An adolescent evasion

In: Uncategorized

16 Oct 2012

This Perspective column was first published in Monday’s edition of Fund Strategy.

Will automatic enrolment into pensions schemes help Britain meet the challenge of an ageing population? Understood properly the answer should be a resounding “no”.

There is a fundamental flaw in the way the question is posed. It embodies the incorrect assumption that demographic ageing is necessarily a burden on society. In doing so it mystifies the real economic and social challenges that Britain is facing and in doing so makes finding a solution more difficult.

The discussion of auto-enrolment provides a good starting point to examine why this is the case. Even those outside of the investment industry will probably have heard of it by now thanks to a national advertising campaign. It is hard to miss celebrity business types such as Theo Paphitis and Karen Brady proclaiming that they are “in” in relation to pensions.

In a rolling programme running over the next six years those employees who are not already in an employer pensions scheme will be enrolled in one. This could amount to as many as 11m people. They will have the choice of opting out if they want to but the default option is to include them.

As with other pensions-related initiatives, such as raising the official retirement age, the justification for the initiative is that it will help meet the costs of an ageing population. So according to an official guide from the Department of Works and Pensions:

“In 1901 there were 10 people working for every pensioner in the UK. In 2010 there were 3 people working for every pensioner. By 2050 it is expected that this will change to just 2 workers.”

This is in line with what successive governments have argued. For instance, in 2006 the then prime minister, Tony Blair, wrote in the foreword to the pensions white paper that: “there has long been recognition of the need to overhaul our pension system for a society where we all live longer.”

Admittedly such arguments have a common sense appeal. At first sight it seems logical that an older population should be more of a burden than a younger one. People often think of their elderly relatives and how they can become a burden on their families.

But it should not take long before questions start to emerge. For instance, Britain’s ageing population is hardly a new phenomenon. Life expectancy has risen from the early 40s in the middle of the nineteenth century to over 80 today. The proportion of the population that is over 64 has also increased steadily since the start of the twentieth century. Such figures beg the question of why ageing has become such a preoccupation in relatively recent times.

There are three key reasons why it is wrong to see ageing as a burden on Britain. First, the rise in the proportion of elderly will be at least partly offset by the fall in the proportion of children. Since both groups are dependents on those who are working a true measure of dependence must take into account the two of them.

Children, as every parent knows, are expensive to maintain. They are also a burden on the state budget since education is costly. In an ageing world there may be more spending on hospitals and old age homes but there will be proportionately less spent on schools.

Second, it is misleading to see the relationship between dependents and those working in terms of demographics. In Britain there are officially about 2.5m people unemployed and no doubt many more underemployed. Yet these are people of working age. This is certainly a huge waste of valuable human resources but it is an economic and social weakness rather than a demographic one.

Indeed it is also the case that many elderly people do work or would do so if the opportunities existed. It is not true that all the elderly are frail and unable to work. On the contrary, according to official figures the average 65-year-old man had 9.9 years of life expectancy left in 2008 while for women it was 11.5 years.

Think about the sprightly grandparents who look after their grandchildren – which in turn frees the parents to work. No doubt many more elderly people than do already would also like to do paid work, perhaps part-time, if they got the chance.

Finally, the most important factor of all is the rise in productivity. Each person in work produces, on average, far more than those of earlier generations.

For example, according to figures from Angus Maddison, who until his death in 2010 was a leading expert on economic growth, real output per head in Britain grew almost eight-fold between 1901 and 2008. In other words the average person produced nearly eight-times as much as his forebears at the start of the previous century. It is this rising productivity that enables society to become richer, and, if necessary, support more dependents.

Governments prefer to focus on demography because they find it much easier than addressing the real challenges facing society. In effect they end up blaming the elderly for fiscal problems, poor economic growth and unemployment when they should be celebrating longer life expectancy.

Like overgrown teenagers today’s generation of politicians cannot resist attacking their ageing parents for the world’s troubles.

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The road to auto-enrolment

Successive governments have produced numerous reports and pieces of legislation on pensions over the past two decades. These are some of the key milestones in relation to auto-enrolment:

2002. Government publishes pensions green paper to promote discussion on the topic. Establishes the Pensions Commission under Adair Turner.

2006. Pensions white paper published. Government announces its intention to introduce auto-enrolment.

2008. Pensions Act sets up legal framework for its introduction.

2012. The process of auto-enrolment starts with the largest employers. Small and medium-sized employers are scheduled to follow over the next six years.