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Raising state pension age alone will not be enough to reduce UK public debt in the long term, says PwC

8 July 2011

The Office for Budget Responsibility’s is expected to publish its first detailed report on long-term fiscal sustainability next week. According to PricewaterhouseCoopers’ analysis, reducing UK public debt to pre-crisis levels by 2050 will entail additional tax rises and/or spending cuts of around £20 billion, and an increase in the SPA to 70 by 2046, rather than 68 as currently planned.

If current policies were maintained, PwC projects that UK public debt would be 90% of GDP and rising by 2050 due to the costs of an ageing population. Even if the UK state pension age were raised to 70 years by 2046 public debt would be projected to rise from the middle of the next decade to reach around 80% of GDP by 2050.

To bring public debt back down to just below 40% of GDP by 2050, where it was in 2007 before the financial crisis, would require fiscal tightening of around 1.3% of GDP by 2020. This is equivalent to around £20 billion at today’s GDP values or, for example, a rise of around 4% points in the standard rate of VAT, or a 2% points increase in both employer and employee national insurance contribution rates.

The projected long-term squeeze on the national finances has two primary causes. The first is the one-off pressure arising from the retirement of the post-war baby boom generation born between 1946 and the mid-1960s. The pensions, health and long-term care costs of this relatively large generation will have to be paid for by smaller numbers of working age people in later generations. The second issue is the ongoing trend for people to live longer, leading to a steady rise in age-related spending.

Together these demographic challenges mean that the “support ratio” is steadily falling. Today there are around 3.6 people in the UK of working age for every person above state pension age, but by 2050 this will have fallen to only around 2.4 people based on current plans.

More detail can be found on the PwC website here.

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