Whenever pensions are mentioned these days the word "crisis" is not far behind. But that is misleading, says the think-tank Tomorrow's Company.
Director of Tomorrow's Company
Mark Goyder says there is no need to panic over pensions
Despite what people say, a decent pension for all is affordable.
In fact, we have several decades in which to defuse the so-called demographic time bomb.
Wealth creation is the key to understanding why society will be able to afford decent pensions.
Put simply, productivity growth, which is critical for wealth creation, will outweigh the negative impact of an ageing population on living standards.
If one assumes a modest productivity growth rate of 1.75% a year, the average British worker will produce twice as much in 2045 as he or she does now.
And that will come about when the ageing of the population will peak.
In other words, output will double while the ratio of the over 64s to the rest of the population will go up by less than a fifth.
A specific ratio is often used to prove that there is a crisis.
Called the old age support ratio, it compares the number of people of working age (16-64) with the number of people above the state pensionable age (65).
In 2003 there were 4.1 people of working age for every person over the state pensionable age.
It is projected that this ratio will be 2.1 by 2041, a fall of 42%.
But this is misleading.
As the Economic Policy Committee of the European Commission pointed out in 2001, the essential relationship is really between economically active and inactive people.
No need to panic
If we compare the number of people in work with all those not in work, we produce a quite different picture.
The ratio was 0.92 of a worker for every dependant in 2003 and is forecast to be 0.8 by 2041, a fall of just 13%.
It is worth remembering that the ratio has been less favourable.
It was as low as 0.72 in 1981, when talk of a pensions "crisis" was virtually unknown.
Refining this idea further undermines the notion of a crisis.
That is because not all old people need support.
The figures for 2003/2004 show that, on average, the top 20% of retired households (in terms of disposable incomes) paid £8,684 in taxes and received £7,663 in pension and other benefits.
What black hole?
Simplistic interpretations of the demographic evidence have gone hand in hand with estimates of a yawning savings gap - a "black hole" variously estimated at £27bn and £50bn.
However, the problem is not that we are not saving enough as a nation.
Rather, it is that half the population has substantial savings and the other half has very little.
For example, only 44% of 16-64 year olds have a private pension.
There are many reasons for this skewed distribution of savings.
Among the most important are that:
- low-paid people can find it hard to save
- when they do they fear being means-tested on retirement
- defined benefit systems are declining
- the financial services industry is still widely distrusted.
Of course, those who can afford to save should be encouraged to do so.
But we should not ignore the larger context: providing governments pursue policies which encourage wealth creation, we can as a nation afford a decent retirement for everyone.
In particular, an adequate universal state pension is entirely possible, as well as being necessary.
The issue is economic policy, not affordability or distribution by itself.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated.