Test 15 February, 2017

How will we pay for the welfare state? (II)

This article was first published in Reform’s 2017 Annual Conference brochure. To read more articles, click here.

Along with many other developed economies, the UK faces a public-spending crunch over the coming decades. An ageing population brings with it rapidly growing unfunded bills for state pensions, public service pensions, healthcare and social care.   At the same time, the relative size of the working-age population is set to shrink. If future generations of workers and their employers are not to face sky-high rates of taxation, something has to give.

One of the biggest things which will have to change is our attitude to ageing and to older workers in particular. It is normal in discussions of this sort to quote statistics based on the ‘dependent’ elderly population which has to be ‘supported’ by the working-age population, and the dividing line between the two groups is almost invariably set at 65. But these crude statistics tell us very little about the ability of the working-age population to pay for public services for the dependent elderly.

First, in many respects, 65 is no longer ‘old’. After October 2018 neither men nor women will be able to draw a state pension on their 65th birthday, and pension ages are set to rise to the late 60s and potentially beyond for today’s new workers. Our ability to fund pressures on public spending in future will depend crucially on how far we can retain, retrain and recruit older workers so that they remain on the taxpaying side of the balance sheet.

Second, whilst many people can and do work past pension age, many stop short, whether due to ill health, caring responsibilities or unemployment. This is a waste of people’s potential at the best of times and in an era where there are huge calls on spending from an ageing population we simply cannot go on like this. Much more therefore needs to be done to prevent avoidable early exit from the labour market. A range of policies are needed, including things like: improved occupational health in the workplace; more support for career moves to less physically demanding jobs in later life with associated retraining; more help to enable carers to remain in the paid labour market; and action to ensure employers do not discriminate against older workers and older job applicants.

Supporting older workers is a specific example of a much more fundamental principle. If we are going to have an affordable welfare state, we need to look at prevention and not cure. Much welfare spending is about picking up the pieces after things have gone wrong. By far the most humane approach to managing welfare bills is to tackle the root causes of high spending. Whether this is policies such as supporting frail elderly people to live safely in their own homes rather than needing expensive institutional care or making sure workers with low-level health problems get support to ensure that they do not turn into long-term sickness absence, we can reduce the pressure on public spending and produce better outcomes for individuals. This is where the creative thinking needs to happen.