This isn\’t really sustainable

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.

20 comments on “This isn\’t really sustainable

  1. If we are to support the rising tide of retirees, then the dead weight of scroungers needs to be dealt with.

    If a million people moved from state support into taxpaying employment, the net available increase in money would be enormous. If only we hadn’t had a egocentrical moral compass pushing things the opposite way for 13 years.

  2. The IMF puts world growth in this year of recession as 4.8%. I am of the opinion that it is possible for Britain to exceed the world average.

    Obviously neither our politicians nor the obedient media find it useful to mention such facts.

  3. Datapoint of day: having moved to Oz (with the expectation of probably living in the UK again one day), at lunch today with two serious, well-paid professional friends who’re visiting me (and their entirely un-serious, drag-on-resources, but jolly fun 2-year-old, who didn’t participate in this conversation), one of them said “so, are you paying voluntary NI contributions – what’s the score with your pension?”

    My answer was “well, I reckon I’ll be slightly less annoyed when they abolish non-means-tested state pensions than the people who’ve paid NI throughout will be”. And my friends’ answer was unanimously “yeah, fair enough. You’re making private savings though, right?”.

    It’s interesting that the consensus among middle-class professionals in their 20s and 30s is that the state pension won’t exist by the time we retire – or at least, when we’re 67 (which I think is the current pretend phase-out age). And that we generally view NI as another word for “more income tax”, not some kind of Singapore/Australia style thing that will actually pay you back.

  4. Neil, what in blazes makes you think that a developed country with high wages that’s one of the world’s biggest trading nations and has one of the most developed commercial law systems could possibly grow more rapidly than places where people currently get paid a dollar a day to eat dirt? Global economic growth is high because 4/5 of the world’s people are unspeakably poor and live under useless governments. Much as you might hate both Brown/Darling and Cameron/Osborne, we ain’t there.

  5. I’d be very surprised if in 50 years time people are allowed to live as long as they wish. Such a concept will be regarded as highly reactionary, and possibly illegal.
    Couldn’t happen, you say? Only 50 years ago, the idea that sex between men would be legalised seemed extraordinary, as did the idea, in 1900, that women would one day be allowed to vote.

  6. Tendrykov:
    A strange leap of logic there to liken female suffrage and legalising homosexuality to compulsory euthanasia. In any case you’re wrong, in 1900 many people could envisage women having the vote, indeed they already had it in some places and in 1960 de-criminalising homosexuality was very much on the political agenda. No one now is even advocating compulsory euthanasia let alone actively pursuing it as a political goal.

  7. john b, I remember remarking rather gloomily 20 years ago that I very much doubted there’d be a state pension by the time I was 65 (67 now, as you say) That’s now 25 years away and it seems even more likely.

  8. Growth of 4%? The Bank of England would have a fit. Raise interest rates, prepare for inflationary doom! Or at least, that’s what happened the last time, and then the baby boomers were reaching their most economically productive years.

  9. possibly another alternative?

    if we (should say the young) are going to live longer healthier lives why will they retire at 65? As far as I am aware 65 was used to ensure that the majority of the male population would die either before or soon after claiming

    Why not keep the govt out altogether and let people retire when and if they want to, no need to support a vast army of idle old peeps

  10. I agree with Steves. The problem is if the extra 15 years or so are in bad health.

    I disagree with amost everything else. I’m surprised to learn copying the Nordic countries is the way to get real GDP growth of 4%. In the ten years to 2008, they achieved between 1.6% and 3.3%, and the ten years to 2009 0.9% to 2.1%.

    I’m sceptical the UK could get 4% with a declining workforce and as most people (I think) view pension income relative to employment income I’m not sure how much help it really offers.

    I think the state pension will still be around in decades’ time as it is one of the most obvious ways of paying for retirement. We can pretty much guarantee the State will be here in decades time, and its tax base is the most diversified investment you can get in sterling.

  11. Serf: quite possibly, but figures, please.

    NC: Quite possible; but unfortunately the measures for the necessary re-structuring would not be politically acceptable to the electorate (whose lips are firmly on the state teat).

    Tendryakov: I hope you soon return to whatever secure unit has mistakenly let you out for Christmas. And do take your medication.

