Paying for ageing: decision time

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The looming challenges from the UK’s ageing population have been much debated but little addressed. That’s because the solutions include changing the way policies are made

 The issue of how to address the impact of the UK’s ageing population has been high on the policy agenda since July, when the Office for Budget Responsibility set out the long-term costs in its Fiscal sustainability report. A subject once only occasionally mentioned in passing is now cited in almost all policy discussions and has become one of the defining narratives around public services reform.

So how is the UK policy establishment doing in formulating solutions? So far, the response has not been inspiring.

One notable tendency has been overreaction: ‘We’re all doomed and the whole welfare state is bankrupt.’ This is despite the fact that even by 2060, when the effects of ageing have been fully absorbed, the OBR’s projections suggest public spending as a proportion of gross domestic product will not be high by historical or international standards.

Another tendency has been to use the issue as justification for something that has already been decided on – the best example is the government’s NHS reforms. With some irony, the government is now taking an interest in models of integrated care as a way of reducing the demand costs on health and social care. It may also now be realising that its NHS reforms will make the benefits of integrated care much harder to achieve.

Policy development has also been unhelpfully subsumed into simplistic fiscal debates on ‘winners and losers’. Take the ‘debate’ around means testing Winter Fuel Payments, which has managed to ignore: the disgraceful problem of 25,000 excess deaths among the elderly each year; projections of rising fuel poverty among the elderly; the absence of a properly functioning system for means testing older people; and, the fact that ‘labelling’ cash transfers is actually highly effective as a way of influencing behaviour, and is something we will probably need to do more of in future.

In short, we are going to have to do much better. The truth is that the population ageing challenge isn’t just about pressures on resources, it’s also about the way Whitehall, especially the Treasury, makes policy.

In a new report published today by the Strategic Society Centre, we’ve tried to map the full range of options for the government in paying for ageing. Several points from the report are worth repeating here.

First, the options for the Exchequer will be shaped by household ‘decumulation’ decisions – how they use their accumulated assets to pay for retirement and care needs – and vice versa. So we need to think about the decision framework for households as carefully as we think about the broad sweep of how public policy responds to the cost of an ageing population. There is an interdependence here that we cannot ignore.

Second, you cannot rely on households doing what you want them to do. Various policy responses to population ageing involve targeted retrenchment by the state to create a gap for private spending or private insurance. But if households choose not to respond in this way, the state can be left with higher costs overall. That is why things like new wealth taxes – ie, compulsory insurance via the state – will have to remain in scope.

Third, we need a cross-departmental Office for Evidence on Prevention. Why? We know there are interventions that can delay or prevent the onset of need for expensive health and social care among the older population. But the evidence base on which policies and interventions succeed in preventing ‘downstream costs’ for the Exchequer is still inadequate, not joined-up and too often ignored. An independent body with its own ‘voice’ is required to address this.

Fourth, and perhaps most importantly, public expenditure on older people requires what we’ve called ‘holistic rationalisation’, ie, value-for-money analysis that stretches right across all the different ‘pots’ of age-related spending. At one end of this line, this means the State Pension. At the other end is expenditure on older people in hospital beds.

To be truly effective, such an evaluation will just have to ignore issues such as which bits of money go to which Whitehall departments, and what is allocated nationally or locally. This might create a lot of headaches for a lot of civil servants along the way, but it is something we will just have to do.

And finally, we need to make decisions on strategy now. When economic growth eventually stabilises following the post-2008 ‘great recession’, there will be a limited window to review how older cohorts will use their wealth in paying for ageing, and in particular, to finalise an offer to them in how they will be expected to use their housing wealth.

James Lloyd is director of the Strategic Society Centre. Paying for ageing: decision time for households and the state is published today

3 comments on Paying for ageing: decision time

  1. James, all good insights and a bit of a heads-up for me to read the original SSC report.

    I’d add a couple of specifics to be considered. First is what can we do to address the rapidly accelerating crisis around unjustifiable (economically as well as socially) inequalities in income and wealth in UK society. We are in immediate danger of degenerating into a USA style society – and that will impact directly on the overwhelming proportion of older people.

    The second specific is the preventative spend principle (sometimes conflated with ‘early intervention’). How will we apply VFM notions on that? For example, a generous basic state pension – regardless of recipient’s income – can be argued to be a highly effective way of sustaining good health and well-being… but will that be categorised as preventative spend or as revenue consumption?

  2. Mike Keene says:

    My school year, commencing in 1952, was the largest ever and now 60 years later my year is the largest ever to hit the state pension age. Wow! Who could ever have seen that one coming? Nobody in government apparently if “the impact of the UK’s ageing population has been high on the policy agenda since July”!

  3. Derek Emery says:

    The Bank of International Settlements in 2010 produced a paper on “The future of Public Debt: prospects and implications” see http://www.bis.org/publ/work300.pdf
    “Industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable.”

    In this paper the UK has the second worse future debt prospects in the world to Japan’s. The OECD predict UK growth to average 1.6% up to 2060 which will not be enough to meet rising ageing costs.

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