Crisis? What crisis?
Ask anyone these days and they will tell you we are slap in the middle of something called a ‘Pension Crisis’. It’s something we all agree on and the current Government is committed to ‘doing something about’. That ‘something’ looks like it will include us all agreeing to work longer and to lower our expectations of what we always thought our retirements were going to be all about. It also looks likely that we’ll all tamely accept the notion that even people who have little or no money to spare ought to be pushed into saving ‘for their own good’. Anything goes if we’re in a crisis. Getting out of the way of the crisis is what it’s all about. Nothing else matters, not even people getting swept up into unsuitable investments without proper consumer protection being put in place first. Crises are like that. We do what we must.
But what if there were no crisis? When I said at the beginning of this BeeLine that if you ‘ask anyone’ they’ll tell you we have a pension crisis I should have qualified that and said ‘ask almost anyone’. I have just been reading through a very interesting paper by a chap called Jeremy Goford which looks carefully at the statistics. Jeremy was President of the Institute of Actuaries from 2002 to 2004 and is currently Master of the Worshipful Company of Actuaries. He is also a BeeLiner and a fellow member of the management board of the Pensions Network. His paper, entitled ‘When ‘old’ and ‘inactive’ are not the same’, makes very interesting reading. What follows here is an abridged version of that paper that I have put together and I am indebted to Jeremy for allowing me to use his work in this way.
First things first, I guess, the problem with statistics is that they can easily be manipulated to ‘prove’ things and it’s worth looking again at the numbers around the looming ‘dependency ratio’ (and the ‘support ratio’ for that matter) to see if we’ve been fed the whole story. Oh and don’t stop reading at this point please; I promise it’ll be more fun than it sounds!
The ‘support ratio’, to use one of Jeremy’s explanations, is sort of the number of people doing the supporting divided by the number of people being supported. So in a one-family look at things two parents with three children would equate to two supporters (the parents) having to foot the bill for three people needing support (the sprogs). So in their microcosmic one-family world the ‘support ratio’ would be 2 over 3, or 0.67. On the other hand in a different family where there are two parents and just one child the support ratio would be 2 over 1, or 2.00. From that it should be obvious (I hope) that the lower the support ratio, the bigger a problem it all is for those doing the supporting. In Plain English that plays out as “it’s cheaper to bring up one kid than three”, whereas in maths it reads as “2.00 is a higher support ratio than 0.67”. To the tabloid press that all translates as “high support ratio – good; low support ratio – bad”.
Now, having laid the groundwork I can start to worry you with the ‘facts’. You can do similar things with numbers across the population as a whole to the things I just did there with a couple of families to show what the nation’s ‘old age support ratio’ is from time to time. The old age support ratio is the number of workers compared to the number of people retired. In 2003 the number of people in every 1,000 in the UK who were aged between 15 and 64 was 657, whereas the number of oldies aged 65 and over in every 1,000 was 160. (I know 657 and 160 don’t add up to 1,000 though, that’s because there were also 183 people under the age of 15 in every 1,000 people in 2003. (657 + 160 + 183 = 1,000) But don’t worry about that at the moment, I’ll come to it later.)
So the ‘fact’ is that the old age support ratio in 2003 was 657 over 160, or 4.11. That’s pretty comfortable; a bit like in the microcosmic family. It’s a bit over four people supporting one other person. Not too bad.
Moving on to projections for 2041 the old age support ratio changes a bit as the number of people aged between 15 and 64 drops to 594, whereas the number of oldies aged 65 and over goes up to 252. Whoa! That gives an old age support ratio of 594 over 252, or 2.36. Holy Moley! The old age support ratio is set to plummet from 4.11 to just 2.36! In the ‘high support ratio – good; low support ratio – bad’ way of looking at things that’s a crisis. It can even be described as the old age support ratio being set to fall by 43%! Wow! If that’s not the sort of thing to get the tabloids buzzing and get us all in a state of panic I don’t know what is.
