The UK population is steadily becoming older. ICAEW examines the burden on the public purse at a time of worsening economic conditions.
The UK’s population is getting older and public finances are struggling to keep pace.
According to population projections from the Office for National Statistics, the number of people in the UK aged 65 or over is expected to increase by 35% from 12.5m in 2020 to 15.9m in 2040. This contrasts with a projected 2% increase in those aged between 20 and 64 over the same period (38.9m to 39.5m) and a projected fall of 11% in those aged under 20 (15.6m to 13.9m).
It is a significant issue for public finances, which operate on a ‘pay-as-you-go’ approach that sees the current generation of taxpayers pay for the state pension and health and social care needs of previous generations. More pensioners for each person of working age implies higher taxes or lower spending per pensioner or, most likely, a combination of the two.
Health and social care
Having more people in older age groups is already driving demand for NHS services across the UK. Not only are people living longer – and therefore using the NHS for longer periods – but they are doing so at a point in their lives where their medical needs are greater, increasing the cost to the public finances and putting greater pressure on health services.
Research by the Nuffield Trust has found that NHS spend per person rises sharply after age 50, with the ‘85 and above’ bracket needing NHS spending of £7,000 a year on average. In particular, medical care for men in that age group costs about seven times more than for the late-30s cohort.
In England, these factors have contributed to NHS spending rising almost a third in real terms since 2013/14. Despite that, The King’s Fund reports that the NHS has still needed £3.3bn extra in both 2023–24 and 2024–25 to meet increasing demand. Similar budgetary pressures are affecting the NHS in Scotland, Wales and Northern Ireland.
Going forward, NHS spending will need to grow by 3.1% a year and social care funding by 4.3% a year to meet the needs of the UK’s ageing population, estimates the Health Foundation. It’s more funding than was promised in the NHS Long Term Plan, published by the government shortly before the pandemic added yet more pressure to the UK’s healthcare infrastructure.
“One of the reasons for NHS wastefulness and inefficiency is that the current care delivery model is not suited to the challenges of an ageing population,” notes Sebastian Rees, Senior Researcher at thinktank Reform. “The real issue is how to develop a new delivery model. We need to aim for a ‘compression of morbidity’. This means that as people get older, the aim is that they should spend less of their lives in ill health. Right now, the inverse seems to be true.”
There is added pressure on adult social care services, too, especially following the commitment made by recent prime minister Boris Johnson to expand eligibility and cap social care costs to individuals.
Social care plans to stop people in England paying more than £86,000 for personal care expenses are due to be introduced in October 2023. But the finances of the elderly are a cause for concern, too. While many members of the current generation of pensioners own their homes and are in receipt of index-linked defined benefit final salary pensions, future cohorts have less generous pension arrangements that may make them more reliant on the state once they retire.
The impact on patients
Despite extra cash being made available, the NHS is still facing significant challenges. In December 2022, the Institute of Fiscal Studies found that the NHS had 8% more nurses, 9% more consultants and 15% more junior doctors than pre-pandemic but, beyond increasing GP appointments, first cancer appointments and attending COVID-19 patients, fewer patients are being treated.
“In the latest month of data, the NHS carried out 14% fewer emergency admissions, 14% fewer outpatient appointments and 11% fewer elective and maternity admissions than in the same month in 2019,” note economists Max Walker and Ben Zaranko. “Rather than imposing a one-off, time-limited shock to the healthcare system, there are worrying signs that COVID-19 has dealt a lasting hit to NHS performance [while] resources are being squeezed in the short-term by higher inflation.”
The Telegraph reported that, by September 2022, consultant-led (‘elective care’) treatment waiting lists in England reached 7.2 million, the highest since at least 2007. The number of patients waiting more than 52 weeks for elective treatment was 400 times higher than in mid-2019.
The latest ONS Winter Survey, conducted during January 2023, reveals the effects on patients. Among respondents seeking an NHS appointment, 65% had been waiting for up to six months, another 12% for up to 11 months, and 17% longer than a year. Around 70% of adults waiting for NHS treatment said the delays had a negative impact on their lives.
Meanwhile, 46% of adults who had tried to make a GP practice appointment said it was difficult or very difficult. And 21% of respondents reported needing to contact their GP in the previous month but then deciding against it, with more than half of them expecting the wait for an appointment to be too long.
The state pension
Spending on the state pension has increased alongside health and social care, rising from £38bn in 1999/2000 (3.6% of GDP) to £99bn in 2019/20 (4.4% of GDP). This is despite a rise in the pension age for women from 60 to 65 and a relative reduction in the state pension in the early 2000s.
One of the ways the government has chosen to mitigate the rise in the number of pensioners is to increase the state pension age – from 65 to 66 to age 67 by 2028 and to age 68 by 2046 (under the Pensions Act 2007).
Another way of reducing the cost to the public purse would be to reduce the state pension in real terms. However, this would be politically tricky and follow successive governments’ commitment to the ‘triple-lock’ that uplifts the state pension by the higher of inflation, wages or 2.5% each year.
A recent step taken by the government to minimise the cost of the state pension was to switch from a variable pension partially linked to earnings to a flat-rate pension unrelated to earnings, albeit still related to the number of years of contributions. It is hoped that individuals will save more through private pensions to provide an income in retirement, but this also poses an ongoing risk to public finances.
Public finances under pressure
Following the effects of the pandemic, the UK’s public finances do not appear to be well placed to accommodate the necessary increases in state pension, health and social care spending.
Over the next five years, the OBR projects a halving of the difference between anticipated spending and the tax take. However, this is only achievable by an already-announced combination of tax increases and spending cuts. And, despite these measures, underlying public sector net debt (excluding the Bank of England) is expected to hit a 63-year high of 97.6% by 2025-26.
And partly as a result of worsening economic conditions in the UK, the costs of servicing state debt are likely to prove much higher than for many years, further reducing the government’s scope for discretionary spending.
The long-term outlook doesn’t offer much manoeuvrability, either. “Our baseline projections show the primary balance [fiscal balance excluding debt servicing] worsening progressively over the long term, from a surplus of 0.2% of GDP in 2026-27 to a deficit of 11.25% of GDP in 2071-72,” says the OBR, highlighting health spending, pensions and adult social care as the core drivers.
The OBR also sees the national debt rising to 267% of GDP in 50 years’ time “if upward pressures on health, pensions and social care spending, and the loss of motoring taxes, are accommodated”. Returning debt to 75% of GDP – as in the pre-pandemic March 2020 Budget – would need a mix of tax rises or spending cuts equal to extra tightening of 1.5% of GDP (£37bn a year in today’s terms) as each decade starts.
That would be very challenging for any government to implement. While the planned rises in the state pension will help, reforming the NHS and the provision of adult social care would need to produce significant savings to counteract the growing pressure on costs. And with an increasing proportion of public spending going towards pensions, health and social care, less will be available to invest in the infrastructure, skills or research that is needed to generate economic growth and boost tax receipts without raising tax rates.
More people living longer is, of course, good news, but it comes with a sizeable price tag.