Independence Day: Balancing the effects of an ageing population

4th Dec, 2015

Last week both the Trajectory Trends Breakfast and the weekly blog tackled the question of whether or not the UK had enough people.

In doing so we explored issues of population density, immigration and ageing with each issue bringing its own challenges and its own opportunities. Our population is set to grow by ten million by 2039, and whilst we believe that this growth will have a positive impact on the UK as a whole it is important to understand that the difficulties we face will not be simply those of a larger population, but a new one.

Dependency 1

Source: UN World Population Prospects

Nowhere is this more clear than in the way in which we manage our ageing population. To illustrate the way in which both the challenges we face and the strategies we adopt in encountering them will change, we will explore UK dependency ratio – a metric which once painted a powerful image of the problems caused by an ageing population, but one which will become less and less illustrative of the challenges facing the UK as we manage dependency through changes to the retirement age.

From 1925 to 2010 the age at which you could access your state pension was 65 for men and 60 for women. In response to societal changes in employment and family structure, the age at which women retire has been gradually increasing with equality in retirement age set to be reached in 2018 at 65. The incredibly long-standing nature of state pension age meant that throughout the 20th Century the ratio of the population not in work due to old age increased steadily; from 16 per 100 workers in 1950 to 28 per 100 workers in 2015.

Whilst the total dependency ratio in the UK (the dependency ratio which takes those aged 0-15 into account) was tempered by slowed birth-rates from the 1970s, our position in the late stages of demographic transition now means that – without accounting for net migration – we will have an ageing population increasing stably in size. If the retirement age was left untouched our old age dependency ratio would be catastrophic – the UN World Population Prospects projection would put the figure at 42 people not working due to old age for every 100 working – with a total dependency ratio of 70 non-working people for every 100 workers.

Our ageing population thus represents a challenge, a challenge we are managing by gradually increasing the retirement age as our health is maintained deeper and deeper into old age, increasing our capacity to work later in life. This means that whilst the dependency ratio is still an important figure to understand and manage, it is unlikely that it will continue to indicate problems facing society.

As we can see in the chart below, changes to the age at which state pensions can be accessed will have drastic implications on dependency. Using the 2012-based National Population Projections produced by the Office for National Statistics and projected changes in the retirement age produced by Standard Life we can illustrate the impact of our management strategies on the dependency ratio, tempering the number of non-working people relative to the number of working people in the UK.

Source: ONS/Standard Life/Trajectory

Source: ONS/Standard Life/Trajectory

Rather than increasing as in the 20th Century, the dependency ratio as managed by retirement age will remain at around 55 non-working people for every 100 working people well into the 21st Century. It is for this reason that the dependency ratio’s relevance is diminished; dependency will not be a problem faced by our new population. Instead we will encounter other problems.

Research published this week by the OECD shows that workers in the UK “will have the worst pensions of any major economy and the oldest official retirement age of any country”. On top of this, the number of individuals making private pension contributions has reduced whilst the average private pension contribution has increased, indicating polarised pension saving habits; the rich continue to contribute whilst the poor, rather than reducing contributions, stop making them altogether. Combined with these poor state pensions there is the potential for a highly polarised generation of pensioners – some staving off poverty as others live in relative comfort.

Increased life expectancy and health related to financial wealth mean that whilst our life expectancy rises on average, the range between life expectancies and the ability to work later in life will be drastically different for the rich and poor.

We have managed our dependency ratio, and whilst this is crucial to the continued functioning of our society, our new society will create different problems which must also be managed.