Pensions have been generous since the Second World War. That might be about to changeby Jonathan Derbyshire / December 10, 2015 / Leave a comment
Read the rest of Prospect’s big ideas of 2016 here
Since the Second World War, governments in liberal democracies have maintained a compact with voters, making generous provision for old age pensions, healthcare and education. This has been one of the sources of their legitimacy. Today, however, under a range of pressures, particularly demographic ones (see below, “The Alzheimer’s economy”), governments across the developed world are contemplating the possibility that they will have to change drastically the terms of their compact with the people.
In the coming decades, the UK government (and many others in the west) are going to default on some of the obligations that people take for granted. All those “contracts” which people think successive governments have written with them are being rewritten, and not in their favour. The state pension edging later, the refusal of national healthcare systems to cover dementia, the devolving of care for the elderly moving to local authorities, who may not be able to afford it—the changes may not be dramatic but will be constant. (Politicians in the UK, for example, are flirting with the idea of removing tax relief on all pension contributions)
As Charles Goodhart, Manoj Pradhan and Pratyancha Pardeshi showed in their cover story in the December 2015 issue of Prospect, adverse demographics in the advanced economies mean that the ratio of the old to those of working age is about to get worse. This will have significant political consequences. If governments are to continue meeting their obligations, particularly to the old, the tax burden on workers will have to rise, with the result that the “two key cohorts of the population—the working-age population and the elderly—will become locked in a political battle.”
Mainstream politicians are already struggling to resist the challenge of populist parties of both right and left which appeal to the “left behind,” those who have lost out from globalisation. (In Britain, for instance, the UK Independence Party has strong support in struggling, isolated coastal towns where the benefits of a liberalised and open economy are hard to discern.) Next they will have to work out how to manage the coming generational conflict.