The cost of our ageing society - Edinburgh

The Cost of Ageing

David Sinclair, International Longevity
Centre – UK @ilcuk @sinclairda

The International Longevity Centre-UK is an independent, non-partisan think-tank
dedicated to addressing issues of longevity, ageing and population change.

ILC-UK Planning Tomorrow, Today

 think tank
 evidence based
 policy focussed
 balanced
 independent
 respected
 experts
 networked
 international


Who do we work with?


The cost of ageing

Growing dependency
ratios

The cost of ageing is
significant today

Looking forward

But it is manageable if
we act


The cost of our ageing society

European Commission
2012 Ageing Report

Office for Budget
Responsibility: Fiscal
Sustainability Report, July
2012.


Dependency ratios are increasing (by 2060)

From around four working-age
people to around two working-
age people for every person
aged 65 (UK)
From more than six working-
age people for every person
aged 65 and over to just over
two working-age people for
every person aged 65 and
over (Globally)


Relatively fewer ‘working age’ adults (EU)

The greater the old-age dependency ratio, the more
pressure there is on state systems to fund pensions,
benefits, and health and care costs for older people.
Children Working-age Age 65 and over
100%

80%

60%

40%

20%

0%
2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060


The challenge in some places is more severe

Old-age dependency ratio (65+ / 15-64)
80

70

60

50

40

30

20

10

0
F

T
E

S
T

P

V
U

N
I

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A

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R

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M
I

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E

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7
1
5
1

7
2

2
1
2010 2010-2030 2030-2060


Cost of ageing

In the UK: age-related
spending is projected to
rise from an annual cost of
21.3% to 26.3% of GDP
between 2016/17 and
2061/62, a rise of 5% of
GDP (equivalent to a rise
of around £79bn in
today’s money).


Pension costs

• UK spending on public pensions (state pension,
pensioner benefits and public service pensions) is
projected to rise from an annual cost of 8.9% to
10.8% of GDP between 2016/17 and 2061/62
(equivalent to a rise of £33bn in today’s
money). These assumptions do not include
consideration of the impact of a single-tier
pension.
• EU spending on public pensions is projected to
rise from an annual cost of 11.3% of GDP to
12.9% of GDP (2010 to 2060).
• Globally: IMF project that global spending on
pensions could rise from an annual cost of 5.3% to
11.1% of GDP between 2010 and 2050 in
advanced economies.

UK spending on pensions as a proportion of
GDP to rise to 10.8% by 2062
12%
State Pensions Pensioner Benefits Public Service Pensions
10%

8%

6%

4%

2%

0%
2016-17 2021-22 2031-32 2041-42 2051-52 2060-61 2061-62


Progress with pension reforms: spending

16

14

12
+2,3 p.p. +1.5 p.p.
10 (2009 AR) (2012 AR)
8

6

4

2

0

F

S
E
T
P

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N
-2

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U
7
2
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-4

2009 AR 2012 AR


Healthcare costs

• In the UK: spending on health care is projected to see the
largest rise of all elements of age-related spending, rising
from an annual cost of 6.8% to 9.1% of GDP between
2016/17 and 2061/62, a rise of 2.3% of GDP (equivalent to
a rise of around £36bn in today’s money).
• In the EU: spending on health care is projected to rise from
an annual cost of 7.1% to 8.3% of GDP between 2010 and
2060, a rise of 1.1% of GDP.
• Globally: it is difficult to project the costs of health care
because of the lack of data from developing countries. But
evidence of growing numbers with long term conditions.