    Matthew:

    a) “one of the most obvious ways of paying for retirement”? The most obvious way is to pay for it yourself.

    b) “I’m sceptical the UK could get 4% with a declining workforce”. Not sure that the workforce will decline, if pension payments (state and private) decline…I’m 57 and hoping to work part-time from 65-80; and I had an excellent colleague who worked until she was 86!

    c) “I’m surprised to learn copying the Nordic countries is the way to get real GDP growth of 4%. In the ten years to 2008, they achieved between 1.6% and 3.3%, and the ten years to 2009 0.9% to 2.1%” — Tim??

    Tim adds: I’m not quite saying that if we do everything the Nordics do then we’ll get 4% growth. I am saying that we’ll not get 4% growth unless we do some of the things the Nordics do. Like, for example, follow the classical economics of taxation: less on corporates and capital, more on consumption.

  12. Paul

    a) I’m not convinced it is. In history, most have relied on children, more recently on funds from the general population. If you intend to use your own money, it’s very difficult to judge a) how much money you will need, and b) how to ensure you have that amount of money. You can, of course, pre-fund some spending, such as housing to a degree and tinned food, but not much.
    b) Well yes, that’s the point Steves is making and I agreed with, about raising retirement ages. But in the absence of that…

  13. Matthew

    a) OK, but, as you know, the past is not an infallible guide to the future. The sun will ‘rise’ tomorrow; but economic and demographic trends…And change is in the wind technologically and medically… Hey, be just a little optimistic…

    b) Fitter older people will work longer and longer. The cult of youth in employment will hopefully decline. When I ran a business, I tended to hire older applicants — more willing, more experienced, more presentable ‘front of shop’, better value for money, better educated…er…what not to like?

  14. Well we agree on (b), although it does depend on how healthy people.

    On (a) I think you’re in the minority and indeed the trend might be the other way – even Tim supports a Citizens’ Basic Income.

  15. Matthew

    On (b), yes, I agree; but (i) health will probably improve and (ii) technology may extend working lives — lively minds in feeble bodies could use dispersed computing to work…

    On (a), CBI is all very well; but not affordable in the current set-up – the measures for the necessary re-structuring to make it affordable would not be politically acceptable to the electorate, at present.

  16. 1) 40 years of paid loafing is unsustainable it simply cannot be done, especially not with the current demographic trends.

    2) The new cohorts are not receiving the same quality of education as the previous ones, who are retiring right now. Moreover, often even if they do, there are not enough to replace the ones that are leaving. Retention of knowledge and skills will be difficult, and so, unless we can get old people to work longer, our systems will degrade as they leave.

    That plus a few other sad things (tax, red tape, demographics with a dearth of 20-30 yer old consumers, yadda) make me think that economic growth
    in real terms is not going to happen anytime soon.

    3) Old people are costly to hire. In fact, we’re back to the age old paradox of too many people in need of a handout who are too expensive to hire.

    I know, Poland is cheaper, but we cannot make all those oldies move there.

    Something is wrong when we have all this human potential, but no way of tapping into this.

  17. Apologies for the necro-post, but I thought consumption taxes had a greater level of deadweight loss than income taxes?

    Land taxes are so ridiculously simple to levy, administrate and collect I am really shocked we don’t do more of them. Once per year (or five years etc.) every landowner evaluates the value of his land and pays the tax on it (at 1%, .1%, etc.) with the catch that the evaluation is published and anyone willing to submit a greater valuation for that same tract+improvement may force a sale of the land. No evasion, no administration costs, little to no deadweight loss.

    I suppose if you wanted to levy a LVT rather than just a straight property tax, you could mandate that the forced sale required any improvements the current owner had made to be bulldozed.

    Tim adds: In increasing order of deadweight: property, consumption, income, capital and corporate.
    And yes, an LVT, great idea. However, we do need to remember one thing. TheUK already raises more of its revenue from property taxation than does any other OECD country. Business and domestic rates amount to some 11% (or is it 9%?) of total revenue, vastly above OECD average of 5% or so.

    So while we might not all it an LVT, and it’s distinctly different (applying to value of building, not land) we are already at the right end of the spectrum on taxing property.

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