Population prediction proves true

by Robert Whiston   Aug 2013

yes_yesHow sweet is the sensation of one’s prediction coming to fruition ?  Prediction is a powerful tool – especially when against all the odds, against mainstream thinking, a prediction made in 2006 comes true in 2013. This is as good as getting the Home Office to accept – via the Stern Review –  that they had their rape statistics and definitions mixed up.

This week, Aug 2013, has seen announcements in the national media that Britain is undergoing an unexpected population and birth rate increase with headlines such as:

 ‘More UK births than any year since 1972, says ONS’

BBC news [1]

Baby boom drives UK population growth

Financial Times [2]

The reason why this is so pivotal is that since 2006 a plethora of changes of near-galactic proportions have been implemented on the back of the single assumption that the population and birth rate would decrease. Almost without exception, every other EU country has seen its population either stagnate or decline. The fact is, at this early stage, no one is quite sure why the population has increased. However, the list of policy changes and the resulting invention of new policies is as long as your arm – they go on and on – but here are a few examples:

  • Pension provisions have changed, the age of entitlement has changed – no longer is it 65 and a single-tier pension is to be introduced.
  • An entirely new employment Stakeholder Pension has been created.
  • The new Universal Credit has been introduced to replaced Job Seeker Allowance, Income Support, Child Tax Credits, Working Tax Credits, Housing Benefit.
  • All state welfare benefits  have been ‘capped.’
  • Legal Aid has been severely curtailed causing policy changes in an array of legal fields which were once based on this assumed funding.
  • State funding for divorce and child maintenance are too expensive to continue to operate in their present form.

The Pensions Commission Report, chaired by Adair Turner was published in 2005. It concluded that the present regime was unsustainable and that ordinary working men and women will have to work for more years, and or pay more in taxes and still be expected to accept less in pension benefits. However, I had followed the fund flows into the National Insurance Fund for 20 years and knew it could operate successfully without great reserves said to be required.

Nonetheless, everybody ‘bought into the idea’ of an impending crisis – and this was well before the financial crash of 2008-09.

Turner’s report made the point that by 2035 pensioners would suffer a 30% drop in real income compared with pensioners at the present time (Adair Turner is now Lord Turner of Ecchinswell).

In an editorial, the Daily Telegraph (13th Oct 2004) emphasised how British pensions were already poorer than EU equivalents: Germany, Holland, Italy and Luxembourg gave about 85-90% of median income to pensioners – UK about 65%. [3] The EU average was just over 80%. Ireland was bottom with just over 60%. Currently, the UK then spent 6% of GDP on state pensions compared with 11% EU average. The official response to this was that these countries had been ‘over generous.’

But by 2013 we have wages that are not increasing, or at best increasing by 1% pa, work hours being cut and inflation  officially put at about 3% (but more likely 9%). So deflation and purchasing power of even those in work is falling at 2% or more a year.

Genesis

The story begins in the early 2000s when dire prediction were being made about the unaffordability of state pensions. The fear in 2003 was that old people would, by 2020, outnumber young workers, with the result that the ‘tax take’ from these young workers would not be big enough (the tax base), to meet the demands that state pensions and other state supplied services needed for the retired and low-income classes.

Contrary to the Turner Report into pensions which created panic among the political classes, I predicted there would be an up-swing in the population, probably due to an increased in the number of children born (and not due entirely to more mass immigration) between 2010 and 2020 (NB. Adair Turner was formally deputy chairman of the investment bank, Merrill Lynch, Europe – part of Bank of America which had to be bailed out with public money in 2008). In 2006 I wrote that:

  • “Although both births and fertility are presently at a nadir there is no reason to think they will remain there, as Fig 5 (below) exemplifies. Economic circumstances and fiscal incentives can and do cause birth rates to fluctuate.”
  • Accepting the population trends found in ‘National Population Projections 2002-based’, England alone is best placed to cope with old age and paying pensions. Its birth rate and population alone is expanding, and by inference a growing population, working and paying into the National Insurance Fund, with Wales and Scotland static, i.e. increasingly ageing.

The implication, therefore, was that even in 2006 amongst all the figures and conflicting data there was reason to detect a feeble, if marginally expanding population (but only in England) and all that was needed was encouragement or a change in circumstances to ensure its momentum.

Pre-Millenium trend

In a paper to Conservative Central Office dated Dec 15th 2005, I cited the opinions of Elisabeth Croll, an expert on Asian demography, and Jean-Claude Chesnais a leading French demographer. [4]

  • “We now recognise from the experience of economies in SE Asia that a growing population is a precursor for economic growth.“

Prior to that the conventional wisdom was that advanced societies could only look forward to declining populations and less than replacement fertility rates (shown here as Figure 6.1), Fig_6.1followed by stagflation. Japan being a prime example of this.