Now, if we’re to accept that kind of thing we’ve got to make a number of wild assumptions first. To start with we would need to assume that everyone aged between 15 and 64 is a contributor. We would also have to assume that everyone over the age of 65 is completely dependent upon the support of the hard-pressed workforce. And, if we’re not careful, we’ll fool ourselves into thinking that children under the age of 15 are self-sufficient and can support themselves. All three of these assumptions are wrong.
To deal with the last one first, children aged 15 and under are totally dependent on others for support (any of you with a batch of them at home will know that is true). Everything they eat, drink, wear and play with, not to mention the cost of their accommodation, education and their general well-being is provided by others. To allow for this obvious fact in the support ratios already quoted above changes things a bit. To do that you need to look at the total age support ratio. The number of people aged 15 to 64 compared to the total number of oldies and children needing support. (I know that still assumes all 15 to 64 year-olds are supporters and all oldies are spongers, but I’ll come to that; just accept it for now.)
The total age support ratio in 2003 was 657 people in every 1,000 between the ages of 15 and 64 supporting 160 oldies and 183 kids. That’s 657 supporting 343 hangers-on. The total age support ratio was therefore 1.92.
The projected total age support ratio for 2041 is 594 ‘workers’ likely to be supporting 252 oldies and 154 kids. Now that’s a hell of a lot more oldies than in 2003, as the previous ‘old age support ratio’ showed, but it’s also far fewer children being supported too. The total age support ratio for 2041 is therefore 1.46. Now that’s down from the total age support ratio of 1.92 in 2003, but only by 24% and not the 43% that just comparing old age support ratios gives us. The support ratio is still going down, which is not good, but down by 24% isn’t as much of a crisis as down by 43%.
But that still doesn’t give the whole story. The fact is not everyone aged between 15 and 64 is a supporter. Many of them are economically active, but some are not. Also, some of those aged 65 and over are economically active too.
What you really need to do to understand what’s going on with the macro economics stuff is to look at who’s economically active against those who’re economically inactive. It’s the actives who support the inactives after all.
In 2003, of the 657 people in every 1,000 aged between 15 and 64 the number who were economically active was 471, whereas the number who were economically inactive was 186. In addition, of the 160 oldies per 1,000 just 152 were economically inactive and 8 were economically active. So, looking at the economic support ratio for 2003 (that is the active workers and oldies compared to the inactive workers plus the inactive oldies plus the kids) we get 479 (471+8) supporters supporting 521 others in every 1,000. That’s an economic support ratio of 0.92.
The economic support ratio for 2041 looks set to be 446 supporters supporting 554 others. That’s a ratio of 0.81, which is less than 0.92, but only by 12%. So looked at from the economic support ratio standpoint of economic actives supporting economic inactives our ‘crisis’ looks more like a 12% drop in the support ratio than a whopping 43% drop. In fact it looks a lot less like a crisis all the time really.
But there’s another twist to the tale. What we’re in danger of overlooking is the fact that people who are supporting others still have to support themselves while they’re doing so. I mean, workers need to eat too, right? The better way to look at things is to compare the way the total economic support ratio shifts over time. That is the ratio of workers to all people and not just to those people who are inactive. If you crunch those numbers you end up comparing a total economic support ratio of 0.48 in 2003 with one of 0.45 in 2041. That’s a drop in the support ratio of just 7%, which is nothing much to get worked up about really. But that’s not the story we’re getting is it?
Sure there’s a small reduction in the support ratio going forward over the next forty years or so, but one of the big brakes on that that stops it being a runaway train is that more people over the age of 65 are choosing to remain economically active. That’s a growing trend that is shown in the statistics. That trend doesn’t have to increase by much more before we could stop worrying about any reduction at all in the total support ratio. So stop fretting and get on with enjoying the summer, it’s possible the ‘problem’ is already fixing itself without us all having to get so worked up over it all. Mind you, I bet we’ll still get legislation in the autumn to fix the problem anyway, because we’re in the grip of a crisis and that’s something we’re all agreed on…..
20 July 2006
"When 'old' and 'inactive' are not the same" by Jeremy Goford, 21 March 2006
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