News from Cass Business School

The economic challenges of an ageing UK population

Monday, 13 July, 2009

As life expectancy continues to increase and the ratio of adults of working age to the population aged 65+ (old age support ratio) goes into decline, new research by Les Mayhew, Professor of Statistics at Cass Business School, examines the significance of the impact of these demographic changes.

Increasing Longevity and the Economic Value of Healthy Ageing and Working Longer investigates the economic challenges of an ageing UK population and considers it to be at a demographic crossroad: the number of workers to the number of young and old people peaked in 2007 and is now in decline.  The report, commissioned by the Prime Minister's Strategy Unit, suggests that the downside of getting outcomes wrong' doing nothing based on current trajectories could result in economic stagnation, but it also estimates the potential economic benefits of getting outcomes right' through the period of accelerated ageing.

Les Mayhew, Professor of Statistics at Cass Business School comments: The evidence for pursuing an alternative more healthy or active ageing trajectory' is compelling.  If increases in healthy life expectancy and working life expectancy are able to keep pace with life expectancy, the future looks brighter and quantified estimates of the difference this could make are given.  However, the analysis begs the question of what actions need to be followed in order to ensure that it will happen as conjectured.

Unusually for studies of this kind the study focuses on three kinds of expectancy to build its case: life expectancy, healthy life expectancy, and working life expectancy: a change in any one of these has important economic implications.  Some of the key findings include:

 Male and female labour participation rates have been under 65% for years but only a 2% increase/decrease in labour participation rates equates to 1 year increase/decrease in working life expectancy.  This alone would make a significant difference to economic prospects.
 Using a simple economic model, a passive' ageing scenario based on current trends could bring economic problems in terms of higher taxes and falling standards of living, especially if long-term increases in wage productivity are not maintained.  The worst case is that both GDP and GDP per capita could fall; the best case is that both could rise but for this to happen certain conditions need to be met.
 Labour participation rates drop significantly after age fifty, long before normal pension age.  Increasing state pension age will encourage people to work longer, but success is not guaranteed since pension age is no longer a reliable indicator of when people cease economic activity.
 Those with the longest working life expectancy at age 50 are more educated, home owners, married or co-habiting and in reasonable health.  By contrast, reasons for economic inactivity in the 50+ range include poor health and increased caring responsibilities.
 If extra years are not being spent in good health, there are consequent implications for the cost of health and social care, pensions and social security benefits, and hence taxes.
 The report also highlights the danger that healthy people of working age could eventually become a scarce commodity and therefore another barrier for the UK to contend with.  To avoid this healthy life expectancy must increase concomitantly with life expectancy.
 If these conditions are not met a significant increase in the amount of replacement migrant labour coming into the UK in coming decades is likely.  The population is already projected to increase to 70m by 2025 but the report estimates that this could be between 8m and 14m higher.

The evidence for cost effectiveness is currently weak and needs to improve, partly since pay offs are long-term and uncertain (e.g. action on childhood obesity, heart disease, alcohol consumption, smoking cessation).  Data from around the world suggest that the impact of increasing spending on healthcare could be negligible due to diminishing returns to health improvement at current levels of spending.  For example, a complete cessation of smoking would yield a greater increase in healthy life expectancy and economic benefits when compared with a 50% increase in healthcare spending (approximately £50bn a year).

Professor Mayhew comments: The findings indicate the need for greater linkages between policies so that changes in longevity or one of the other expectancies crudely increasing longevity by one year should be matched by changes in pension age, pension and benefit values, participation rates or healthy life expectancy.

In the current recession there is a danger that the hard fought gains in the labour market since the previous recession will be lost and that damage or previous cycles could be repeated, and so it is even more important to have a co-ordinated strategy.

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Les Mayhew, Professor of Statistics at Cass and author of Increasing Longevity and the Economic Value of Ageing and Working Longer

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