Will you still need me, will you still feed me, when I'm sixty-four?
The famous lyric from the Beatles song of 1967 has moved from an individual plea to a loved one, to a more general appeal to society. A lot has happened between 1967 and now: man has landed on the moon, the Communist Soviet Union has disintegrated, almost everyone has amazing technology at their finger tips and we are now living longer than ever before.
If you were an 18 year old in 1967 you would be one of the Baby Boomers joining the UK workforce for the first time. You are now 64 and possibly looking forward to your pension and retirement. The state pension age has been stuck at 65 for men and 60 for woman for that person’s whole life. Whilst the rest of the world has changed at an alarming rate, the “Old Age Pension” age has remained the same.
The opportunity to be a retired pensioner is a relatively recent occurrence. Prior to the Old Age Pension Act of 1908 there was no state help and it was looked at as being semi villainous to be old with no money or means to support yourself. You either begged, starved, or if you were lucky (or maybe unlucky) you ended up in the Workhouse. However, this act only came into force if you were over 70 and without means of over £31.50…….per year! It wasn’t until the National Insurance Act of 1946 that we saw the introduction of a comprehensive social security system that covered unemployment, sickness and retirement, as we know today.
We all know that there is an ageing population problem, but what is it and what does it mean? Let’s have a look at some of the data that is freely available at the UK Office of National Statistics.
In 1967 the life expectancy for a man was 69.1. This meant that a man, on average, only lived for four years after reaching the state retirement age of 65. In 2010 the life expectancy for a man in England had grown to 78.9, almost an eight-year increase in only 43 years. If, however, you reached your 65th birthday in 2010 you were expected to live until a whopping 83.4. This means that over the last 43 years a man has been living on average one extra year for every 3-5 years lived - really astonishing.
The trend looks to carry on, with the expectation that 33% of children born in 2012 will live to 100. In 2012 there were 14,500 centenarians - by only 2035 it is forecast that there will be 110,000.
The actuaries have got their figures hopelessly wrong in the past. Private and public pension promises that were made to workers cannot be fulfilled. Bear in mind that in developed countries, 60% of the cost of an average pension is paid by the state.
So why are the statistics changing so dramatically? There are two reasons: the childhood mortality rate has significantly dropped and the older average age of mortality has increased. There are a whole plethora of secondary reasons such as advances in the environment that people live and work in, a lower fertility rate and, most significantly, the huge leaps in medicine.
The outcome is a large change in the amount of people working compared to the amount of people over 65. The table below highlights this.
The ratio of workers to pensioners (the "support ratio") is declining in much of the developed world. Increased life expectancy (with fixed retirement age) increases the number of retirees at any time, since individuals are retired for a longer proportion of their lives; while decreases in the fertility rate reduces the number of workers.
In 1950, there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries. By 1980 it was 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by 2050. The average ratio for the EU was 3.5 in 2010 and is projected to reach 1.8 by 2050.
It’s great that people are living longer and what’s more significant is that they are leading healthy purposeful lives for longer. The retirement age has now been abolished in the UK, so people can work as long as they want to or are able to. There is a downside though. If you work for the state where men still retire at 65 - or even earlier in some areas such as the Police where you can retire after 30 years service - how can the pension contributions paid now last for three or four times longer than initially envisaged? The Government is addressing this problem by raising the retirement age of men and women to 65 in 2018, 66 in 2020 and 68 in 2046. The present Coalition is keen to link retirement to life expectancy, which could see a 33 year old of today working until 73 and an 18 year old to 77. This is all very well, but do you really want a policeman on the beat or a surgeon of this age?
There isn't any silver bullet out there that will solve the problem. It will only be resolved by a combination of actions.
The retirement age will have to be increased. Of course this is happening, but not even at the rate required to only keep pace with the extension of life expectancy.
A more substantial amount will have to be paid by workers into pension funds. This will not just be employers’ contributions, but also employee contributions. In the past, people have been living the equivalent of 10% of their working lifetime in retirement. Now that people are living three times or more longer in retirement, their pension contributions will need to reflect this.
It is obvious that the state cannot provide for everybody. There will have to be changes to tax and particularly the taxing of assets. It seems obvious that hot potatoes such as inheritance tax and wealth built up in a lifetime will have to be used to provide for medical care.
Immigration can also play its part. Typically, immigrants are young and well qualified and can significantly boost the state finances. They tend to be hard working, with over 71% of immigrants of working age in economically active compared to only 67% of UK-born people.
The affordability of care and medicine, particularly in later life, will have to be addressed. Currently, 50% of a person’s cost to society is being taken up in the last year of his or her life.
Some of these points are going to lead to some really tough political and social decisions. Young people are going to have to work for longer not only to provide for themselves, but also to provide for the current older generation that is living beyond its anticipated lifetime. Older generations both now and in the future will have to be prepared to use their homes and other assets built up over their lifetime to help pay for their cost to society in later life, and the tricky topic of euthanasia will not go away.
History may well come to view that the last 100 years has been a well meaning social experiment that has unfortunately hit the buffers. We have had two generations that have greatly benefitted from this experiment, but now things must change.
So yes, we will still need you and will feed you when you are 64 - as long as you are prepared to work for longer and pay more towards your retirement!