ritain’s population time-bomb was the subject of the 21st Century Challenges debates sponsored by the Royal Geographic Society this week. My co-discussant, Angela Eagle, MP, the Minister for Pensions and the Ageing Society, and I may have had a different sense about the urgency and scale of the issues involved but we certainly agreed on the principal challenges that our society faces.
There is no shortage of anecdote. Next week, for example, Radio 4 will broadcast The Age of Ming, a programme focusing on ageism in the media generally, and specifically with regard to Sir Menzies Campbell’s goal to lead the Liberal Democrats. This is only one example, though, of the ageism that still abounds in society, the workplace and elsewhere. The distinguished economist, public servant and author J. K. Galbraith at the age of 87 highlighted the “still”' syndrome, which is when elderly people are taunted with questions such as “Are you still working?” or “Are you still taking exercise?” And so on. Galbraith’s advice was to draw attention to the questioner’s lack of grace and decency by saying, “I see that you are still rather immature.”
Although the issue of ageism and the individual is important, ageing societies represent a strategic and fundamental challenge to our way of life that is no less important than climate change.
The Office for National Statistics reported recently that for the first time there are more people aged over 65 in the UK than there are aged under 15. Over the next 40 years the younger cohort will be roughly stable, but the older cohort is going to double in size. The fastest-growing age cohort, though, is the over-80s, whose numbers will increase from 2.7 million today to 6.2 million. These simple observations clearly tell us something very important about the change in the age structure of our population, but do they foretell a time-bomb?
Many people deny such an apocalyptic outcome and assert that we will cope, just as we have since the dire warnings of Malthus and before. I suspect that is true but, if so, it would be only because we take the challenge seriously enough to change our institutions, and the way in which we live and work.
The key macroeconomic problem is that rising life expectancy is coinciding, uniquely for mankind, with low or falling fertility rates. This is what is producing such a rapid increase in the age structure of the population and in the old-age dependency ratio, that is, the over-65s as a proportion of the working-age population. Put another way, in the UK there are four people of working age to support each pensioner but by 2040-50 this number will have fallen to 2.5. In short, we are no longer having enough children to become tomorrow’s productive workers able to support the increase in the number of older citizens. The labour supply, which with productivity growth drives our long-term growth capacity and living standards, is faltering, relative to the universe of older citizens.
In the UK 17 million baby-boomers joined the labour force in the period 1964-83. The first wave of baby-boomers is reaching retirement age now, and the remainder will follow in the years to about 2030. These baby-boomers were the cannon fodder of the economic boom that lasted more or less from the early 1980s until 2007. The boom was all the more powerful because unprecedented numbers of women joined the labour force as well, adding to the labour supply; because the boomers brought higher levels of educational attainment and skills into work; and because they availed themselves of easier-to-access credit, to finance ever-larger purchases of consumer durables and homes. They helped to push household debt as a proportion of disposable income to a record 180 per cent in 2007.
The boomers are now heading off into retirement and inactivity. Female participation in the labour force looks to have peaked and may well decline during the recession. Older boomers are joining the ranks of the unemployed faster than any other age group except the very youngest workers. Educational attainment levels are certainly not rising any more, especially for older workers. And credit supply and the use of housing as a form of savings have gone into a fairly long hibernation. To top it all, the crisis has suddenly thrown a spotlight on two critical financial problems. Individuals mostly do not save enough for retirement anyway, and now their pension plan arrangements are either falling apart (in the case of defined benefit schemes) or are under significant stress (defined contribution plans).
Public debt in Britain has doubled to nearly 80 per cent of GDP and could reach more than 100 per cent by 2013, thanks to the recession and the costs of financial system stabilisation. The rating agency S&P recently downgraded the country’s sovereign debt outlook from stable to negative, and warned that the prized AAA credit rating was at risk. We already face one parliament — possibly two — in which fiscal policy will be tightly constrained, but the costs of age-related spending over the next 40 years could be 10-15 times as big as the costs to the State of the banking crisis. The challenge of ageing societies is that the status quo is unsustainable. So what is to be done?
Immigration is one obvious way of addressing inadequate labour supply, but, leaving aside the political and social issues associated with high immigration, the UK would have to double its net annual immigration rate from just over 3 to 6 per 1,000 inhabitants, or from 190,000 to nearly 400,000, for the next 40 years to keep the share of the working-age population stable. Today, this seems completely unrealistic.
Education spending needs to be sustained so that levels of educational attainment and skill formation can be increased for people throughout their working lives. We probably have to do this anyway, despite the prospect of falling class sizes and university enrolments, simply to remain competitive and innovative in the world economy. But investment in human capital, through lifelong learning and skill programmes, is essential to the ageing society that is evolving.
The direct way of offsetting the sharp rise in age structure and boosting the output of labour is to raise the participation in the labour force of the two groups who are underrepresented: women, and people over 55. The UK scores relatively well at female participation, with a rate of 70 per cent, though the employment rate for younger, single women with children, especially from poorer backgrounds, is very low. The UK is at the high end of the range for older worker participation in rich nations, at up to 58 per cent. However, the participation rate for over-65s is only 7 per cent.
To encourage more women and older citizens to stay at work or return to work cannot be done with gender and age discrimination alone. It can be done only by addressing the social and economic factors, largely centred on childcare, that permit women to work and rear children, and, in the case of older citizens, by recalibrating the way we think about the workplace and retirement.
Flexible or phased retirement systems and flexible working arrangements that lead to extended working lives, and the termination of a statutory retirement, are not a throwback to the 19th century. Barely 10 per cent of jobs in the UK are in fixedlocation manufacturing and mining establishments. In our information and knowledge economy, not only can people work for longer, but also the evidence suggests that a large majority of people want to do so. If most people worked until 67-68, this would boost growth in the economy, produce larger tax revenues for the State, and allow people more time to accumulate retirement savings.
Even though Britain’s demographics are not as unfavourable as in most other advanced nations, our population time-bomb exists because we will not be spared the economic and social consequences of rapid ageing. The longer we think we can “wing” it through the next 20 years, the more likely that economic and financial stress and intergenerational conflict over resources will mount. The quality of life for older citizens will deteriorate, rates of pensioner poverty will rise, and new multigenerational family structures will present new problems for care, working women and employment conditions. The population time-bomb may lack the visual imagery and fear that run through the climate change debate, but it is nonetheless real.
George Magnus is Senior Economic Adviser, UBS Investment Bank, and the author of The Age of Aging: How Demographics are Changing the Global Economy and Our World (John Wiley, £19.99)
