The debate on pensions, which is directly linked with long-term demographic trends underway, has heated up since I last touched upon the issue in July (see blog of 3 July). I noted then that by 2010 there will be roughly one pensioner to every four people in work in the developed world. On current trends, by 2025 this ratio could have changed to one to three, and possible higher.

Increasingly, European countries are beginning to take action:

• Initially Germany was one of the most forward looking Member States, raising the pension age to 67 by 2026, increasing the limit by one month every year;
• The Netherlands agreed last month to raise the pension retirement age by two years to 67 by 2025. Social Affairs Minister Piet Hein Donner predicted the economy will be short of 800,000 workers by 2040 unless the retirement age is raised;
• In France, President Nicolas Sarkozy announced this week that his government would take steps to encourage people to work longer for their pensions. The shortfall in the pensions section of the social security system in France is forecast to hit €10.7bn (£9.5bn, $16bn) in 2010 and to continue growing rapidly;
• Meanwhile, in the UK, as a result of the UK Pensions Act, which became law on 26 July 2007, for those born after 6 April 1959, the state pension age in the UK will increase from 65 to 68 between 2024 and 2046. The Shadow Chancellor George Osborne recently announced that an incoming Conservative government would raise the retirement age to 66 by 2016, accelerating the recommendations put forward by Lord Turner which have mostly been ignored by the Labour Government. 

Where are these actions taking us? Let us take a historical perspective…

• In 1908, David Lloyd George, the then Chancellor of the Exchequer, introduced the Old Age Pensions Act which provided between 1 shilling and 5 shillings a week when people reached 70. But at that time the average life expectancy was 48 for men and 52 for women.
• After the Second World War, the state pension age in the UK was set at 65 for men, at a time when life expectancy for a man was 66.4 years and 72.5 years for a woman.  Now, in 2009, life expectancy has risen to 77 years for a man and 82 years for a woman in England - the pension age of 65 for men has not altered since 1948.
• These long-term trends are likely to continue. One recent estimate estimates that by 2056, the life expectancy for a man and woman living in England will be 84 and 89 years respectively (this could well be higher dependent on rapid advances in medical science).

The demographic pattern hits different countries in different ways. Russia, China and Japan have ageing populations, while nations such as those of Latin America, Iraq and India are much younger (half the Afghan population is under 25). Given the unlikelihood of having more younger people available anytime soon, how are we to be competitive and innovate with an ageing population? How can we stop the ratio referred to above (pensioners to those in work) from increasing, as forecast?

With the aim in mind for a high quality of life for our pensioners, two policy measures come to mind which merit attention:

• Should those above 65 wish to continue to work and remain contributing to the national economy in a myriad of ways, should they not be encouraged to do so? Will this not be seen more as a freedom to do what they want rather than simply having an entitlement to a pension?
• Why not, as Denmark has done - index the pensionable age to life expectancy in the UK?

To some degree the UK Pensions Act has started this process but should life expectancy be expected to reach 85 for men by 2050, should we not be planning for the pension age to be closer to 75?

Demographic Trends