Spending on health care will see the
greatest increase of all age-related
spending over the next 50 years

Projected health care
spending as a
proportion of GDP


Long term care costs

• In the UK: spending on long term
care is projected to rise between
2016/17 and 2061/62 from an
annual cost of 1.1% to 2% of
GDP, a rise of 0.9% of GDP59
(equivalent to a rise of around
£14bn in today’s money).
• EU spending on long term care is
projected to rise from an annual
cost of 1.8% to 3.4% of GDP
between 2010 and 2060


Spending on long-term care

Projected spending on
long-term care as a
proportion of GDP


Cost of education flat

• In the UK: spending on education
is projected to remain generally
level between 2016/17 and
2061/62 at an annual cost of 4.5%
of GDP. (NB Partly due to
spending cuts in education
announced in November 2011)
• In the EU: spending on education
is projected to reduce from an
annual cost of 4.6% to 4.5% of
GDP between 2010 and 2060


Costs of unemployment up in UK

 In the UK: spending on unemployment
benefits is projected to rise from an annual
cost of 0.3% to 0.6% of GDP between
2010 and 2060 (equivalent to a rise of
around £5bn in today’s money).
• In the EU: spending on unemployment
benefits is projected to reduce from an
annual cost of 1.1% to 0.7% of GDP
between 2010 and 2060. Partly due to
European Commission expectation that
there will be a decrease in the structural
unemployment rate.


Looking forward

 Changes in longevity, fertility
and migration
 Trends in health care and
long-term care
 Labour market participation
rates and labour market exit
ages
 The economy and GDP
growth


Changes in longevity

Longevity is expected to continue
increasing: Increasingly long lives
impact the costs of pensions, health
care and long-term care as individuals
need to receive these benefits and
services for longer.

Globally, life expectancy at birth is
projected to increase by 13 years during
this century from 68 years in 2005/10 to
81 years in 2095/2100.


Life expectancy is increasing

In the UK, life expectancy at birth is
expected to increase by 7 years for
men and 6.7 years for women
between 2010 and 2060.

Within the EU, life expectancy at
birth is expected to increase by 7.9
years for men and 6.5 years for
women between 2010 and 2060.


And we might be underestimating

 The projected costs of ageing will be
higher if people live for longer than
current longevity projections indicate.
• The IMF warns that, based on past
underestimations, it is possible that
current global longevity projections
could be underestimated.
• If longevity projections are being
underestimated, this could add
between 1.5% to 2% of GDP to the
annual costs of pensions in countries
with advanced economies by 2050

Fertility rates are below replacement rate

• Fertility rates are increasing but are still lower than
a 100% replacement rate of 2.1 births per woman
per lifetime in the EU and the UK
• A reduction in fertility relative to the rest of the
population has implications for future proportions of
working-age people to older people.
• Global fertility rates are currently at 2.47 births per
woman.
• The UK has a fertility rate higher than the EU
average, at 1.94 in 2010, which is projected to fall
to 1.91 by 2060


Impact of the global economic downturn

EU GDP growth is expected to be 1.4% per year between 2010 and
2060 compared to 2.5% for the 10 years 1997-2006.

More difficult for the state to pay for longevity: Employment and
productivity falling; falling tax intake; more difficult to meet debt
obligations; difficulties in funding public pension systems

And for the individual: Unemployment, reductions in wages, or
reductions in hours worked, make it more difficult to save
adequately for retirement; Falls in value of pension pots; The value
of a pension annuity has decreased; Price inflation has been high,
especially for pensioners who spend the majority of their income on
basic goods and services (eg food and energy) which experience
greater inflation.


Potential growth rates decline

Productivity (+1.5 %) becomes the dominant source of
growth
3.0 Potential GDP growth - EU27

2.5

2.0

1.5

1.0

0.5

0.0
4
0
2
6
0
2
8
0
2
1
0
2
1
0
2
4
1
0
2
6
1
0
2
8
1
0
2
0
2
0
2
4
0
2
6
0
2
8
0
2
3
0
2
3
0
2
4
3
0
2
6
3
0
2
8
3
0
2
4
0
2
4
0
2
4
0
2
6
4
0
2
8
4
0
2
5
0
2
5
0
2
4
5
0
2
6
5
0
2
8
5
0
2
6
0
2
2009 AR 2012 AR


Trends in healthcare

As a result of a growing older
population, increasing longevity and a
greater coverage of public health care
within the EU the pressure on public
health care funding is likely to continue
growing. Public health spending in the
EU currently accounts for 14.6% of total
government spending, around 7.1% of
GDP.


