The economic cost of an ageing society

The economic cost of an ageing society is increasingly subject to debate. We know that the proportion of public expenditure committed to age-related spending will grow substantially in coming decades. And a declining old age dependency ratio is also likely to have significant economic effects.

The recently published, Office of Budget Responsibility ‘Fiscal Sustainability Report’ (1) argued that “Population ageing will put upward pressure on public spending”. They said that public spending aside from debt interest would increase by 5.4 per cent of GDP or £80 billion in today’s terms by 2061.

The OBR anticipated:
* Health spending rises from 7.4 per cent of GDP in 2015-16 to 9.8 per cent of GDP in 2060-61
* State pension costs increase from 5.5 per cent of GDP to 7.9 per cent of GDP as the population structure ages and State Second Pension entitlements mature. and
* Social care costs rise from 1.2 per cent of GDP in 2015-16 to 2 per cent of GDP in 2060-61. (2)

Moreover, these projections may be conservative: GDP growth could be slower than anticipated, but individual entitlements to certain aspects of age-related spending will be impossible to retrench. Health and care spending could increase further if longevity simply means we spend longer in ill-health towards the end of our lives – notwithstanding the significant uncertainty that surrounds the long term care funding system at present.

This week we saw further debate on the economic impact of an ageing society, but this time in terms of the future of investment returns. With a growing older population, we are likely to have more people decumulating their assets. In other words, a large cohort of retirees means that there will be more people selling their investments than there will be people re-investing through long term saving.

New research (2), by Zheng Liu and Mark Spiegel, published this week in the United States has explored this issue. The researchers explored data going back to 1954 to understand if there was a link therefore between age distribution and the performance of the stock market. They found there was.

They predicted that “the actual P/E ratio should decline from about 15 in 2010 to about 8.3 in 2025”. In effect they predicted a bear market up until 2021. Their good news, which seems little to get excited about, is that in 2030 (after the baby boomers have died!) the real value of equities will be about 20% higher than in 2010.

This research clearly adds another dimension to the economic impact of an ageing society. If it turns out to be an accurate prediction, very worrying times are ahead.

David Sinclair and Craig Berry

(Published initially at www.ilcuk.org.uk)

1) http://budgetresponsibility.independent.gov.uk/wordpress/docs/FSR2011.pdf
2) The OBR also pointed out that “These increases are partially offset by a fall in gross public service pension payments from 2 per cent of GDP in 2015-16 to 1.4 per cent in 2060-61”
3) http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html