Ministers say people should prepare to spend more than a third of their lives in retirement due to the \”staggering\” rise in life expectancy.
In the first official projection of its kind, the Department for Work and Pensions today forecasts that almost a fifth of Britons will celebrate their 100th birthday.
The long lives are, that\’s just great.
It\’s the \”retirement\” bit that isn\’t.
Because someone, somewhere, has to pay for that third of life in economic inactivity. (Add to it the one fifth of a century, or perhaps more like a quarter of the average life spent economically inactive in youth.)
There are various ways of course: much greater savings during the periods of economic activity….this would imply much lower tax rates then present so as to allow room for such savings.
Or it could all be tax paid, which implies much greater taxes than at present.
Or to reduce the burden on those economically active we could reduce the level of consumption by the old that we\’re willing to pay for: but \”elderly poverty\” as a deliberate plan is unlikely to work.
And whichever of these we do plump for, we\’re still left with the fact that each economically active person is going to be carrying the costs of more economically inactive people: whether it\’s through returns to capital from previous savings or whether it\’s current transfers through the tax system.
(Umm, actually, that\’s an interesting idea. We know that we\’ve seen a rise in the return to capital over recent decades, measured as a percentage of the economy. And that we\’ve also seen a sharp rise in those in retirement. Might it be that some/all of that rise in the return to capital is in fact the transfer of current economic activity to those in retirement? Hmm, some of it defintitely is but whether it\’s an appreciable amount I\’ve no idea. Anyone able to work it out?….umm, private pensions paid out are some £35 billion a year I think? 3%, 2.5% of the economy? Anyone know what they were say 30 years ago?)
Now, there is one get out here. A way in which those currently working can (through either tax or profit share) support an increasing number of retired, without too much impact on the returns to their labour, while still providing a reasonable and rising living standard to those in retirement.
It\’s called economic growth. If trend growth were, say, 3%, then the economy doubles every 23 years. Four times in a working lifetime. That gives us enough flexibility, there\’s a sufficiently cornucopian amount of growth there, that we\’ll not notice too much nor mind too much about the amount that is going to support those retired.
4% would of ccourse be better.
So how do we do this? Raise trend growth from its current 2-2.5%? For that might be what we need to do.
At which point Classical Liberalism Man leaps into action. We can put aside all those lovely ideas about planning or growth, about the State taking a leading role. For even if you do believe the Ha Joon Chang\’s of this world, they are still talking about economies behind the production frontier. The UK is very definitely at that frontier.
In effect, what we need to do is move more closely to the Nordic or Scandandavian model. No, not the State takes care of every child\’s skinned knee part, for we\’ve already allocated our possible redistribution to those in retirement. But what we do need to do is have, as they do, that classically liberal economy humming away underneath that redistribution. For that\’s the only way we can generate the growth to keep the system humming along.
Taxes moved off capital and corporations, onto consumption. Land taxation would be a great idea. Hugely flexible labour markets (the Bob Crow\’s of this country howled out of public life).
In short, if we\’re going to have to have a lot more redistribution, which we will with a rising pensioner population, then we have to look to the only economic structures that manage to support both high levels of redistribution and high economic growth. That is the Nordics: which means that underneath the redistribution we need to have what they have. A largely classically liberal economy.