As the British population carries on growing older in larger numbers, the government will have to make some tough social and healthcare spending decisions, says a new report.
Analysts from insurance giant Legal & General Investment Management (LGIM) has worked out that even if the state pension age was lifted to 75 years old, politicians will still have a problem funding spending on the National Health Service.
Raising the retirement age overnight would still means deciding whether to increase taxes, cut other spending or reduce funding for the NHS to balance the books, says the company.
“Slower population growth and ballooning healthcare costs would put significant pressure on the public finances in the coming decades,” said LGIM economist James Carrick.
“We may end up borrowing a lot more, we might have to cut spending more, we might have to make healthcare less generous. There are various options, but all are painful.”
Life expectancy rises as births fall
He explained that LGIM has worked out that raising the state pension age to 75 would help close the funding gap but still leave a 5.5% budget deficit – which amounts to around £110 billion.
At a retirement age of 66, which the government will achieve by 2020, the deficit sits at 7.5%.
But population growth has seen life expectancy rise while the birth rate had fallen, leaving an imbalance in numbers between the older and younger generations.
“We don’t have the tax base of workers to pay for the pensions and healthcare of retirees,” said Carrick.
“If you increase the retirement age by 10 years, then these people are still paying tax, and delaying their pension, but changing legislation does not change how well people are.
“Theresa May tried to move towards having a conversation with the public because we have this issue of an ageing population, we need to support them, but how do we pay for that? That has just disappeared.”
He also pointed out that the nation had a commitment to funding the state pension – which increases from 5.1% GDP in 2021-22, to 7.1% in 2066-67.
“We may end up borrowing a lot more money and then seeing what happens to the economy when we run large deficits. we might have to cut spending even more, we might just have to make the healthcare system less generous, there are various options, but all of them are painful,” Said Carrick.