OBR warns of big tax rises as population ages

Hot on the heels of the Dilnot report recommending additional spending on elderly care to the tune of an extra £1.8 Bn per year, the FT today discussed a report released by the Office of Budget Responsibility.  The OBR reported:

• Pressures from an aging population would require a tax rise of £22 BILLION per year in 2016, if the UK is to achieve a reduction of its public sector debt from 84.5 to 40% of GDP by 2060.
• This increase reflects increases in Health, Long term care, and state pension.
• The OBR also conceded that its projections were extremely sensitive to different assumptions, the most important of these is the assumed modest rise in health spending.  With a rate of health spending growth closer to the historical average, this would add a further 5% of national income by 2060

Clearly this would suggest that the "unmentionable issue" of ongoing state funding for long term care for an increasingly elderly population cannot continue to be pushed onto future generations through increased tax.  I have spoken in my last post about the very real need to unlock some of the property equity gains to self-fund care, but this only applies in the short term. 

So what is the longer term solution?  Many people are still unaware that there is a pensions change being phased in over a few years from 2012 that will require compulsory contribution pension to a "Personal account".  Starting at 1% each, this will grow to 3% contribution by the employee and 5% by the employer.  I believe that this is wholly inadequate, and we need to have genuine debate about the need for greater self reliance in our retirement years, and reducing the dependance on the state for care (as I have oft expressed I think that this can only be provided on a low-quality, low-price basis with increasing rationing).

Being Australian, I look to my experience there.  (There it is called supperanuation).  Briefly:

1.   The government in 1992 recognised the coming major demographic shift and introduced a similar compulsory contribution regime, of 9% (employer funded) and this is to shortly grow to 12% from 2013.
2,   The taxpayer-funded age pension still provides core funding for retirement. The Australian state-funded age pension differs from its counterpart in most other western countries, being both modest (27.7 per cent of average wages for a couple) and means-tested (against both the income and the assets of the recipient).   This policy ensures the age pension in Australia will remain frugal and targeted, and Australians seeking a comfortable retirement lifestyle need to save for it.
3.   Pension savings enjoy various tax benefits. Contributions are deductible (within limits) against taxable income; earnings on investments in superannuation funds are taxed at concessional rates; and superannuation monies drawn down in retirement are lightly (or zero) taxed.

In the UK I believe we will need a much higher level of individual pension savings before we can adequately meet the retirement needs of our ageing population.  As politically unpalatable as the issue may be, I think the OBR report shows that time is running out to address the issue.  Continuing to think solely in terms of taxation rises to fund continued state-provision have gone beyond simply delaying the pain, they now represent a major issue to the whole UK economy.  Please, will someone in government take this issue by the horns?