The social and economic implications of a rapidly ageing population, a consequence of low fertility rates and rising longevity, are becoming increasingly apparent in the UK and other developed countries. A shrinking pool of workers has to fill the labour void left by the retiring ones and concurrently provide for their support, as reflected in the growing old-age dependency ratio. Several solutions are considered as a way to reduce the strain the new demographic situation places on public services, in particular the state pension and benefits system, and health care. The prevailing approach of combined spending cuts and tax rises across the board or the prolonging austerity undermine living standards of citizens, disincentivise workers and hinder the growth of businesses. Hobbled by the workforce shortages in the critical period of adjusting to the new demographic market drivers, the UK economy can slide back into recession, a situation which additionally puts private pension investments at risk. Boosting the immigration, often considered a quick remedy for the labour crisis, poses a political challenge of its own and, as we have shown, merely mitigates the problem. At the same time, fairness between generations requires that everybody spends a similar proportion of adult life contributing to and receiving a state pension. Spurred on by the above and many other interrelated issues, the UK has decided to introduce a broad reform of the state pension system, raising the retirement age for all born after 1950. The former state pension age of 65 for men and 60 for women (established by the Old Age and Widows' Pensions Act back in 1940) is already due to equalise by 2018, and next increase for everybody to 68 by 2046.
We employ Averisera microsimulation engine to compare the forecasts of pension cost dependency ratio for the UK under the following scenarios assuming different state pension age (SPA) and its reforms:
The details of the SPA transitions implemented by our model are given in the state pension age timetable published by the Department for Work and Pensions.
Additionally, we consider different scenarios of future relations with the EU, which vary migration patterns between the UK and the rest of the world.
Click items in the legend to show/hide scenarios or display their relative differences, and the date axis to change its range.
The historical pension cost dependency ratio maintained a sustainable level until 2007. Beyond that period it began to rise owing to population ageing, caused by low birth rates and extending life expectancy. The unprecedented rate of this process is propelled by post-war and 1960s baby boomers achieving the state pension age. In addition, their retirement considerably reduces the workforce, whose large part consists of cohorts born in the period of declining fertility rates, from the mid 1960s to 1970s. The trend is somewhat softened by the influx of EU workers, especially the post-2004 enlargement wave from A8 countries.
The rise of state pension age for women starting in 2010 reverses this trend sharply, creating a substantial gap between the old and the new pension scheme scenarios. In particular, the latter reduces the pension cost dependency ratio to the level from 2007. Afterwards, the ratio picks up its previous upward trend fueled by the advancing population ageing, but consecutive rises of retirement age revert it back to around 29%. The trend stops to grow after 2038 owing to subsiding life expectancies. Its final small bounce occurs in all scenarios when the children of large 1960s cohorts enter their retirement years.
The values at which the trends stabilise strongly depend on the considered state pension scheme and are moderately affected by the varying migration patterns in different EU membership scenarios. In particular, the currently introduced state pension age reforms will lead to a considerable and permanent reduction of the pension cost dependency ratio, reverting it back to the levels from before 2007.
The details of presented methodology and data sources are privided in my recent article “Forecasting the impact of state pension reforms in post-Brexit England and Wales using microsimulation and deep learning”, presented at the International Microsimulation Association Congress 2018 and (soon) PenCon2018.