Posted on 3/07/2017 by
The state pension age is due to rise to 66 for men and women by 2020
The UK's ageing population will force the Government to raise taxes, borrow more or cut back on healthcare spending even if Britons are forced to work until they are 75, according to Legal & General.
Analysis of official projections showed raising the retirement age by a decade overnight would still result in “painful choices” for policymakers.
L&G Investment Management (LGIM) said slower population growth and ballooning healthcare costs would put significant pressure on the public finances in the coming decades.
We may end up borrowing a lot more, we might have to cut spending more, we might have to make healthcare less generous. There are various options, but all are painfulJames Carrick, LGIM
Its projections show raising the state pension age to 75 will still leave the Government with a budget deficit of more than 5.5pc of GDP - or around £110bn in today’s terms, compared with just over 7.5pc of GDP if people retire at 66.
Economists said demographic pressures were unlikely to be offset by delaying pension payments and higher income tax revenues, with official figures showing older Britons are more likely to work part-time.
James Carrick, global economist at LGIM, said linking the state pension to life expectancy and raising the retirement age for men and women to 66 by 2020 and 67 by 2028 had helped to boost the UK’s labour force by 0.25pc per year.
However, “population skyscrapers” in countries such as the UK meant life expectancy had risen faster than anticipated while the birth rate had slumped.
“We don’t have the tax base of workers to pay for the pensions and healthcare of retirees,” he said.
“If you increase the retirement age by 10 years, then these people are still paying tax, and delaying their pension, but changing legislation does not change how well people are.”
Mr Carrick said the Prime Minister’s attempt to change the way social care is paid for would have started to address the stark choices Britain faced.
He said: “Theresa May tried to move towards having a conversation with the public because we have this issue of an ageing population, we need to support them, but how do we pay for that? That has just disappeared.”
Projections by the Office for Budget Responsibility (OBR) show health spending is expected to rise from 6.9pc of gross domestic product (GDP) at the start of the next decade to 12.6pc of GDP in 2066-67 as the cost of an ageing population and new medical developments puts pressure on the public finances.
Fertility has been in rapid decline over the past few decades.
Source: UN population porjections
State pension costs are also expected to increase from 5pc of GDP in 2021-22 to 7.1pc of GDP in 2066-67 as the population ages, according to the Government’s independent watchdog.
Mr Carrick said: “We as a society have made a commitment to look after our elderly population. I just don’t think we appreciate how much this is going to cost.”
“We may end up borrowing a lot more money and then seeing what happens to the economy when we run large deficits. we might have to cut spending even more, we might just have to make the healthcare system less generous, there are various options, but all of them are painful.”
LGIM highlighted the importance of immigration to the public finances.
It calculated that it costs the UK Government around £220,000 in healthcare and education costs per person by the time a British-born child reaches the age of 21.
"When someone comes to the UK from abroad, that country has already paid for their healthcare and education,” said Mr Carrick.