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The Actuary The magazine of the Institute & Faculty of Actuaries

OBR urges long-term view on costs of ageing UK population

The Office for Budget Responsibility (OBR)’s Fiscal Sustainability Report, released today, suggests that the increased longevity of the UK’s population will lead to a significant economic crisis if long-term decisions aren’t made now.

The report foresees that, due to rising costs of healthcare and pensions, the government’s debt will hit 107% of gross domestic product (GDP) by 2060 - even without new austerity measures being implemented in that time - compared to the current figure of just below 70%.

The OBR stated its belief that the cost of healthcare will increase from 7.4% of GDP to 9.8% in 2060, while the basic state pension is expected to cost 7.9% of GDP compared to 5.5% currently.

The full report by the OBR can be found here

Round-up of response:

Pension Corporation
Dr Bob Swarup, partner, commented on the extent of public sector liabilities.

"Previous publications, including the Policy Exchange paper on public sector pensions, have already floated the idea that the public sector liability is around £1 trillion or so. So there’s nothing new there and in any case, I am sure that the number has been analysed ad infinitum by others.

"What I am pleased by is the detail. The main objective should be to increase the transparency of government statistics, in particular those to do with public sector (net) liabilities, and to develop tools to better assess the long-term sustainability of the public finances and the degree of fairness of government policies across the generations.

"Coming out of the deepest recession in living memory, it is certainly an opportune time to revisit these issues and it is increasingly important as we see the flood of baby boomers beginning to retire. Bear in mind that pensions is but one of the three major costs associated with the elderly for the government - long-term care and healthcare are two other equally important legs of the stool.

"However, we still need a broader approach than that currently used to assess better the true state of the public sector finances. There are many other important liabilities the government might face. And equally, there are many non-financial assets the government holds that will help meet these liabilities in the future.

"Some of the liabilities have been captured (PFI projects, for example), but there are other important liabilities arising from social / moral commitments that are not. The state pension is a prime example. An even wider assessment of the public finances could thus include all future government spending, which citizens might expect - based on current policies - to benefit from in the future. To balance this, such an assessment should then also include all the taxes citizens might expect to pay in the future. It should also include non-financial government assets such as social housing and physical infrastructure.

"Intriguingly, some people, such as Martin Weale and Professor James Sefton, have tried to use an approach called generational accounting to look at this. Assuming current spending and tax policies (and individual behaviours) remain unchanged forever, they have projected all government spending and revenue into the future. The numbers are stark. With the population ageing rapidly, the share of pension and health spending in GDP will rise strongly over the coming decades. Their numbers, though based on 2008, indicated that the fiscal position would have to be tightened by around 10 per cent of GDP to ensure long-term solvency.

"But even this tightening is not sufficient to make future generations equally well off. Someone born today will get a better deal out of the welfare state than someone born in, say, 20 years’ time. Even more tightening would be required to achieve inter-generational fairness. This generational accounting is a useful "what if" exercise, which can alert policy makers of the challenges ahead.

"This suggests that the UK’s public finances are in their current state neither sustainable nor inter-generationally fair. While the former merely confirms what we knew already, the latter adds an important dimension to the debate. We are not doomed yet but policy action and most likely changes in individual behaviours (for example, remaining in the labour market for longer where possible) are required to achieve sustainable outcomes in the long term. Now is the time for action. This is the true challenge for this and future governments."

Age UK
Michelle Mitchell, Charity Director:

’The scale of projected public spending increases as a result of ageing needs to be put in context. In recent decades public spending has swung up and down by similar amounts due to economic and political changes. We have time to make long-term plans and as a nation we are starting from a good base, with relatively low levels of spending on state pensions and health compared to other rich countries.

’Longer life is a cause for celebration, but it will require economic adjustments. People will have to work for longer and the state pension age will gradually rise to reflect life expectancy. Relative to the size of the economy, it is inevitable that we will see increased pension payments and consumption of health and care. But it is for us, as a society, to choose the balance between public and private provision and what this should mean for tax and spend.

’There is no evidence that the public wishes to see entitlements in later life reduce, when people have contributed for all their lives. If we plan sensibly and carefully calibrate long-term spending and taxation decisions there is no need for national debt to increase alongside life expectancy.’