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The Actuary The magazine of the Institute & Faculty of Actuaries

Coming of age

Life expectancy has hit record levels, but public age-related spending is likely to have to follow suit. Emma McWilliam and Richard See Toh report


Image: Chris Dunn
Image: Chris Dunn

Medical advancements and improved living standards mean many of us will celebrate living a long life. The stereotypes of elderly people knitting in Eastbourne have long been replaced by images of a generation that is busy, engaged, economically active and, in general, healthy.

While this presents opportunities for many, it also raises significant challenges around how individuals manage their wealth and how society continues to provide social and financial support in the form of pensioner benefits, healthcare and long-term care.

Future public
expenditure policy has to reflect the numbers of people who will be needing support, so collaboration across sectors, and particularly with actuaries, is vital

To further the debate on this important issue, the Institute and Faculty of Actuaries and the International Longevity Centre (ILC-UK) have joined forces to host a series of events and research as part of their report, The Cost Of Our Ageing Society.

Longevity projections

Life expectancy at birth in the UK has increased significantly and is now at a record level for anyone born in 2013 – 91 years for men and 94 years for women, according to figures for cohort life expectancies from the Office for National Statistics (ONS).

Population projections see the size of the silver generation (65+ age group) increasing at a greater annual growth rate than younger age groups (15-64), causing unprecedented demographic shifts. The 2012 Ageing Report from the European Commission (EC) indicated that the old-age dependency ratio, which measures the number of elderly people as a proportion of those of working age, will move from around four working-age people for every person over 65, to around two by 2060. Bittersweet comfort, perhaps, that the UK and Ireland sit favourably within the European Union (EU) (see Figure 1).

Figure 1

To maintain current average old-age dependency ratios across the EU, the retirement age would need to increase to around 75 years by 2060, directly affecting many of today’s younger working population.

Simple old-age dependency ratios fall short of telling the full story, as low levels of economic activity within the working population result in lower contributions to age-related spending. High levels of youth unemployment mean that intergenerational collaboration is vital to finding a solution.

Consequently, measures such as labour market-adjusted old-age dependency ratios are key to governments building public policy that stimulates employment and reflects both demographics and the needs of every generation.

Increasing time spent in good health arguably negates some of the financial costs associated with increased life expectancy  – especially for healthcare and long-term care. It also opens up the possibility of working longer to help offset such costs.

However, in reality, absolute increases in healthy life expectancy generally lag behind total life expectancy. Morbidity increases place upward pressure on health-related spending, which is clearly linked to the number of years spent in ill health.

Therefore, perhaps a more revealing measure to target is years spent in ill health (see Figure 2). Dying older but with fewer years in ill health may, over time, improve quality of life and lead to cost reductions.

Figure 2

According to a fiscal sustainability report from the Office for Budget Responsibility in July 2012, total annual age-related spending in the UK is projected to rise from 21.3% to 26.3% of GDP between 2016-2017 and 2061-2062. This 5% increase may not appear large over time, but the report from ILC-UK, The Cost Of Our Ageing Society, illustrates that it is equivalent to around £80 billion in today’s terms.

Age-related spending

Pensioner payments (including state pensions, pensioner benefits and public-sector pensions), healthcare and long-term care costs are all projected to increase, while education remains flat (see Figure 3). Healthcare costs contribute to the greatest increase in age-related spending, equivalent to £36 billion in today’s terms.

Figure 3

Demographic pressures and potentially more years spent in ill health will place significant pressure on healthcare demand.  Creating a framework that fosters healthcare innovation and efficiency should help to deliver higher-quality treatment and services more cheaply.  Directing attention to preventative medicines or programmes could also lead to long-term savings by preventing the onset of chronic diseases.  Such measures may give rise to greater immediate costs but, without these improvements, healthcare spending in future could increase dramatically.

According to the EC’s 2012 Ageing Report, age-related spending across the EU is projected to rise from an average cost of 25% of GDP to 29.1% between 2010 and 2060.

Many countries are gravitating toward a combination of public and private provision of healthcare and long-term care, and the insurance industry has an important role to play. Whatever framework is in place, a safety net is required for vulnerable individuals, particularly given potentially greater levels of frailty and disability at older ages.

The UK government proposed a cap of £75,000 on what individuals will have to pay for long-term care costs from April 2017, over which level the state will step in. In addition, means-testing thresholds will increase from £23,250 to £123,000 in England and Wales.

Experts must rally together

According to the EC’s Annual Growth Survey 2013, several policy approaches are possible: aligning retirement ages with changes in life expectancies, restricting access to early retirement and supporting longer working lives. Creating better conditions for healthcare innovation and development offers more possibilities. No single policy is a magic pill, however, and reforms should be holistic, considering the implications for every generation.

Ahead of The Cost Of Our Ageing Society report, The ILC-UK and the profession jointly surveyed a number of individuals across a range of professions and disciplines. In particular, we sought views on which policy initiatives should be adopted (see Figure 4).

Figure 4

The highest support was for policies that recognise the value and positive contribution of older generations. Some 90% of respondents supported phased retirement and part-time working, showing a strong appetite for frameworks that allow individuals, if they wish, to make a smoother transition into a later retirement and enable society to further benefit from their experience.

The lowest support was for policies encouraging higher birth rates, possibly because they are not so much solutions as ways to move costs from one generation to another. Lastly, the survey revealed that while the UK is generally ahead of other EU countries in its plans to increase the retirement age to 68 by 2046, more than one-third of respondents thought that retirement ages should increase further and faster.

Longevity investigations help to fine-tune projections and highlight key issues, but they cannot change the fundamental challenges facing society. The employment landscape will need to evolve and the care costs conundrum must be solved through a set of policies that are fair for every generation.

The debate surrounding The Cost Of Our Ageing Society is just one step towards a more unified approach across professions, which will enable individuals and society to enjoy the gift of living longer.