Seismic shifts in the welfare state: demographic trends and pension and NHS reform

Document type
Corrie, Cathy; Nolan, Patrick
Date of publication
1 May 2013
Reform ideas; no.4
Social Policy, Health Services, Older Adults, Poverty Alleviation Welfare Benefits and Financial Inclusion
Social welfare
Material type

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The report argues that the government must lay out plans to cut the cost of pensions and tax credits and begin a debate on the future of NHS funding.This would help safeguard these programmes and help to meet the deficit challenge.

Politicians are running scared of the elderly voting bloc. In the 2010 election 76 per cent of eligible people aged 65 and older voted; well above the turnout for the population as a whole of 65 per cent. The fast growth in the number of people aged over 65 means that in the 2015 election 1 in 4 voters will be 65 or older. This will increase in every successive election to 1 in 3 by 2050.

The same changes that make reform politically difficult also make it necessary. These demographic trends also mean transfers to retired families (net of the taxes they pay) are growing in real terms. Office for National Statistics data show that in 1990 the average retired family made an annual net gain of £5,422 from the welfare state. Twenty years later, that gain had risen to £10,009, adjusted for inflation. This is happening just as the share of the population that is working aged and can pay the taxes required to fund them is falling. The UK’s welfare state is turning on its head.

New Labour and the Coalition Government identified the need to put the state pension on a more affordable footing. But they have not done enough to reduce future costs. The proposed single-tier pension will not reduce spending until the 2040s. The savings from bringing forward the retirement age have been undermined by increasing the generosity of the state pension over time. Poor value for money benefits like the Winter Fuel Allowance, free TV Licences and bus passes remain outside the value for money agenda.

For working aged households, welfare spending should shrink when the economy grows and vice versa. Yet over the last decade this link has been broken. Between 2005 and 2010, the average family received an additional £347 in benefits in real terms. Of this increase, the biggest increase, of £175, was due to higher tax credits. The result is that many costs will continue to rise even when growth improves. Growth will not solve the Chancellor’s welfare spending problem. This higher welfare spending has also done little for families themselves – as their higher benefits have come with higher tax bills. They have been caught in a wasteful money-go-round funded by their own taxes.

The introduction of a cap on Annually Managed Expenditure (AME) should help manage these costs. While departmental expenditure has shrunk by 8 per cent over the past three years, AME has grown by 25 per cent. The Coalition must avoid the temptation to exclude pensioner benefits from an AME cap. Excluding these benefits would exclude a third of all AME and mean it is simply not credible, particularly when other large areas of AME (such as debt interest) would also need to be outside the cap.

The NHS has remained protected from departmental cuts. This is the largest area of departmental spending and accounts for a growing share of the public services that families consume. For pensioner households, spending on the NHS now accounts for around 95 per cent of the major public services they consume. For decades real reform to the funding of the NHS has remained off the agenda. Emphasis has been given to reorganising the service to make the NHS more efficient. As important as this is, governments can no longer avoid hard decisions on how the NHS is paid for.

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