The UK and other western economies face the prospect of an ageing population.
As the post-war baby boomers grow older, and people live longer, the number of over-65s in the UK is expected to nearly double by 2050. This is often seen as a problem for society, leading to higher health care and social costs, and increasing demands on the public purse to pay pensions. But there can also be positive benefits for the economy.
As people live longer, they can work well beyond their mid-60s while they remain fit and healthy. Already, this is happening. Over half of the increase in UK employment in the past two years was accounted for by the over-50s – 500,000 extra 50-64 year-olds in work and 150,000 over-65s.
This week, PwC published its Golden Age Index, comparing the performance of different countries in terms of the employment and earnings of older workers. The UK is in the middle of the league table.
The star performers are the Scandinavian countries, while southern Europe is at the bottom of the league. PwC economists calculate that, if the UK matched the performance of Sweden in terms of the employment of older workers, GDP could be boosted by around £100bn – over five per cent.
It is sometimes argued that older workers displace young people and contribute to youth unemployment. But this is just another version of the “lump of labour” fallacy, namely that there is a limited number of jobs to go around. In fact, the spending of older workers boosts the economy, creating jobs for others – both young and old. Indeed, Saga estimates that the over-50s contribute around half of total consumer spending.
A further boost to the economy can come from the wealth which older people have accumulated in property, pensions and other forms of savings. Net of mortgages and other borrowing, the accumulated wealth of UK households – in houses, pensions and other financial assets – is now over £8.5 trillion, seven times annual post-tax income.
This accumulated wealth can be deployed to support economic growth. For example, pension funds can be an important source of finance for the investment needed to improve our transport infrastructure.
This happens routinely in Canada and Australia – but has yet to take off here in the UK. Money tied up in property can be freed up by downsizing, providing additional resources to support consumer spending by pensioners while releasing property suitable for younger families moving up the housing ladder. We need to adapt our economy to an ageing population to reap these benefits.
A flexible labour market helps, as older workers are more likely to work part-time or be self-employed. New business opportunities can be created if companies respond to the growing market generated by older people, tailoring products to meet their needs.
And the tax system should provide the right incentives to save for retirement – along with flexibility to draw down pension savings when they are needed, as the government now recognises. If we adapt in these ways, an ageing population can be a support to growth, not a drag on the economy.