Ageing population. Must try harder

Date: 26/11/05

Ranking Britain's oldsters at work

IN BRITAIN, as in other advanced countries, post-war baby-boomers are approaching retirement. A smaller generation will replace them in the workforce. As a result, the ratio of people aged 65 and over to the working-age population is set to soar, and with it financial pressure on fewer workers and taxpayers to provide for more pensions.

The dependency ratio will rise from 27% to 45% in Britain over the next 30 years - less than the increases in Italy or Germany, but still a leap to reckon with. Across rich countries, such rises are expected to push up state-pension spending as a share of the economy. Yet, remarkably, the government projects that the bill for pensions in Britain will stay broadly unchanged at around 5-6% of GDP.

It hopes to achieve this by concentrating spending on poorer retirees, notably through the means-tested pension credit which it introduced in 2003. But the policy has a fatal flaw. For it to work, employees on quite modest incomes will have to save more for their retirement. But the pension credit discourages them from doing this: it is withdrawn at a rate of at least 40% for every extra pound of savings income. Because state pensions are anything but lavish, almost two-thirds of all pensioners are expected to be eligible for the credit in 20 years' time. So this disincentive to save is affecting more and more workers.

On November 30th, the government-appointed Pensions Commission will map out an escape route from this policy dead-end. It will propose reducing the incidence of means-testing by making state pensions more generous, and would help pay for this by raising the state-pension. Gordon Brown, the chancellor, has already signalled that he is worried about the potential cost of the commission's proposal, leading to speculation that the government will bin it.

Yet raising the state-pension age will prove worthwhile only if it raises the effective-retirement age - the average age at which people leave the workforce. At present, the average British man soldiers on until he is 63. That is respectable by international standards (see chart) but much less impressive than the Japanese, Icelanders and Swiss, who work beyond the state-pension age. British women rank similarly to their menfolk, though their effective-retirement age of 61 is a bit higher than their state-pension age.

Over the past four years, the proportion of people of both sexes who work beyond the state-pension age has risen encouragingly. Yet, once again, some other countries do a lot better. In Britain, only a seventh of people aged 65-69 are still in the labour force, compared with between a quarter and a half in America, Japan and New Zealand.

This suggests that it is quite feasible for many more British people to carry on working in their late 60s, as the Pension Commission would have them do. But if the effective-retirement age is to rise, there will also have to be an end to early retirement. Over the past two decades, more people in their 50s have been leaving the workforce. Among those aged between 50 and the state-pension age in Britain, 30% - 2.7m people - do not work; by contrast, only 20% of people aged 25-49 are not employed. And the comparison for men is even more telling.

This may look dismal yet it compares favourably with many other rich countries. The black mark against Britain is the degree to which people claim incapacity benefits. The proportion of men and women in their 50s who are out of the labour force because of illness or disability is among the highest in the OECD.

The government has postponed announcing its plans for shaking up incapacity benefits until early 2006. Its long-awaited proposals will be a litmus test of how serious it is about getting people to work longer.