23 June 2022

The demographic time bomb is ticking – we can’t keep doling out money to pensioners who don’t need it

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There is an increasingly fashionable trend among a certain type of Westminster-adjacent commentator or political tweeter to bemoan ‘the boomers’. This has come up a lot this week after the Government confirmed it would raise the state pension next year in line with inflation, in contrast to its stance on wages.

It is worth digging into some of the numbers, and the historical trends, to illustrate what exactly we are dealing with, and some of the misconceptions.

We are spending more now on benefits for pensioners, including the state pension (sorry to all those pensioners who like to write letters and comments about how it’s a pension they paid into – but it is essentially a welfare benefit). The rise in spending on pensioner benefits over the last three decades or so amounts to around 1% of UK GDP. At the same time, the percentage of our national income we spend on welfare for working-age households has fallen by a similar level. 

You may think that this is not much of a surprise: after all, the population has been ageing, has it not? Of course it makes sense that spending on supporting pensioners has been growing. But in reality, when we talk about spending on pensioner benefits, we are talking about people who are over state pension age, which is the point at which eligibility starts for the various sources of support. We have been steadily increasing the state pension age over the last 12 years. 

You may be surprised to hear that, as a result, the proportion of the population who are over state pension age has not in fact started to rise much yet. It is forecast to rise considerably in the coming decades, but right now the Old Age Dependency Ratio – that is, the number of people over state pension age per 1,000 people of working age – is actually comfortably lower than it was in 2010, and lower even than it was in the 1990s. 

It is quite common to try to explain the ‘bungs to pensioners’ problem as an interplay between demographics and electoral maths – the ‘baby boomers’ are becoming pensioners and so make up a bigger voting bloc. The problem is, it’s not true – not yet, anyway. The proportion of voters who are pensioners has actually fallen (though it is true that pensioners are much more likely to actually vote than younger age groups).

So, rising spending on pensioner benefits is not actually down to an ageing population – quite the opposite. We are spending a bigger portion of our national income on pensioner welfare than we were a few decades ago, but spending it on a smaller section of the population. 

The argument that is often made about increasing the generosity of pensioner benefits is that many pensioners still live in poverty, and many, especially women, rely on state support as their sole or main income. The problem here is that the welfare state has also been moving towards being less and less targeted at the poorest pensioners, in favour of a more universal approach.

Only around one in five pensioners now receive income-related benefits such as Pension Credit, down from around two in five in the 1990s. This is the opposite of the trend for working age households, where we have been moving away from universality towards means-testing – despite the fact one of the key arguments against means-testing is its impact on work incentives. 

All of which means we are now in situation where we are spending considerable sums on benefits for rich pensioners. 

The proportion of people who sit at the bottom of the income distribution who are pensioners has been falling, and pensioners make up an increasing proportion of the best-off households. Among the poorest fifth of the overall population, the percentage who are pensioners has dropped from 19% in 1995 to 14%, while the proportion of the richest fifth who are pensioners has risen from 13% to 20%. In fact the majority of pensioners (52%) are now in the top half of the income distribution. In other words, the average pensioner is better off than the average working age person.

Despite this, benefit income is actually making up a larger proportion of richer pensioners’ incomes – 10 years ago the richest fifth of pensioners got 13% of their income from benefits, it’s now 16%. Astonishingly, the richest pensioners get more in benefits than the poorest fifth of pensioners are receiving on average. For working age households, the opposite is the case, with benefits spending heavily focused on the poorest households. 

It seems increasingly indefensible that the state should be spending so much per head on people who simply do not need it, when a significant chunk of the Government’s fiscal consolidation efforts over the last 12 years have focussed on savings from working age welfare. The inevitable costs have been put off by increasing the state pension age, but the demographic time-bomb is ticking. The dependency ratio is forecast to shoot up from 280 pensioners per 1,000 workers to 352 over the next 20 years.

That will require some very tough choices, from both parties. A common refrain is that the Tories have been spending billions on pensioners to woo them and ignored younger voters, with Labour set to gain once the baby boomers start to die out, but the fact is the Labour Party have been more vociferous in their support for policies like the triple lock, and have also opposed increasing the pension age. It’s not just the Conservatives but the whole political class that will need to face up to the facts – the current trend just isn’t sustainable. 

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James Heywood is Head of Welfare and Opportunity at the Centre for Policy Studies.