There is no quick fix – tax rises or otherwise – for dealing with an ageing population

Coping with an ageing population is not just about increasing national insurance contributions or finding some other way of increasing taxes to pay for social care. It is about rethinking how we organise our entire society.

This is an immediate political issue in the UK but actually it is one for the entire developed world. The UK is slightly better placed than most of Europe and certainly Japan, as the population is projected to continue rising through the middle of the century. But just about everywhere fertility is below the 2.1 level needed to maintain populations. In 2019 the total fertility rate in England and Wales was 1.65 children per woman, lower than all previous years except 2000, 2001 and 2002.

The country with the longest experience of dealing with an ageing population is Japan, with its combination of very long life expectancy of just under 85 years, and a very low fertility rate of 1.36 last year. The outcome has been that while the country remains prosperous, and its elderly people self-evidently are well cared for, many houses are simply left empty.

A record 13.6 per cent of all properties in Japan were registered as “akaya”, homes that had been abandoned without heirs or tenants, in 2018. and the country has stopped growing in economic terms. Japanese GDP was lower last year than it was in 1995.

Does this matter? Growth isn’t everything of course. But it certainly matters if there are insufficient funds to care for elderly people, and there is a reasonable resentment among everyone of working age if a higher and higher proportion of their wages goes in looking after people who retired a long time ago. This possible rise in national insurance is being seen as “a tax on the young”.

There are really only three ways our societies can adapt. One is indeed for people of working age to pay more tax. A second is to encourage (or force) people to save more for their old age. And the third is to increase labour participation rates, in particular by getting older people to work for longer.

We have to do all three. The problem with the national insurance concept is that the idea at its core – that each generation of workers should pay the pensions of the previous generation – worked fine when there were three or more people of working age for every pensioner. From the mid-1970s through to the early 2000s there were 3.3 workers per pensioner. But that is projected to fall below three by 2050, and people are coming to realise that this is not really insurance at all. National insurance contributions are a tax, just like any other.

Should people save more? Well, yes of course, and the combination of nudges – such as automatic enrolment on pensions and tax incentives – to do so are to some extent pushing up the savings rate. But this is resented. Last year there were a string of strikes by university lecturers in protest to paying more into the university superannuation scheme.

So what about increasing participation rates? It is certainly true that older workers resent having to wait longer for their state pensions, but realistically this is probably the least painful way of dealing with the issue. If people are living longer they have to work longer. Two years ago the European Commission published a study looking at what might happen through to 2060 – and actually did the calculations for the EU 28, including the UK.

There are several messages. One is that a smaller but better-trained workforce can produce more output than a larger less-well-trained one. Another is that encouraging more people of working age to stay in the labour force is as important as encouraging older people to stay in it. A third is that while immigration increases the size of the labour force, it does not help the key ratio of workers-to-non-workers so much. And countries, including Spain and some eastern European members, that have been losing their young skilled workers to emigration face a particularly serious problem.

But there is no quick fix. Encouraging people to work beyond retirement age is fine for some professions – as a member of the “silent generation”, born before 1946, I would count journalism as one of those and am delighted to do it. But it would not work for airline pilots.

So what our societies have to do is the lot: pay a bit more tax, save a bit more, work a bit longer. Then the numbers begin to add up.