Working longer – a solution?

The longer that people spend in work, the longer
they have to save for retirement and the shorter their
retirement will be, relative to their working life.

A later average age of exit can also increase the
number of people in work, relative to the number who
are retired, making it easier to fund pensions,
benefits and health and care costs from current
taxes.


We are working longer

 Labour market participation at
older ages (ages 55 to 64) is
expected to increase within the
EU from around 50% to around
67% between 2010 and 2060.
 The average age of exit is also
projected to increase from
around 62 to around 64 within
the EU and from around 64 to
around 65 within the UK
between 2010 and 2060.


Ageing or retirement problem ?
Adult life spent in retirement EU27

Men Wom en

2010 2060 2010 2060

Em ploym ent rate of older w orkers (55-64) 54.5 66.7 38.6 60.3

Average entry age 21.6 21.6 23.6 23.6

Average exit age 62.5 64.3 61.7 63.8

Life expectancy at the tim e of w ithdraw al 18.9 22.7 22.7 26.0

% of adult life spent in retirem ent 31.7 34.7 37.4 39.3
Requested exit postponem ent in years
(to keep % life spent in retirem ent
constant) 2.0 1.3


Must address worklessness across lifecourse

• A low old-age dependency ratio does not necessarily mean
that the burden on working people is reduced unless many of
the people of working-age are actually in work
• Another way of measuring the degree of dependency in a country
is by looking at proportion of people who are not in work as a
proportion of the total population. (Labour Market Adjusted Ratios)
• In the UK 42.6% of the population were not in work in 2010. This
is expected to increase to 47.5% by 2050. Within the EU as a
whole, the proportion of the population out of work is expected to
grow from 47.7% in 2010 to 56.3% in 2050.26


Can migration help mitigate the cost of
ageing?

YES
Migration affects population size and can reduce
dependency ratios (depending on age-structure
of migrants)
The UK is expected to receive around 8.6m net
migrants over the next 50 years
The EU is expected to receive around 60.7m net
migrants over the next 50 years

BUT
•The EU would require a far greater level of net
migration to maintain the current dependency
ratio (an extra 11 million migrants by 2020).

What else do we need to do?

• Governments need to prepare for uncertainty
• Governments need to ensure pension systems are
sustainable, allow for greater risk-sharing, and are
less vulnerable to longevity risk
• Linking retirement ages to life expectancy can help
protect pension system sustainability
• Across the world, people will need to continue to
work longer
• Policies must focus on enabling active, healthy
ageing rather than just tackling the costs of ageing



• Countries need to ensure there are safety nets for
those who cannot work longer
• Governments across the world should consider how to
create better conditions for health care innovation and
development
• If governments were to introduce legislation restricting
the inward flow of migration the dependency ratio
could be increased beyond current projection levels
• Addressing the needs of ageing populations will
require ongoing investment in research and data
collection



• Efforts need to be put in to tackle unemployment
amongst those of working age. People in particular
groups such as women and people at risk of social
exclusion are more likely to be unemployed.
• Governments might wish to look at ways of helping
women with children to be able to remain in the
workforce, through development of child-care
programmes and work with employers to ensure
fathers can contribute more to raising children and
women are not penalised for taking career breaks.


We must recognise and maximise the
contribution of age

• Labour market participation
at older ages is on the rise.
• Carers of all ages contribute
the equivalent of £119
billion every year in the UK)
• Older consumers (aged 65
and over) spend on
average, around £100bn
per year.
• Older people volunteer

We can tackle the challenges of
the cost of ageing

But is there the political and
social will?


The cost of our ageing society - Edinburgh

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