Surviving the pensions crisis means encouraging work
The Queen’s 90th birthday has quite rightly dominated the media over the past week. Her Majesty continues to break all sorts of records, spending longer on the throne than Queen Victoria and being our oldest ever reigning monarch. But longevity should no longer give cause for surprise. The oldest participant in the London Marathon was 88, a mere whippersnapper compared to the 92 year old who ran the event in 2015.
Robert Fogel, an economic historian based at Chicago, was one of the first people to draw attention to the dramatic lengthening not just of life spans, but of active life which was about to take place. In his Nobel Prize lecture in 1993, he correctly predicted that the number of older people in the US would rise much more rapidly than the Census Bureau was predicting. Now, there are 45 million Americans over the age of 65, a big chunk of the entire population of the UK, and 6 million aged 85 and over.
Fogel worried about the implications for health care and pension costs, concerns which are widespread in policy making circles today. In terms of pensions, the obvious solution is to raise the retirement age. But governments face resistance to this. Even George Osborne has not dared to go further than legislating for an increase in the pension age to just 67 – in 2028! Retirement is popular. A key reason, as Fogel pointed out, is the vast increase in the supply and the quality of leisure time activities for what he quaintly described as the “laboring classes”. In addition, the relative prices of leisure services such as movies, television and travel have fallen substantially.
Yet there are signs of behavioural change taking place from the bottom up. Last November, the Department of Work and Pensions (DWP) published a report on the employment statistics of workers aged above 50 over the past 30 years. The number of people in employment over 50 has grown faster than the population aged over 50. A lot of the growth has been amongst women in the 50 to 64 year old age group.
In addition, the employment rate for people over 65 has doubled since the mid-1980s, from 4.9 per cent of the relevant population to 10.2 per cent. Initially the rise was in the 65-69 age group, but over the most recent decade, the over 70s have increased their participation rate in the labour force to 9.9 per cent.
The problem of how to fund the pension costs of an ageing population remains a serious one. We need to encourage more older people to work. Economics can help, but the mainstream approach has its limits. This essentially describes an equilibrium situation, and then tells us what the new equilibrium will look like after a change has disturbed the old one. But the pensions issue is about how we adapt as a society to a situation which is out of equilibrium, how we manage the process of change in disequilibrium. Behavioural economics has more potential to help.
As published in CITY AM on Wednesday 27th April 2016
Image: Chelsea Pensioners by Defence Images is licensed under CC BY 2.0