Act now to avoid pensions shock wave warns Lord Hutton
THE UK’s aging population offers the potential for a pensions shock wave unless urgent steps are made to address the situation, former Business Secretary Lord Hutton told an audience in Birmingham.
Delivering Birmingham Forward’s Roger Dickens Annual Lecture Lord Hutton said the public policy concerning older people was based on a redundant concept of life after 65.
“The old notion that after this milestone in your life, all you can expect is decline and dependence is hopelessly unsuited to the new world and the new times we live in,” he said.
“The challenge is how to build a new model that assumes older people will participate actively in society and in the workplace for longer and to the best of their ability.”
However, the new concept is not without problems – notably how the lifestyle change is to be funded.
Lord Hutton said the Office for Budget Responsibility had estimated that public finances are likely to come under increasing pressure over the longer term, primarily as the result of an ageing population.
Due to this, the Government will end up having to spend more as a share of national income on age-related items such as pensions and healthcare.
“But the same demographic trends (ageing) would leave Government resources roughly stable as a share of national income. In the absence of off-setting tax increases or spending cuts this would eventually put public spending net debt on an unsustainable upward trajectory. It is likely that such a path would lead to lower long term growth and higher interest rates,” he said.
Continuing, he said much of today’s public spending on health and benefits – which together account for half of total public spending – is focussed on elderly people. 65% of DWP benefit expenditure goes to people over working age, equivalent to £100bn in 2010/11, or one seventh of total public spending.
“Continuing to provide state benefits at today’s average would mean additional spending of £10bn a year for every additional one million people over working age – an enormous extra pressure on resources.
“The growing numbers of elderly people will clearly present challenges for providers of these services as well as for public finance as a whole.”
Lord Hutton said Government needed to find the right balance in its economic, fiscal and industrial policies so that Britain could continue to provide a good place to attract inward investment, promote and reward innovation and develop new scientific and technological developments.
“We will need to focus absolutely on improving our international competitiveness which has been declining in recent years. Productivity will need to increase across the whole workforce – young and old alike,” he said.
He said a number of problems had to be addressed when it came to occupational pensions. Firstly, not enough people are saving for their retirement. Second, those who are saving are not saving enough. And finally, current public service pensions are not on a sustainable financial foundation.
“These three problems pose a very serious risk to the long term health of our public finances, our overall economic competitiveness and ultimately to social inclusion,” he said.
“Our public service pensions are a fundamental part of our national savings infrastructure. So it is vitally important that the long term finances of these schemes are sorted out.
“Most people in the public sector are saving for their retirement – which is a great thing – but they have not been saving enough to provide for the extra years they are living. So the taxpayer has been making up the difference. And 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. My very strong view is that we should not wait that long before we get the system back onto a more sustainable footing.”
