Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Demographic Trends and the Future of Pensions in the UK

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Demographic Trends and the Future of Pensions in the UK

Article excerpt

1. INTRODUCTION

The second report of the Pensions Commission (PC, 2005), of which the author was a member, was published in November 2005. This paper summarises the evidence and arguments behind the Commission's recommendations. A fundamental part of that evidence is the degree to which, in common with other European countries, the UK is an ageing society, with part of this driven not just by rising longevity, but also by rapidly increasing expectations of further longevity improvements in the future. Since the report was published, the British government has adopted the bulk of the Commission's recommendations, enacting reforms of the state pension system in the 2007 Pensions Act, and proposing reforms to private pension saving in a second Pensions Bill, passing through Parliament in 2008. At the same time, official projections of life expectancy have further increased.

2. DEMOGRAPHIC CHANGE

Figure 1 shows successive Government Actuary's Department (GAD) principal projections of female (cohort) life expectancy at the age of 65. In the 2001-based projections, available to the Commission when we started work in early 2003, this was projected to rise slowly from a little over 20 years now to just over 21 years for women reaching 65 in 2050. In the 2004-based projections, available when the Commission produced its main recommendations in 2005, the latter figure had risen by four years to nearly 26 years. As the figure shows, the 2006-based figures published two years later have increased this still further, to more than 27 years. For men reaching 65 in 2050, officially projected life expectancy is now 25 years, compared to only 19 years in the 2001-based projections. This view of the world for which we are planning pensions policy changed profoundly just while the Commission was sitting, and has continued to change since we reported.

[FIGURE 1 OMITTED]

But, as such revisions themselves illustrate, such projections are inherently highly uncertain. To underline the difficulties of trying to look so far into the future, it is instructive to look back at the projections Beveridge used in drawing up his famous 1942 report, Social Insurance and Allied Services, summarised in Table 1. These suggested that just thirty years ahead, the proportion of the population aged over State Pension Age (60 for women and 65 for men) would have risen from 12 per cent in 1941 to 21 per cent by 1971. In fact, it was only 16 per cent in 1971 and will not--on current (2006-based) projections--reach 21 per cent above what will be the unified SPA, by then 66, until 2031.

Beveridge and the Government Actuary who advised him did not foresee the post-War baby boom. As well as increasing life expectancy, the second factor driving the increase in the proportion of the population over 65 is the unwinding of the impact of the baby boom. As Figure 2 illustrates, what we now expect to see over the next 25 years is a rapid catch-up to where the old age dependency ratio would have been without the baby boom (the dashed line), if fertility rates had remained at their level of the 1930s, rather than rising above them until the mid-1970s as they actually did (the solid line). Over the next twenty years we will get back to where Beveridge might have thought we would have got to, having had a period of what has in some ways been one of false security.

[FIGURE 2 OMITTED]

As well as the need to prepare for increasing longevity, a second implication of this is therefore to expect the unexpected, future demographic structure is highly uncertain. Further life expectancy of 25 years for men reaching 65 in 2050 may indeed be the most reasonable projection we can make now, but some would still defend the logic of an effective "limit to life" which produced the projection of 19 years a few years ago. On the other hand, others would point out that even the new higher projection implies quite a rapid slow-down in the rate of improvement of age-specific mortality which we have experienced for the last 25 years. …

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