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The Money Programme Wednesday, 3 May, 2000, 10:18 GMT 11:18 UK
More 30/4/00

The Age Wave

If you visit the American state of Florida, you can't fail to notice the number of older people. So many retire to that sunny place that over-65s now make up nearly a fifth of the population. Unnatural? Well, what you're seeing is humanity's future. That same proportion will soon be true in most western countries: in Italy by 2003, in Germany by 2006, in France and Britain by 2016, in America as a whole by 2023. The greying of society will present challenges to pension systems, health care and attitudes to retirement.

The Age Wave isn't guesswork. You could say it's a future that's already happened. After World War II there was a baby boom - a huge rise in the birth-rate. But after 1970 there was a birth dearth, with birth-rates in western countries falling below replacement level, where they've remained. The baby-boomers start retiring soon, but enough young workers to replace them just weren't born. For the first time in history, the old will start to outnumber the young.

This disproportion will be made worse by our greater longevity. Medicine has pushed up life expectancy; there will be thousands of centenarians. Older people will be fitter, and thus able to enjoy to the full thirty years of active leisure in the long sabbatical of retirement. Or will they?

The key demographic statistic is what's called the dependency ratio: the number of tax-paying workers as against the number of dependent pensioners. In Britain today it's 3.5 to 1. But as the century advances the ratio will tighten. By the mid-century, the IMF predicts a dependency ratio in Britain of 2.1 to 1, in Germany 1.2, and in Italy 0.7! In other words, every Italian worker will not only be supporting himself and his family but also a pensioner whom he does not know.

The reason is that state pension schemes are pay-as-you-go: pensions are paid out of the contributions of today's workers. When there are too many pensioners and too few workers, that leaves two unpalatable options: massively higher taxes on the workers, or pensions that are far lower than those the retired forlornly assumed they had paid for and are entitled to. Politicians have been reluctant to tinker with pension rights, but, in several countries, without reform the system will soon be unsustainable.

The French, Germans and Italians largely rely on their generous state pension schemes. The British have sensibly moved much faster into private or company schemes; but the demographics still mean a pensions crunch everywhere in the developed world. Britain also faces a mounting crisis in the NHS. Over-65s account for nearly half of NHS spending, and there will be more of them, living longer. Neither doctors nor politicians like to talk about rationing health care - but that's the dilemma they're facing even today, and it will get progressively tougher.

Are there answers to the worsening dependency ratio? One is immigrants, but millions would be needed to keep the worker-pensioner balance as it is now. Another is simpler, more obvious and more likely: we shall just have to work, and thus pay taxes, for longer. At the moment, Britain, like most western countries, has a culture of early retirement: two thirds of workers go before they're 60. Youth unemployment is still the bugbear, and most companies drop older workers as soon as they can. That will have to change.

A man of 60 today is probably as fit and productive as a 40-year-old a few decades ago. Is it right that he should enjoy a decades-long holiday paid for by the taxes of the young - especially when there are more and more of him and fewer and fewer of them? Should not the retirement age rise to 70, or be made flexible? For governments trying to meet unfunded pension obligations out of a diminishing tax take, the answer is likely to be yes.

But while many older people feel rejected and discarded by employers, and would love to go on working, there are probably as many delighted to put their feet up. Work will have to be made attractive to the old: not too much stress or responsibility, flexible hours, part-time contracts. Already a handful of British employers are waking up to changing reality. Knowing that demographics will soon force them to hire the old, they are discovering that wrinklies are not only reliable and conscientious, but blessed with an asset no-one can take from them: experience.

The Age Wave is coming; we should be ready for it.

John Penycate

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