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A longer life is no reason for gloom Samuel Brittan The Financial Times 19/11/04 The Week, that valuable press digest, has a column entitled "Boring But Important". Two obvious candidates for inclusion are pensions and UK local government. With the aid of the Interim Report of Adair Turner's Pensions Commission, I hope to show that the basic pensions issues at least are more straightforward than the debate on the detail of entitlements and contributions suggests. The latter has become almost impossibly complicated because of the interaction of numerous schemes and rules changed many times in an ad hoc way. The report is not concerned with the current insolvency of some occupational pension schemes and concentrates on emerging longer-term problems. The basic issue arises from increasing life expectancy. In 1950 a man of 65 could expect to live just 12 more years. Today it is about 19 years. If the trend since 1950 is extrapolated, men of 65 will be expecting to live an extra 24 years by 2050. Women have always lived longer. The key measure is the age dependency ratio - the number of people above 65 relative to those aged 20 to 64. The postwar baby boom postponed the effect of increasing longevity by creating a bulge in the number of those of working age. As a result the dependency ratio has been nearly flat at about 27 per cent for the past 20 years. But as the baby boomers retire this effect will disappear and the dependency ratio will rise towards the end of this decade to reach 50 per cent well before mid-century. According to Mr Turner, there are four options: pensioners will become poorer relative to the rest of us; average retirement ages must rise; taxes and national insurance contributions must increase; or savings must do so. He underplays the immigration option, but let that pass. The point about savings is often misunderstood. As Wynne Godley, the economist, has pointed out (FT,November 9), if the relative living standard of the retired is to be maintained, the consumption of the working population must be held back. The only way that this can be done without higher taxes is if future generations save more. Would higher savings today increase the future national income from which pensions would be paid? Even if it did, it would not affect the need to transfer to the old a higher proportion of that income. In any case, in a world where savings flow easily across national frontiers, UK investment is not limited by UK savings. A higher savings ratio in the UK would mainly be reflected in more overseas portfolio investment. Because of overseas taxation only part of the yield would accrue to UK residents; and such investments would be subject to diminishing returns as many countries try to build up assets for future pension needs. One approach would be a near-doubling of income transfers to the elderly from 10 per cent to 17½ per cent of gross domestic product. If this is unacceptable we are left with one possibility - to raise the retirement age. On Mr Turner's arithmetic, the average retirement age would have to rise to 69.8 by mid-century. It is quite inadequate, however, for some politician just to advocate a slightly higher state pension age and expect a pat on the back. He or she is likely to be caught out by further increases in longevity. It would be necessary to index the retirement age to longevity, a course that I have frequently advocated. Indeed, it would have to be double-indexed for a while to make up for the time when the baby boom obscured the problem. One populist reaction is to say that we will have to work until we drop. But this is rubbish if the dropping occurs later than before. On tentative evidence Mr Turner judges that "for many people increasing life expectancy is associated with an increase in the number of years of healthy active life". A more sophisticated objection is that richer people live longer than poorer people and thus the latter will suffer more from raising the retirement age. But this could have been said at any time in the past. The Lloyd George and Beveridge schemes assumed that retired workers would enjoy their pension for only a few years. Obviously there are many jobs that older people cannot do as well as younger ones. Later retirement merely adds to the already strong arguments for a more flexible working life with a more gradual transition between full-time working and retirement. Of course I am not advocating that the state should tell people when to retire. People should make their own trade-offs between how soon to stop work and their subsequent standard of living. The shift from defined benefit to defined contribution pension schemes should make later retirement more attractive. The European Union's age discrimination directive, due in 2006, may also help. But there remain other institutional barriers to staying on at work. The official state pension age not only affects the state pension but also acts as a beacon to private funds. If that were indexed to longevity, as has just occurred in Sweden, it is likely that private schemes would also encompass postponed retirement. Since Biblical times people have coveted a longer life span. It should not be the national tragedy that media discussion is making it.
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