There are better responses to an ageing population than austerity
Last week we published research on the fiscal implications of Northern Ireland’s ageing population. There’s a general consensus an ageing population will adversely affect the public finances but much less of a consensus on how a country might respond.
The extent of this fiscal pressure is illustrated in the Office for Budget Responsibility’s Fiscal Sustainability reports which show how spending and tax receipts vary by age, and which we reproduced for Northern Ireland in the graph below. It shows that between the age of 20 and 60 people tend to pay more in tax than they receive through state spending on welfare and services – they are “net-contributors”. Meanwhile older and younger groups are net-recipients – the receive more in public spending than they contribute through tax. For older people spending is initially driven up when they start to draw on their state pension and tax receipts gradually fall. But spending increases sharply again at the age of 80 by way of health and long-term care services. So when the ratio of people aged over 60 to those aged 20 -59 changes there is increased pressure on the fiscal balance, particularly when there is an increase in the proportion of people aged over 80.
In Northern Ireland the pressure is even greater. Firstly, Northern Ireland’s population is ageing at a faster rate. Presently 16% of the population is aged over 65, lower than the UK average of 18%, but it is projected to reach 26% by 2045, slightly higher than the projected UK average of 25%. This faster ageing trajectory is due to the zero levels of migration expected in Northern Ireland. Migrants are much more likely to be of working-age, and their arrival in Great Britain will slow the overall ageing of the population there. Northern Ireland also has lower levels of tax receipt among the working-age population, as both average earnings and the employment rate is lower than for the rest of the UK. Receipts from income tax, VAT and national insurance in Northern Ireland are already far exceeded by spending on health, care, education and welfare with the former accounting for 64% of the later. If it had the age profile of 2045 today, this revenue would only account for a 51% of spending – this 13 percentage point fall is the impact of the ageing population.
One of the obvious responses to such fiscal pressures to cut spending on services and welfare. Our research shows that only a (real terms) freeze in the value of all benefits, including state pension would be sufficient to fully counter the fiscal impact of an ageing population. But this would mean indefinite austerity for pensioners and working-age families on low incomes which is an extreme and harsh response.
There are, though, other options. For example, increasing healthy life expectancy, being a desirable goal itself, could also reduce the high levels of spending on health and long-term care among the oldest in society. There is plenty of scope for Northern Ireland to make improvements here; in the last decade healthy life expectancy at birth increased by 4 years in Britain, but in Northern Ireland it did not change. An improvement in healthy life expectancy of 5 years by 2045 could reduce annual spending on health and care so that tax accounted for 55% of spending compared to 51% if it does not change.
Other changes, for instance in the labour market, could also help level up these figures. Northern Ireland’s 16-64 employment rate is currently projected to be 67% in 2045. This is some way short of the EU target for 2020 of 75%. If that target were reached by 2045, along with a rise in employment among the over 65s to half that level, tax receipts would cover a further 8% of total spending. Changes to the state retirement age add a further 3%. In combination, then, one can begin to see how the effects of the ageing population could be offset.
It is sensible to expect an ageing population to lead to an increase net public spending. But the research shows that, although the potential increase is considerable, other achievable changes can offset it. Holding down public sector earnings and social security benefits for decades is one of them. But this is a harsh response to increased life expectancy. Alternatively, a combination of higher employment, increased healthy life expectancy and more productive public services is a viable alternative to endless austerity.