UK tinkers with higher pension ages, ignores impact on GDP

Consumer demand

SHARE THIS STORY

UK Feb14Many readers have asked to see how the UK economy is being impacted by its ageing population, following the blog’s December series on the US, China, Japan, Germany and France.  As the chart shows, it is in a very similar position to all of these countries:

  • Life expectancy has increased by 17% to 81 years today, from 69 in 1950 (red column)
  • Fertility rates have almost halved to 1.5 babies/woman today from 2.8 in 1960

This increase in life expectancy is, of course, a major achievement.  It is easy to forget that Western life expectancy was just 36 years in 1820, less than 200 years ago (and in the rest of the world it was only 24, the same as in the year 1000).  Almost overnight, in historical terms, people then began to live for longer.

The UK, as the world’s leading economic power, was at the forefront of this change, closely followed by the other W European nations and the USA.  Increased life expectancy boosted economic growth, as described by the great economic historian Angus Maddison in his authoritative ‘The World Economy: A Millennial Perspective.’

In turn, as we noted in chapter 1 of Boom, Gloom and the New Normal, the UK became the second country in the world to introduce a state pension in 1908.  Even then, however, life expectancy was only 50, whilst pension age was set at 70.  And only those earning less than 12 shillings/week (£40, $65, €45 in today’s money) were eligible.

The UK thus followed Germany’s lead in 1889, which had also set pension age at 20 years above life expectancy.  Only 600k of the UK’s 40m population were eligible for the pension, which was worth just 5 shillings.  Today, by comparison, the state pension has become a universal benefit, received by 17% of the UK’s 63m population.

The problem is that our thinking about pensions and retirement age has not kept pace with developments in life expectancy.  And it has been left well behind by the collapse in fertility rates.  The number of those entering their wealth creating period between the ages of 25 – 54 years is 17% lower than in the 1946-70 BabyBoom.

The result has been to effectively create a ‘sandwich generation’, where today’s Wealth Creators will increasingly have to support their parents financially as well as their own children.  And unlike their parents, they also have to pay record prices for their homes and repay college tuition loans.

It is thus not surprising that economic growth has remained very slow since the credit bubble ended in 2008.  Governments have tried to revive the bubble, in the belief that ever-higher house prices will ensure their re-election.  But in reality, they are simply adding to the debt burden.

As in other countries, there is little awareness of the likely economic impact of these developments.   Yet as the new OECD Pension Handbook highlights, 29% of the working age population are already over 65 years.  And politicians have chosen to only make minor adjustments to pension age:

  • Women’s pension age is increasing from 60 to 65 by 2017
  • Both men and women’s pension age will then increase to 66 by 2020 with further minor increases by 2046
  • At this point, the pension age of 68 will still be below that of 1909, whilst life expectancy may well be close to 100

As elsewhere in Europe, detailed pension arrangements are too complex for a blog post, but the key facts are:

  • Average earnings are $36k per worker
  • The basic state pension is estimated to be worth 16% of average earnings for a single person
  • There are other benefits and credits including winter fuel allowances and free travel passes
  • Plus all UK citizens are entitled to free healthcare

Overall the OECD calculate that gross pensions are worth 31% of median earnings.  In addition, many people will receive a small private pension from their employer and/or personal savings.  But the average ‘pension pot’ is only £30k, providing a pension of just £1200/year.

This might not have mattered too much from an economic viewpoint if people still died close to pension age.  After all, less than 1 in 3 adults were in the New Old 55+ generation as recently as 1950.  But the ageing of the BabyBoomers means there will nearly 1 in 2 adults (43%) in this cohort by 2030.

This will inevitably result in a major decline in spending power, as more and more Boomers move into retirement.  And as household spending is 60% of UK GDP, the economy will almost inevitably see low growth and deflation as a result – making the debt burden even harder to repay.

Yet as in the other countries covered in this series, there is very little discussion of the likely impact of this development on the wider economy.  Instead policymakers prefer to focus on important but relatively minor issues such as the impact on social security and healthcare costs.

But one day, the electorate is going to wake up to what is happening.  And it is unlikely to be happy when it does.

PREVIOUS POST

Q4 results show companies still waiting for something to turn up

04/03/2014

We all live in hope.  That seems to be the underlying message from the blogR...

Learn more
NEXT POST

Local buyers priced out of London housing market

06/03/2014

Most people, if they are lucky, never get to see a property bubble during their ...

Learn more
More posts
Plastics producers face a ‘wake-up call’ from both ends of the value chain
22/11/2020

Plastics producers have had a great run over the past 60 years, as demand took off for their product...

Read
Smartphone sales confirm mid-market of ‘affordable luxury’ is disappearing
15/11/2020

Another 3 months, another decline in global smartphone sales. And more pressure on mid-market player...

Read
Welcome to the New Normal – a look ahead to 2030
01/11/2020

10 years ago, I took a look ahead at what we could expect in the next decade, as discussed last week...

Read
If you don’t want to know the future, look away now
25/10/2020

Next week, I will publish my annual Budget Outlook, covering the 2021-2023 period. It will highlight...

Read
The Top 5 pandemic paradigm shifts
28/06/2020

The Covid-19 pandemic has accelerated the fundamental changes which were already underway in global ...

Read
Hertz goes bankrupt as non-essential consumer demand disappears
24/05/2020

The US Federal Reserve has now spent $7tn bailing out Wall Street. But it couldn’t save the 10...

Read
Smartphone sales head into decline as affordability becomes key
10/05/2020

The smartphone sales decline accelerated in Q1, as Strategy Analytics report: “Global smartpho...

Read
China’s plastic ban and recycling launch marks end of ‘business as usual’ for plastics industry
26/01/2020

Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more