Raising the retirement age
There are no good options for cutting government debt, but extending all of our working lives could be the best of a bad lot.
That's the basic argument in a paper released [pdf link] on the back of today's NIESR report.
To recap, the institute's economists think that debt will rise to nearly 100% of GDP by 2015, not 78% as the Treasury forecast in the budget. It will start to fall by then, but only to about 90% by 2023.
By then, the NIESR economists say the government ought to be looking to get debt back below Gordon Brown's old ceiling of 40% of GDP. Helpfully, they provide a menu of unpalatable ways to get there.
It could cut all public spending by 10% in real terms over the next decade; it could raise taxes by the equivalent of an extra 15p on the basic rate of income tax over the same period; or it could raise the retirement age by five years by 2023.
These are the extreme, "either-or" scenarios. You could obviously do a diluted version of all three.
But if you thought a five year extension of all our working lives was a desperate measure to cut government debt, that's a list that could start to change your mind. Especially when I tell you that the 15p on income tax would be on top of the 8p rise from today's level that is already built into the NIESR forecasts.
As the authors point out, the beauty of raising the retirement age, from a budget standpoint, is that it raises revenues and cuts spending at the same time. Income tax receipts go up, and spending on pensions goes down.
By cutting the average time in retirement, you also reduce the gap between what we currently save, and what we would need to save for the comfortable retirement we expect.
That's a big plus in an economy that was saving far too little, even before the credit crunch slashed the amount that those savings could plausibly earn.
Other things equal, the authors reckon that adding one year to our effective working lives would reduce public borrowing by 1% of GDP after 10 years, and reduce the national debt by 20% of GDP over 30 years.
Because most people tend to retire a little before the state retirement age, you need to raise the pension age by about 1.5 years for every one year you want to extend the average working life. That's why the authors say you would need to raise the state pension age to 70 to bring debt down to 40% by 2023.
It all sounds pretty extreme. And it is. Right now, none of the major parties have suggested that a debt stock of 40% of GDP is a reasonable target for less than 15 years' time. Even if all of the chancellor's forecasts come true, the Treasury doesn't expect debt to fall back to that level until 2032.
As the NIESR economists admit, there is also a huge amount of uncertainty around all of these forecasts. Other things are not equal. And anything could happen. There is even a possibility that debt will come back down to 40% on its own.
Finally, you could quibble with the 40% number itself. The Treasury expects debt to be just over 50% of GDP in 2023, which would be pretty low by international standards. (Today at least - who knows what those standards will be in 2023.)
Most economists think that for that to happen, the government will need to do more to rein in borrowing than has been announced to date. But should we take even more drastic steps to reach the arbitrary target of 40%? Many would say no.
But even if you reject the 40% target, it's hard to argue with the basic idea of radically reducing the public debt over the next 15 years.
As Martin Weale points out in the main report, if you assume that major recessions happen, on average, one in every 20 years, and raise national debt by 30% of GDP, then to handle such crises in a sustainable way you need to more or less balance the budget in normal times.
If the Conservatives still want to do it, that is what "mending the roof while the sun is shining" would look like.
By 2023 we will be nearly 15 years on from this crisis, and that much closer to the next one. Assuming that a future government has not put an end to boom and bust, by then it needs to have mended a lot of roof.
Raising the retirement age further, and earlier, than already planned has not featured so far in the doom-laden discussions of future budget cuts. But after reading this study, I think it will.
UPDATE, 11:30, Thursday 7 May: A quick update to respond to some comments.
Raising the retirement age is not a soft option, as many of you have pointed out.
For one thing, as some have noted (eg 7), it's not fair. Middle class professionals will find the prospect of five more years of work a lot more palatable than someone who's worked in heavy industry all their life. That's one reason why any government proposing this change might make it voluntary to start off with.
It might start by offering incentives to delay retirement for those in a good position to do so, rather than directly penalising those that retire at 65. Existing state pension rules already go some way along this road.
I've also been struck by how many have you want to know what would happen to public service workers in all this (eg 8, 14, 25). Already they are already widely perceived to get a cushy retirement deal relative to the private sector. If the comments on this blog are any indication, there would be enormous pressure to reform public sector pension arrangements in the event of any plan to make everyone work longer.
All of these are huge issues we will inevitably come back to. But for those of you who say, understandably, that you don't fancy working five years longer just to clean up a mess made by a lot of banks, remember that we were talking about having to work longer, long before the credit crunch. And for good reason.
Fifty years ago anyone retiring at 65 could expect to live another 13 years. Now it's about 20 years, and that number is rising remarkably fast. "Healthy" life expectancy is not rising as quickly, but it is rising - on average you can expect around 14 years without serious illness. That's a lot more than when the 65 retirement age was set. How much you've benefited depends a lot on class - the poorest in society have not benefited from these advances nearly as much as those higher up the income scale, which makes the unfairness I mentioned a serious issue which would need to be addressed.
But the reality is the vast majority are looking at a much longer healthy life than our parents and grandparents did. It is not clear to me why we shouldn't spend a few of those extra years at work. Nor, at current savings rates, is it sustainable.
As I mentioned yesterday, one of the attractive features of this plan would be that it would narrow the gap between what we save now, and what we would need to save to live well for all the years of retirement we can now expect. Right now, as the NIESR economist emphasize, the numbers simply do not add up.
Many of you wonder where the jobs will come from (eg 30). From where we stand today, it's a reasonable question. But remember we had a big rise in the working population since 2001, for various reasons, and a large rise in the number of jobs as well. There isn't a fixed amount of work out there, and if we extend working lives that ought to mean faster economic growth as well.
There are plenty of important questions to be resolved - as I said before, this is no soft option. But at a time when we hear a lot about spending cuts or tax rises as the solutions to Britain's budget woes, it's helpful to be reminded that there is a third option to throw into the mix.