Lesson from Australia: Retirement benefits don’t have to bankrupt us

Patrick Nolan
WHEN The Who’s Roger Daltrey first sang “I hope I die before I get old,” he was probably not planning on receiving the winter fuel allowance. Yet 47 years later, at some stage this month a £200 cheque from the UK taxpayer will drop through his letterbox.

Daltrey is one of a growing number of people born since the mid-1940s who are at or are approaching the official retirement age. There are so many baby boomers that, between 2010 and 2015, the number of people over the age of 65 will have increased by 1.3 million. By 2050, for every retired person there will be two and a half people of working age, down from four today.

Demographic changes provide some benefits. People now entering retirement are healthier, wealthier and more active than previous generations. But there are also costs. Ageing makes much of the existing welfare state unaffordable. Money is already a problem for the government. An older population will make this problem worse.

The welfare state was designed for a young and growing population. Like a pyramid scheme, retiree entitlements would be funded by younger workers, who would in turn receive benefits funded by the next generation. But, with an increasing share of the population receiving benefits and a decreasing share paying for them, the pyramid is being turned on its head.

The situation is not hopeless, however. Experience of reform in countries like Australia shows that the UK could build a welfare state that not only provides for its citizens but also future-proofs the economy against government deficits and debt.

Like the UK, Australia guarantees all citizens health cover and a secure retirement income. But unlike the UK, the cost of welfare is more evenly shared between Australian citizens and the government. Australian citizens pay for nearly a third of health care themselves. They contribute nearly 10 per cent of their income towards private pensions. Four in five Australian pensioners receive a targeted pension.

More even sharing of costs has many advantages. It makes public programmes more affordable and can increase the options available for helping people in retirement. It also has important political effects. Stronger private programmes create a more durable consensus that funding welfare is not just the job of government. Without this consensus, the UK will continue to face pressure to expand its welfare state. Australia’s broader funding base allows it greater flexibility to introduce pro-growth policies, like a more competitive tax system.

The government has ducked the issue of long-run affordability. A more generous indexation of the state pension has offset savings from bringing forward the increase in the retirement age. The challenge of funding long-term care remains elusive and poor value for money spending – like the winter fuel allowance, free bus passes and TV licences – remains off limits for this Parliament at least.

The temptation for David Cameron will be to put off dealing with these challenges, but this will only make reform harder. Not only is the number of people over 65 increasing, but the elderly are by far the most likely to vote. This gives the grey lobby immense power, and this power is only going to increase. As Reform has shown, while 41 per cent of the voting population was aged over 55 in 2010, based on current turnout rates this will grow to 45 per cent by 2020.

The changes required to make the welfare state affordable are not easy: people saving more for retirement, scrapping the winter fuel allowance, free bus passes and TV licences, greater use of equity in homes to fund long-term care, health services being moved out of hospitals and a greater requirement for private health insurance. But, as Australia shows, these changes would put the welfare state on a more sustainable footing.

Dr Patrick Nolan is the chief economist at the independent think tank Reform. Its report Entitlement Reform is available at www.reform.co.uk