UK workforce’s longstanding ‘baby boomer dividend’ turns into a debt this year

Published on Housing, Wealth and Debt, Intergenerational Commission

Cost of Britain’s ageing society by 2060 will increase by equivalent of a 4p income tax rise without further action

The UK’s non-working population will start to grow faster than its workforce for the first time outside of economic downturns since the early 80s this year, according to a new report published today (Tuesday) by the Resolution Foundation as part of its Intergenerational Commission.

Live long and prosper? looks at how life expectancy has risen and shifted the patterns of people’s lives over the last century – from staying in education for longer, to having children later in life, and fewer of them, and working to older ages.

It highlights the living standards boon of living longer, with almost two thirds of baby boomers expected to reach age 80 and over a third of babies born over the next 20 years set to live to 100.

However, it also sets out the challenges for individuals and the state of maintaining incomes over a longer life and supporting a growing older population. The number of non-workers in Britain is set to grow by 350,000 in 2017 compared to an increase of 100,000 workers – despite employment being expected to remain at a record high.

The report shows how over the last 30 years the UK economy has benefitted hugely from rising life expectancy and increased employment among its large baby boomer population which currently stands at over 15 million. It notes how half of baby boomer women are still working at the age of 60, compared to just a third of women from the generation before them. This ‘baby boomer dividend’ has increased the tax base and helped fund education, health and welfare provision.

However, the report warns that 2017 marks a tipping point in which the size of the UK’s non-working population grows faster than its working population – and turns dividend into a debt. This trend is set to continue and accelerate over the coming decades.

The report warns that the falling ratio of the working age population to dependents will place growing economic pressure on the remaining workforce. If the UK today had to support as large a pensioner population as is expected in 2060 without any new policy change it would imply a cost pressure of £15bn a year – equivalent to a 4p rise in the basic rate of income tax – to fund welfare and health provision.

Without the government’s existing approach of accelerating increases in the State Pension age (SPA) that cost could be higher. In a sign that further acceleration may be on the cards, the latest government review of the SPA suggests it could reach 68 by 2030, rather than 2046 as under current legislation.

The Foundation warns against fatalism regarding the economic impact of an older population and too narrow a focus on simply raising the SPA. It says the government should look at additional ways to reduce the fiscal cost of longer living and boost individuals’ lifetime living standards, in particular through a renewed focus on securing full employment.

It notes that workers aged 50 and over have provided two-thirds (66.4 per cent) of all net employment growth since 2010, and that while many pensioners will be unable to work there is plenty of scope for raising older workers’ employment further still.

The Foundation says that a renewed drive to reach full employment, including helping older and disabled workers to remain in employment, would boost employment by over a million – and help maintain the ratio of workers to non-workers for decades to come.

It welcomes the recent abolition of the default retirement age, which has helped drive recent employment growth by ending legal age discrimination, and calls on the government to go further by introducing a new 12-month ‘right to return’ for workers who suffer from a period of ill-health. Such a policy would mirror the extended maternity rights that have proven so successful in recent decades.

David Finch, Senior Economic Analyst at the Resolution Foundation, said:

“The huge strides we’ve made in life expectancy mean that we are set to see a big shift in the age profile of the UK population. Almost two thirds of baby boomers are expected to reach 80 and over a third of babies born over the next 20 years are expected to live to 100.

“Rising life expectancy has helped more people to work for longer and made a major contribution to higher living standards over the course of their lives. But the sheer size of the baby boomer generation – and rising longevity for everyone – also brings economic challenges that must be addressed.

“2017 marks a tipping point in Britain as retiring baby boomers swell the ranks of the non-working population faster than our workforce. As this continues, our ageing society brings challenges for future generations of workers. If we had to cope today with the pensioner population we expect by 2060 it would mean a cost pressure equivalent to a 4p rise in the basic rate of income tax.

“So far the solution to pay for our ageing society has focused on increasing the State Pension age to delay when people can draw on public support. But just as important is ensuring that more people are able to work up to that point through a renewed focus on full employment. That will boost the living standards of those working and reduce pressure on the public purse.

“Rising employment among older workers has been one of the biggest economic success stories of recent years and further progress can be made with government support. A new right to return to work after ill-health would help more older and disabled workers to remain in employment. This would deliver a huge boost to living standards and reduce the economic cost of longer living.”