Samuel Brittan: Here’s to longer lives

In the depths of the 1930s depression, John Maynard Keynes wrote an essay looking ahead through the immediate difficulties to a time when production would have increased so much that the economic problem would be solved and the people could concentrate on higher things such as personal relations, the arts and leisure.

The magic of compound growth could, Keynes asserted, make us eight times better off in 100 years relative to where we were in his base year, 1929. Output per capita has indeed since grown in most western countries in line with Keynes’s expectations. Yet the promised land still seems far off.

Keynes was aware that there were people who had desires that could be satisfied only if they felt materially superior to their fellows. Such folk could be left to their ocean cruises and luxury hotels. “But the rest of us would no longer feel under any obligation to applaud and encourage them.”

Keynes clearly underestimated the new consumer applications of science and technology, which would feed the desire for higher real income. It may also be that the desire to feel superior to others is not confined to the very rich, but reaches much further into the bulk of the population.

Economists of an interventionist bent are divided about whether policy should aim to slow down or accelerate growth in material possessions. Some, such as Richard Layard in the UK and Thomas Frank in the US, want to discourage such growth because they believe that happiness depends more on comparisons with others than on absolute attainment. On the other hand, Benjamin Friedman, in a new book, The Moral Consequences of Economic Growth (Alfred Knopf), argues for measures to promote growth on the grounds that it brings with it other benefits such as openness, tolerance and democracy.

I do not have to adjudicate between these protagonists because there are more tangible reasons why we may be deprived of the fruits of economic growth. They can be summed up in the words: increasing dependency ratios. The ratio of people of pensionable age to the working population is rising rapidly in most countries. In addition, the number of those of prime working age is falling, as the baby boom generation passes into retirement and is followed by smaller cohorts.

A recent report from the Organisation for Economic Co-operation and Development, Ageing and Employment Policies, places our pension worries in wider perspective. It is not just a matter of financial machinery to provide entitlements. It is a question of higher real transfers. If there is no change in work and retirement patterns the ratio of older inactive people to workers will almost double in the OECD area from 38 per cent in 2000 to just over 70 per cent in 2050. In Europe, the ratio could rise to almost one older inactive person for every worker. On the same assumptions the growth of gross domestic product per capita would decline to about 1.7 per cent over the next three decades, or 30 per cent less than its recent rate.

The bulk of the problem is due to increased longevity over the whole OECD area which has – measured at birth – risen from 63.8 in 1950 to 77 in 2000 and a projected 83.4 in 2050. We should be celebrating rather than bemoaning the advances, which have doubled the number of years for which most people can expect to live after the conventional retirement age. It must be obvious that if retirement ages were indexed to longevity much of the problem would disappear.

Surely, however, the choice between high take-home pay during one’s working life and a high standard of living in retirement ought to be with the individual citizen? Agreed. But once we accept that there should be a minimum level below which no one, however improvident, should be allowed to fall, then the state has already stepped in with a bias against retirement savings. Moreover, the retirement age for the state minimum pension guarantee is bound to act as a signal for private arrangements.

There are also numerous public policies and corporate habits that discourage older people from working even before the official pension age is reached. The average participation rate among 50- to 65-year-olds is only 60 per cent. Indeed, the most interesting finding relates to the multitude of practices that lead to such low rates. Not so long ago many governments and union leaders pushed for early retirement in the mistaken belief that there was a fixed number of jobs which would then go to younger people.

If we worry about the shrinkage of the denominator of the dependency ratio – that is, the number of people at work – we need to look at immigration. Possibly, immigrant birth rates will eventually fall towards those of indigenous populations. But the process will take several decades and allow OECD countries more time to adjust to changing age ratios. Of course, wider social considerations are involved here, but so they are in nearly all aspects of policy towards ageing.