the cost of our ageing society - edinburgh

The International Longevity Centre-UK is an independent, non-partisan think-tank

dedicated to addressing issues of longevity, ageing and population change.

The Cost of Ageing

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



ILC-UK Planning Tomorrow, Today

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



Who do we work with?

http://www.housinglin.org.uk/

http://www.dh.gov.uk/health

http://www.google.co.uk/url?sa=i&rct=j&q=BT&source=images&cd=&cad=rja&docid=G-7vjkyhkckoCM&tbnid=nxYEOO791l2ijM:&ved=0CAUQjRw&url=http://www.uswitch.com/tv/news/2012/11/british_eurosport_comes_to_bt_vision/&ei=VE4SUaz_A6eW0QWizIDgAw&bvm=bv.41934586,d.d2k&psig=AFQjCNHYMZsXtv4deM-_Rd4iW5FijOtRMA&ust=1360240537348380

http://www.pfizer.co.uk/sites/uk/Pages/default.aspx

http://www.google.co.uk/url?sa=i&rct=j&q=prudential&source=images&cd=&cad=rja&docid=_50fNauR_yu1EM&tbnid=CbdObA4nbf4lAM:&ved=0CAUQjRw&url=http://www.grovelands.co.uk/rdr-crisis-as-prudential-calls-for-a-delay/&ei=uU4SUf7OFPO10QWAx4HwDA&bvm=bv.41934586,d.d2k&psig=AFQjCNEDsAHmnrUtUJrGsb0onG-GTdC0yA&ust=1360240678425765

http://www.google.co.uk/url?sa=i&rct=j&q=aviva+logo&source=images&cd=&cad=rja&docid=mnNOvtn1gnuOQM&tbnid=-TovLwRQxEAXBM:&ved=0CAUQjRw&url=http://symbolphotos.blogspot.com/2011/07/aviva-logo-photos.html&ei=504SUbJ6wqDRBfKtgZAJ&bvm=bv.41934586,d.d2k&psig=AFQjCNFnZD8euFW9hZNyBYAEXCslnzSlJg&ust=1360240740558355



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.

0%

20%

40%

60%

80%

100%

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Children Working-age Age 65 and over



The challenge in some places is more severe

0

10

20

30

40

50

60

70

80IE UK

NO DK

BE LU SE

FR NL FI CY

EU

15 AT

EU

27E

A17 CZ

EE

MT

ES

GR IT LT PT SI

HU

DE

BG

EU

12 SK PL

RO LV

2010 2010-2030 2030-2060

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



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

0%

2%

4%

6%

8%

10%

12%

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

State Pensions Pensioner Benefits Public Service Pensions



Progress with pension reforms: spending

-4

-2

0

2

4

6

8

10

12

14

16

LV PL EE IT DK PT FR SE EL BG UK

EU27 EA AT DE CZ HU FI LT N

L ES RO IE NO SK MT BE SI CY LU

2009 AR 2012 AR

+1.5 p.p. (2012 AR)

+2,3 p.p. (2009 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

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

2052

2054

2056

2058

2060

2009 AR 2012 AR

Potential GDP growth - EU27



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

2010 2060 2010 2060

54.5 66.7 38.6 60.3

21.6 21.6 23.6 23.6

62.5 64.3 61.7 63.8

18.9 22.7 22.7 26.0

31.7 34.7 37.4 39.3

2.0 1.3

Requested exit postponement in years(to keep % life spent in retirementconstant)

Men Women

Average entry age

Employment rate of older workers (55-64)

Average exit age

Life expectancy at the time of w ithdrawal

% of adult life spent in retirement



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?

YESMigration 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 yearsThe 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

Documents