Chart 1: the changing shape of the UK population
Age structure of the UK population in 2015, 2020 and 2030, by single year of age to 89 and bands thereafter, ONS 2012-based principal projections, thousands.
A rise in the elderly population, particularly if not matched by health improvements, will place ever-greater pressure on the public finances, as a relatively smaller working-age population supports growing spending on health, social care and pensions.
Around 55% of welfare spending (£114bn in 2014/15) is currently paid to pensioners, with the state pension by far the largest element of this. This expenditure is forecast to increase by an average of £2.8 billion a year over the next five years, resulting in spending of £128 billion by 2019/20.
Growing numbers of elderly people will also have an impact on the NHS and social care expenditure. The prevalence of long-term health conditions increases with age; and according to a 2010 estimate made by the Department of Health, such conditions account for 70% of total health and social care spending in England.
The Department of Health also estimates that the average cost of providing hospital and community health services for a person aged 85 years or more is around three times greater than for a person aged 65 to 74 years.
Further fiscal pressure is also likely to result from a decline in the working population relative to the number of pensioners (the 'dependency ratio'). A lower proportion of people in work means lower tax revenues and, in all likelihood, higher public expenditure.
Despite the recent increases in state pension age, it is expected that the pensioner population will continue to rise. In 2014 there were 3.2 people of working age for every person of pensionable age. This ratio is projected to fall to 2.7 by 2037.
Chart 2: Working-age people per pensioner
Even after planned increases to the state pension age, the number of working age people per pensioner is expected to fall. Number of working-age people per pensioner, 1980–2012 and projections to 2037.
Challenges for future Governments
The Office for Budget Responsibility points out that without offsetting tax rises or spending cuts, the ageing population will cause a widening of budget deficits over time, eventually putting public sector debt on an unsustainable upward trajectory.
Dealing with the twofold pressures of increased demand and requirements for enhanced services is therefore likely to require both improvements in public sector productivity and increased taxation on the working population. The burden could also be mitigated through a number of other measures:
Reducing welfare payments
Public spending on the elderly could potentially be reduced, without impact on service quality, by a radical change to the means-testing approach to certain benefits and social care services.
If one were to take a view that age, on its own, is not a good indicator of need or ability to pay, it would seem sensible to review whether that should be the sole determinant of access to services and benefits.
However, the 'political economy' of an ageing population could hinder moves in this direction. In particular, older people are more likely to vote; and if they are growing in number, this could make changes that reduce welfare and care entitlements politically difficult.
Much of the costs of old age have arisen because growth in total life expectancy has outpaced growth in healthy life expectancy (i.e. the number of years we can expect to live in good health). Policies that improve preventative healthcare, and help people to remain active and healthy in later life, could help increase the proportion of life spent in good health and reduce costs.
There are also large inequalities in healthy life expectancy, which for women ranges from 71 in Wokingham to 56 in Manchester, and for men ranges from 70 in Richmond upon Thames to 53 in Tower Hamlets.
A healthier old-age population would also allow greater numbers to remain in the labour market for longer, thereby mitigating the impact of an ageing population on the dependency ratio. This in turn could increase tax receipts and limit public expenditure growth.
The dependency ratio could also be reduced by encouraging immigration of working-age individuals, although this is unlikely to be seen as a politically attractive option.
Increased numbers of older people in work need not disadvantage the young. Indeed, previous attempts, both in the UK and abroad, to create jobs for young people by encouraging older people to withdraw from the labour market have failed.
The assumption that there is a "fixed supply" of jobs is not borne out by theory or experience: a larger workforce, with more people in work and earning, is likely to create its own demand.