The UK population is ageing, along with those of many Western countries. In future it is expected that there will be more retirees as a proportion of the population and that individuals will live for longer.
Population ageing poses a challenge for policymakers, public services and the public purse. Although projections vary, the ageing population is expected to result in rising demand for age-related public spending – notably the State Pension, the NHS and social care.
Simultaneously, the proportion of the population who are of working age and contributing the bulk of tax revenue will continue to drop. Despite increases in the state pension age the ‘elderly support ratio’ – the ratio between the proportion of the population which is of working age versus the proportion over retirement age – is declining and will continue to do so.
In order to meet the challenge of ensuring sustainable public spending on the older population in the context of these trends, two key policy narratives have emerged.
One is means testing. On this approach, it is argued the government should respond to rising demand for universal age-related services and support by restricting entitlement to only the poorest older households, thereby reducing costs for the Exchequer.
Arguments for means testing are underlined with reference to the considerable property wealth accumulated by the older generation, particularly the so-called ‘baby-boomers’ now entering retirement in increasing numbers. It is often noted that this property wealth is mostly unearned and untaxed, as well as being unprecedented in historical terms.
However, means testing can be problematic. Any extension of means testing to more areas of public spending on older people would realistically have to use the infrastructure and assessments used to allocate Pension Credit, which currently tops up the value of the State Pension for retirees with no private pension savings.
The government’s own figures (.pdf) suggest this means testing system fails to reach around one in three of those who should be recipients, indicating as many as 1.3 million poorer pensioners miss out.
The second key response to the pressure of population ageing on the public finances relates to greater investment in prevention. It is argued that the government should spend more on interventions in people’s lives – such as low-level ‘care and support’ – that reduce demand for more expensive entitlements, such as stays in hospital beds.
The evidence base on cost-effective preventive interventions is not as comprehensive or joined-up as would be desirable. But preventive interventions do exist and can be effective. For example, a study of re-ablement services (.pdf) following a period in hospital by older people found significantly reduced subsequent use of social care services in contrast to a comparator group.
However, these two policy responses – means testing and investment in prevention – have the potential to conflict, and they look set to create a turbulent debate around ageing policy for years to come.
Why? The dilemma is a simple one: the benefits of investment in prevention may only be realised if preventive interventions are allocated on a universal, non-means tested basis.
A good example of this conflict is current debate around whether to means test Winter Fuel Payments for older people. These universal cash transfers are worth around £100-£200 each year to older people who can spend them as they wish. A growing number of critics argue Winter Fuel Payments are an unjustifiable ‘bung’ in the current fiscal climate, and should be means tested.
However, the picture is much more complex. According to the Office for National Statistics, the number of preventable – so-called ‘excess’ – winter deaths each year is around 24,000, with older people, particularly older women, at the highest risk.
The cost of cold-related conditions among older people to the NHS has been calculated by Age UK as being around £1.36 billion each year, excluding potential costs to social services. So the failure of older people to keep themselves warm costs the state billions of pounds each year, and results in many deaths.
However, research from the Institute for Fiscal Studies (.pdf) suggests that on average, households in receipt of Winter Fuel Payment spend 41% of its value on fuel. If the payment were not labeled, households would be expected to spend just three per cent of its value on fuel.
This should be no surprise, extensive social science research has found that labeling cash transfers to households – such as the Winter Fuel Allowance – affects how the money is spent, in direct contravention of how economic theory says households should behave.
In short, Winter Fuel Payments are actually very effective at increasing household expenditure on fuel, and thereby encouraging them to keep warm. So they are an effective preventive intervention.
So while critics argue that at a challenging time for public spending, Winter Fuel Payments should be means tested, it is far from clear this would save money for the Exchequer given their value as a form of investment in preventing the costs of cold-related illness to the NHS and other public agencies.
Evaluating such competing claims is likely to be extremely important over coming decades as the population ages. More than anything else, it will require the availability and effective use of high quality social science evidence.