There are always two ways of looking at things. Some might say: “It’s a scandal, now we have got to work until we drop.” Others might greet the news with glee, and thank their good luck that they won’t be put out to grass at 65. To an extent your reaction to the news will depend on what job you do.

Yesterday the government revealed plans to speed up the raising of the retirement age to 66, and the new working age limit could be applied by 2016. It is also now talking about the possibility of raising the age to 70.

Today we are taking a look at the key issues. How fast is the UK ageing? What will be the burden left by the baby boomers to their kids when they retire? Is more saving really the answer? Maybe we need more immigrants. Read on

What the numbers say

If you were born in 1960, your life expectancy at birth was just over 71. So imagine that. If they had introduced a 70 retirement age, just under half of us really would have worked until we dropped. A child born in 2008 could expect to keep going until 80. If you are 65, then today and if you are a man you can expect to keep ticking another 17.4 years. A woman can expect to go all the way to 85. (See ONS. )

According to the ONS, the proportion of people aged 65 and over is projected to increase from 16 per cent in 2008 to 23 per cent by 2033.

To put this in context, back in 1960 the ratio was 11.6 per cent. But compare this with Japan. In Japan the ratio of people over 65 was 5.6 per cent, and in 2008 it was 21 per cent. (See World Bank data .)

That is all very well, but maybe what really counts is the proportion of working people to those aged over 65. In 1960, the percentage of people aged between 15 and 64 was 65 per cent. In 2008 the percentage number had actually increased (marginally). It was a similar story in Japan, where the ratio of people between 15 and 65 has barely changed over the last 50 years.

The real firework relates to the kids. In 1960, the percentage number of kids aged zero to 14 was 23 per cent in the UK, and 24 per cent in Japan. By 2008 we had seen the percentages fall to 17 per cent in the UK, and remarkably just 13 per cent in Japan.

Or to put it another way, Japan is in the midst of seeing a quite stunning change in demographics. Economists have all sorts of theories to explain Japan’s economic malaise, but surely they miss the point. The ageing of Japan’s population is not the elephant in the living room, it is the herd of mammoths in the bedroom.

The UK is ageing too, it is just that the process lags behind Japan. According to the ONS, in 2008 there were 3.2 people of working age for every person of state pensionable age in the UK. This ratio is projected to fall to 2.8 by 2033, taking into account the future changes to state pension age. (Although, the ONS made these calculations some time ago, so they don’t take account of the new government’s plans.)

The saving bomb

We hear about the demographic time bomb, we have used the phrase here often enough. But it may be more appropriate to talk about a demographic saving bomb.

In Japan, more people are saving. They are saving for the very good reason they are going to retire soon. This has led to a crash in consumer spending, which in turn has caused twenty years of economic anaemia. Policy makers try to solve Japan’s economic ills by creating money and slashing interest rates, but it does no good. That is surely because conventional economics does not have the answer. The obvious answer to Japan’s ills would be a pill to make all women more fertile, or mass immigration.

But there is another important point here. It is high savings in Japan that is leading to economic recession, which in turn is creating the necessity for the government to borrow. The good news is, high savings means there is plenty of money for the government to borrow. So in a way, the need for government borrowing is caused by the fact people want to lend to it. There is a similar, although far from identical relationship, between growing savings and government borrowing in the UK.

Japan’s high saving ratio is also a factor behind the global economic crisis. During the noughties, Japanese saving flooded Western money markets, and today, a sudden rise in Japan’s consumer spending would go a long way to kicking life into the Western economy.

The problem with saving is that it does not do much good on its own. We keep hearing in the West of how we need to save more. But just imagine if this happened. Just imagine all baby boomers doubling the rate at which they saved. And then they retired. Yippee, they have a nest egg from which they can fund their retirement.

But would they really? The only way the UK can fund its growing army of retirees is via producing more goods and services from a diminishing pool of labour.

This is why we believe the short and medium-term implications of the ageing of the UK will be more saving and less inflation. But in the longer term, when the baby boomers have all retired, we may find too much money is chasing too few goods, and we will get inflation.

What really matters is not that we save, it is what we do with our savings. If savings is pumped into high-risk enterprises, finds it way into the pockets of risk takers, then for individual savers this is high risk, but for the UK as a whole this is a relatively risk-free way of ensuring we can meet the needs of our future pensioners. If instead, savers’ money finds it way into property, like it did in the noughties; into government bonds, like it is doing now; or worse into gold, which it may well do going forward; this may feel like it is low risk for individuals, but actually on a macro scale we will be taking the most enormous risk with our future well-being.

There is another option of course, which is that savers invest their money abroad. In which case their retirement may be fundable, but the cost will be a UK economy that limps forward for decades.

It is quite interesting to note, by the way, that according to data from the Bank of England, in 2008 UK families saved more than they borrowed. In all, £24bn was put into deposits and £20bn was taken out as loans. Last year saw the savings ratio among households rise from 2 to 7 per cent. See the Telegraph, Families saving more money than borrowing for first time in 20 years. This development is largely being greeted as if it was good news. Maybe it is, but you need to see rising saving in the context of the above few paragraphs. You may think a rising savings ratio is good news for the UK, but it also explains why economic growth is low, and why government borrowing is high. It is only good news if we see a corresponding rise in investment into risk-taking enterprises. But in an environment in which consumer demand is falling, entrepreneurs are likely to be less enthusiastic about their business ideas.


According to an article in the FT, senior Conservatives are re-thinking the party’s policy to immigration. Apparently they fear caps on immigration will be bad for business. They are right. Do it in the correct way, with appropriate limits, then immigration can solve the UK’s economic plight, and certainly solve the problem of the retiring baby boomers. Those who say immigration has caused the UK’s woes have completely missed the point. In fact, many of the Polish immigrants, the very same people who have been slated in the media, have been a terrific boon to the UK. They work hard, they pay tax, and are only modest users of the welfare system.
See the FT – Fears force immigration cap rethink

According to an article in Foreign Affairs magazine, the solution to the baby boomer problem may be mass emigration of retirees and immigration of workers. The article said: “One somewhat daring approach to immigration would be to encourage a reverse flow of older immigrants from developed to developing countries. If older residents of developed countries took their retirements along the southern coast of the Mediterranean or in Latin America or Africa, it would greatly reduce the strain on their home countries’ public entitlement systems. The developing countries involved, meanwhile, would benefit because caring for the elderly and providing retirement and leisure services is highly labour intensive. Relocating a portion of these activities to developing countries would provide employment and valuable training to the young, growing populations of the Second and Third Worlds. See The New Population Bomb

And the grass

The big trouble with changing the retirement age is that conditions vary across the country, and across the sectors workers are employed in.

Paul Kenny, who is the general secretary of the GMB union, said: “The government knows that manual workers in the industrial regions of the UK do not enjoy anything like the same life expectancy as professionals or other classes or employees…To force someone who has done a lifetime of toil on building sites, farms or in factories to work until they are 66 is completely unacceptable.”
According to the ONS: “Within the UK, life expectancy varies by country. England has the highest life expectancy at birth, 77.7 years for males and 81.9 years for females, while Scotland has the lowest, 75.0 years for males and 79.9 years for females. Life expectancy at age 65 is also higher for England than for the other countries of the UK.”

And that’s the problem, it’s a case of horses for courses. Some people don’t want to retire until they are old indeed. Others, employed in sectors that require hard physical labour, may feel 65 is too old. Still, with horses, some of us want to be put out to grass, others think it is unfair. But what we can say is that the herd of mammoths in our bedroom won’t keep quiet for much longer.

© Investment & Business News 2013