This country faces some enormous challenges; but none is more daunting than how we deal with the rapid ageing of our population. This profound demographic change is going to alter the face of Britain for ever. Yet we have designed much of our public policy concerning older people according to an image of life after 65 that is now redundant. The old notion that after this milestone in your life, all you can expect is decline and dependence is hopelessly outdated. We must assume that older people will participate actively in society and in the workplace for longer and to the best of their ability.
These trends impose massive pressures on the national finances. Much of
today’s public spending on health and benefits which together account for
half of total public spending is focused on elderly people: 65 per cent of
benefit expenditure goes to those over working age, equivalent to £100
billion in 2010/11, or one seventh of public spending. Continuing to provide
state benefits at today’s average would mean extra spending of £10 billion a
year for every additional one million people over working age an enormous
imposition. The same is true of health care. NHS spending on retired
households is twice as high as that for non-retired.
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Wealth creation, therefore, remains vital; and the Government will need to find the right balance in its economic, fiscal and industrial policies so that Britain can continue to attract inward investment, promote innovation and develop science and technology. We will need to focus absolutely on improving our international competitiveness, which has been declining in recent years. Productivity will have to increase across the whole workforce young and old alike.
Since we are, in general, healthier in our old age, one of the most obvious ways we can respond to the challenge of changing demographics is to help support more people to delay their retirement. The longer people work, the longer they have the opportunity to save. This is fundamental to the sustainability of our pension system. There is no way through the maze without a combination of working longer and saving more for the time we give up paid employment.
But the principal responsibility for retirement saving must rest with the individual and not the state. The state can help support a culture of saving through fiscal measures and by ensuring the social security pension rewards rather than penalises savings. A more generous state pension with relaxed contribution rules that ensure more women receive an adequate income can help lay a solid foundation for the pension reforms that are due to begin next year.
When it comes to occupational pensions, we have three problems to solve.
First, not enough people are saving for their retirement. Second, those who
are saving are not saving enough. And finally, our public service pensions
are not on a sustainable financial foundation. The new National Employment
Savings Trust (NEST) and automatic enrolment should help us address the twin
problems of too few people saving too little for their retirement. This will
take time to bring about the necessary change in direction towards a new
savings culture and should be a national strategic priority.
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Our public service pensions are a fundamental part of our national savings infrastructure. So it is vital that the long-term finances of these schemes are sorted out. Most people in the public sector are saving for their retirement, but not enough to provide for the extra years they are living and the taxpayer has been making up the difference. These costs are set to go on rising over the next decade at least and without further additional reform may not get back into a more sustainable balance for the next 40 or 50 years.
But we should not wait that long and there is a way to do this without slashing the value of pension benefits to retired public service employees. This, too, will require a new way of thinking, where working longer and paying a bit more towards the pensions we expect becomes hard-wired into our approach. I cannot see any other way to avoid a race to the bottom that would impoverish millions of public servants and drive up welfare bills.
The health and care system faces an equally daunting challenge and there are specific policies we can pursue that will steer us in the right direction. The recent report of the Dilnot Commission offers the prospect of a new partnership between the state and individuals to share the burden of costs and encourage the provision of new sustainable insurance-based financial products and services covering the provision of long-term care financing.
But while these are difficult challenges, we must not be pessimistic about the consequences of an ageing population or we will miss one very important fact: older people play a vital role in the health and well-being of our country and our society. Grandparents make an increasingly valuable contribution to child care and many who give informal support to others in need are themselves older people.
It has been estimated that the value of this care is the equivalent of £90 billion of public spending. That is massively important to society’s well-being. Older people also provide the greatest number of volunteers, who help enrich communities and create a real sense of value in our society. And finally, we ignore the experience and wisdom of older people at our peril.
Lord Hutton of Furness is a former Secretary of State for Work and Pensions. This is an edited version of an essay from 'The Next 10 Years’, to be published by Reform on March 1
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