means testing  Commission and charges  Debt  Loss of trust in financial services  Cultural factors  Decline in company schemes.

Savings and investment  Savings do not ensure an adequate level of investment in the future of the economy. Their main impact is to drive up the prices of shares and bonds – to levels that ultimately prove unsustainable.  The only savings that will help pay for future pensions are those that are channelled into productive investments in capital goods or in R and D and skills development.

Later retirement  As longevity and health improve many people will both wish and be able to work longer.  Many older workers have skills, experience and attributes that are beneficial to an employer and to the economy as a whole.  What is uncertain is what the level of demand for older workers will be.  There would be little point in raising state pensionable age to 67 if most people were unable to find employment up to that age.

A citizen’s pension  Tomorrow’s Company supports the idea of a universal taxpayer-funded state pension based on residency.  This would remove the deterrent to saving created by means testing, would improve the position of women, would give the poorest people in our society a firm promise of a degree of security in old age. It would have the virtue of simplicity, both in administration, and in terms of being understood by the public.