The ‘completed family size’ rate (CFS) had been since the 1980s ever downwards all across the West – falling in the case of Britain from the now famous ‘2.4 children’ to under 1.8 children per family unit. Of course, it has to be said that the academic views of Croll and Chesnais overlooked the high rate of unemployment in those South East Asian countries, e.g. Philippines, Indonesia.

In Britain a certain panic gripped mood-setters in society and forced pensions onto every political party’s agenda.

The then current moral panic regarding pensions impacted not just the UK but the West and overseas too, particularly the US and some EU countries where the fund set aside for state pensions was already in a parlous, i.e. non-viable, state. Some countries, like Australia, had acted far earlier.

There was a great fear that the ‘worker-to- pensioner’ ratio would explode. The ONS termed this the “Pensioner Dependency Ratio.”

By focusing on projections for 2030, politicians allowed a sense of impending crisis to overwhelm the media and this obviously   influenced the public’s perceptions of what was going on.

Pen_ratioHad politicians not neglected the trend from 1900 to 2000, when the number of people of working age for each person over state pension age fell from 14:1 to 3.5:1 the alarm would have been seen as the hiccup it was and not as a drama. Incidentally, the ratio trend was predicted to fall to 2.5:1 by 2040 so to even an untutored mind this age-based support ratio is not only less steep than recent history but should comfortably be manageable.

‘Population Trends’ (Spring 2004, page 11, Table 4), showed the ratio between those of working age (16 – 65) and those of pensionable age (over 65).  The ratio is constant from 1981 to 2002 at approx. 3:1 (36m v 10m 2002).  In 2026 this was expected to be 39m v 13m, and by 2031 38m v 15m (33% and 40% respectively).

In addition, as can be seen from the Table below there was no actual or inherent surge either in the total numbers  56,352k [1981] ; 57,584k [1991] ;  or 60,057k [2001], or in those age over 65, i.e. 8,130k,  7,897k, and 7,602k, for the same respective years.

Pop_proj

Perhaps key was the upward trend among those aged 0 -14, from 11,602,000 in 1981 to 12,085,000 by 2001.

The great pension robbery

By July 2009 parliament was debating a National scheme for the upkeep costs of pensioners and the care for old people (Hansard Column 393 http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090715/debtext/90715-0019.htm).

The nominal ‘face value’ of pensions paid by the state have increased year on year as the Table below reveals. However, the real ‘Purchasing power’ has decreased year on year. It is probably fair to say that the £90.70 payable in 2008 was barely comparable to the £43.60 paid in 1969.

State_penTheoretically, with an expected retirement age of 65 for both men and women (following an ECHR ruling overturning the 65 – 60 split), and an expected life expectancy for women to be 85 and 75 for men, women therefore have 20 years of pension life ahead of them and men only have 10 years.

The cost to the taxpayer then looks like this:

  • Using £90 (for a single person) as the standard weekly payment (e.g. 2008 level)
  • Woman – £90 per week x 52wks = £4,680 x 20 yrs = a cost of £93,600.
  • Man – £90 per week x 52wks =£4,680 x 10 yrs = a cost of £46,800.

Had women continued to retire at age 60 then the cost to the tax-payer would have been well over £100,000 per woman.

This gender discrimination (£93,600 vs £46,800.), is further compounded when considering the amount paid in over lifetime with regard mandatory NIC (National Insurance Contributions).

Grasping the nettle

It is now very clear that the UK has adopted the Australian Option.  More than ten years after pension reform its sutuatin has been transformed. In the 1980s, Australia had an ageing population with too few people saving and a state pension of diminishing value. Under half of the population were on company pension schemes.

By the mid 2000s, 95% of full-time employees in Australia had a company pension, compared with only a half in Britain (and most of those have now closed down in recent years).

Australian part-time workers (75% of them) had a pension compared with only 15% in Britain. Prior to the economic crash, Australian pension assets soared in value from A$30 bn in 1980s to A$600 bn by 2005. The possibility of repeating this feat in the UK is now dim, due to Quantitive Easing (debasing the currency). Nevertheless, Australia is now probably in a more favourable position with regards its pension funding than most other Westernised countries.

E N D

Footnotes:


[3] ‘The Pensions Crisis: Adair Turner Report’, October 2004

[4] See Elisabeth Croll,  an expert on Asian demography, and Jean-Claude Chesnais a leading French demographer. http://news.bbc.co.uk/1/hi/programmes/analysis/4305907.stm

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