The effect of lengthening Life Expectancy on future pension and Long-Term Care expenditure in England, 2007 to 2032

Abstract

The aim of this analysis is to examine the effect of different assumptions about future trends in life expectancy (LE) on the sustainability of the pensions and long-term care (LTC) systems. The context is the continuing debate in England about the reform of state pensions and the reform of the system for financing care and support. Macro and micro simulation models are used to make projections of future public expenditure on LTC services for older people and on state pensions and related benefits, making alternative assumptions on increases in future LE. The projections cover the period 2007 to 2032 and relate to England. Results are presented for a base case and for specified variants to the base case. The base case assumes that the number of older people by age and gender rises in line with the Office for National Statistics' principal 2006-based population projection for England. It also assumes no change in disability rates, no changes in patterns of care, no changes in policy and rises in unit care costs and real average earnings by 2 per cent per year. Under these assumptions public expenditure on pensions and related benefits is projected to rise from 4.7 per cent of Gross Domestic Product (GDP) in 2007 to 6.2 per cent of GDP in 2032 and public expenditure on LTC from 0.9 per cent of GDP in 2007 to 1.6 per cent of GDP in 2032. Under a very high LE variant to the GAD principal projection, however, public expenditure on pensions and related benefits is projected to reach 6.8 per cent of GDP in 2032 and public expenditure on LTC 1.7 per cent of GDP in 2032. Policymakers developing reform proposals need to recognise that, since future LE is inevitably uncertain and since variant assumptions about future LE significantly affect expenditure projections, there is a degree of uncertainty about the likely impact of demographic pressures on future public expenditure on pensions and LTC.