Resolution Foundation look at demographic changes and impact on state-funded support

policy digest

31 / 01 / 2017

Live long and prosper? Demographic trends and their implications for living standards
Resolution Foundation, January 2017

This report, produced as part of the Resolution Foundation’s Intergenerational Commission, looks at demographic changes and how they may impact living standards in the future. It explores changes in life expectancy, their relationship with proposed changes in the state pension age and the various possible projections around ‘dependency ratios’ – the ratio of working people to dependents.

The report begins by exploring demographic trends over the last century. Continuous improvements in longevity are broadly attributed to falls in infant mortality, advances in tackling infectious disease and reductions in morbidity due to circulatory diseases. Other shifts that have happened include “younger generations leaving education and starting work later”, delaying of family formation and the increase in numbers of women in the workforce. The report views the growth of higher education as a possible strategy by which people can adjust to the challenges of greater longevity, since it increases earnings potential. 

Moving to the challenges of increased longevity, the report notes that many other changes that have taken place will lead to increased life expectancy becoming more difficult for the state. For example, rates of separation and divorce are rising, leading to higher costs of living (“to reach the same standard of living as a couple, a singleton needs to earn 50 per cent more”) and pressures on housing supply. The demographic pressure of longevity is added to by the uneven size of different age cohorts, with the large baby boomer generation starting to retire and putting more pressure on the smaller cohorts that follow it.

The report discusses ‘dependency ratios’, which compare the size of the dependent population (those aged under 20 or over 65) with the working age population. According to this measure there are currently seven dependents for every 10 people of working age, projected to rise to 8:10 in the 2020s and around 9:10 by 2050. However, this is presented as an over simplistic approach, as it does not “reflect rising longevity and changing patterns of work”. If the formulation is changed so that ‘dependents’ includes under 20s and those over the state pension age, which will be increasing to 69 by 2056, the dependency ratio would only reach 8:10 by 2040 and “remain around that level to the mid-2060s”. By this measure the tax burden on working age people would increase by £15bn, or around a 4p rise in the basic rate of income tax, by 2060.

An alternative dependency ratio could look at the number of workers to non-workers. This ratio has improved over recent years from 13:10 in the late 1970’s to 11:10 today, mainly due to more women entering the labour market. One way to improve this ratio in future would be to move further towards full employment. Earnings levels and hours worked are also important considerations when looking at the contribution of working age people. Employment increases are now more likely to come from lower-paid, part-time roles which will contribute less to the public purse.

Another complicating factor is the blurring line between working and ‘dependent’ – the report notes that even if adults can work into their late 60s and 70s they are likely to require greater support (particularly healthcare) in order to do so and therefore their net contribution may be less. It should also be noted that the next generation of pensioners are also likely to have greater personal wealth, which may make them less dependent on state support in their old age than previous generations.

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