Examination of witnesses

Professor Charles Goodhart and Professor Andrew J. Scott.

Q18 The Chair: Welcome to our witnesses for this, the committee’s second evidence session of its inquiry into preparing for an ageing society. We are delighted to have two distinguished academics and contributors on this topic: Professor Charles Goodhart, the emeritus professor of banking and finance at the London School of Economics; and Professor Andrew Scott, a professor of economics at the London Business School. Thank you so much to both of you. We know that you have written so much about this topic but we are really glad that you have come in to give us the benefit of your expertise in person.

I should make it clear that the session is being broadcast on parliamentlive.tv and that a full transcript will be taken, which we will make available to you shortly after the meeting to make sure that we have not got anything wrong and for you to make any corrections.

Let me start with a general question to Andrew, then over to Charles. Can you briefly set out the crucial trends that you think we on the committee should be focusing on when it comes to the economic effects of ageing? Do you think that population ageing and the way we treat this subject should be approached as a positive or negative secular change?

Professor Andrew J. Scott: Okay—start off with the easy questions, then. First of all, I apologise for not being there in person. I am in the States for a family bereavement, which of course makes this topic both secular and aggregate but also very personal.

I guess the exam question is talking about our ageing population. We begin always with the demographic story, which is that, because of declining birth rates and people living for longer, we are seeing a radical change in the age structure of the population. In the UK in 1950, one in nine people was aged over 65. Today, it is more like one in five, and it will head up to one in four then one in three. A lot of focus is given to that number, 65, because it defines what is called the old age dependency ratio, which is possibly one of the most repellent phrases you can use. We should also look at the number of people aged over 80, which is rising: it was 1.5% of the population in 1950 but it is 5% today and is heading towards 10%. So there is a very radical change.

I would say that that is an interesting starting point but my work is always about how we can change how we age; that is about behaviour as well as biology. Another statistic is that the majority of employment growth in the UK and the West over the past 10 years has come from workers aged over 50, both because there are more of them and because they are more likely to work. So there are both opportunities and challenges.

Undoubtedly, an ageing society is one of the greatest achievements of the 20th century. When I was born in 1965, the most common age of death was children less than one. Today, it is people in their late 80s. It is impossible, I think, to see that as only a bad news story. It is in the majority a good news story. The challenge, of course, is that that great achievement of the 20th century gives us one of the greatest challenges of the 21st century, which is how we adapt and adjust to the length of life we can expect. If we do not, we get the problems of an unsustainable health system, a pensions crisis, et cetera.

Professor Charles Goodhart: To the question of whether the present demographic developments are good or bad, the answer is that it is a bit of both. If you think about the level of population and assume that the structure of the population is constant, I think that most people would prefer a level of population, both in this country and in the world, to be less than it is at present—about 30% less or maybe even more. It would help the environment. We are a very crowded island. If we had a lower population, I think it would be a good thing. The problem is not so much the level but the rate of change. The problem is that what Andrew was talking about—the decline in fertility and the rise in life expectancy—is bringing about a huge change in the distribution of our population and the rising dependency ratio. That is a severe problem.

Another point is that the emphasis has largely been on life expectancy. Although that is true, it is equally important to have an emphasis on healthy life expectancy because, if we grow older but cannot cope for ourselves—say, if we have a neurodegenerative disease—we are a major burden on society. Some of you will remember my brother, who was a Member of your Lordships’ House. He died of Alzheimer’s fairly recently. While he was fit and capable, he was an excellent member of your society. When he developed Alzheimer’s, he was incapable and had to be looked after, and there was a great deal of concern. There is no point in raising life expectancy unless you can raise healthy life expectancy by more or less the same amount.

A very good paper by the World Economic Forum on the silver age group came out a couple of days ago. It was fine except that it never mentioned health considerations, which are crucial. Indeed, if there were one change or development that I would particularly like to see and which I think would make an enormous difference to everyone, it would be finding ways of improving our medical ability to predict and cure the neurodegenerative diseases that affect the old.

The Chair: Absolutely—lots of food for thought from both of those contributions. Thank you.

Q19 Lord Agnew of Oulton: Good afternoon. I am interested in savings; there seem to be two schools of thought on savings for people who think they will live longer. Are they saving more? More importantly, how do we encourage society to save more for what is inevitably becoming a longer life—and, to your point, a healthier life—so that people have resources to look after themselves better when they are older and perhaps less healthy? Take those two strands, please.

Professor Charles Goodhart: Let me go back to what I was talking about: neurodegenerative diseases. If you were going to have one of these, you would want to have saved much more, but you do not know. Nobody knows. It is a lottery. Most people tend to assume either that they will not get it or that, if they do, somebody else will look after them. Desirably, there should be some kind of national insurance—a proper national insurance; that is, not the national insurance we have at the moment, which is simply a form of income tax—so that those who do get one of these diseases can survive in a rather better way.

On the overall savings situation, it is true that, as life expectancy increases, savings go up. However, if life expectancy is constant, if you have more old, they will spend more. Again, it is a function of the difference between the level of the number of aged and the rate of growth of life expectancy. The rate of growth of life expectancy—Andrew is much better placed to comment here than I am—is slowing down.

Also, most people underestimate how long they will live now. Andrew was talking about the number of people over 95. Most people, when they are in their 40s, assume that they are likely to die in their early 80s, which is no longer true. If everyone assessed their life expectancy correctly, and if life expectancy was growing rapidly, savings would rise. However, my argument is that neither of those is actually the case and that, with an increasing number of aged relative to those who are getting older and saving, the direction of savings overall could go down rather than up.

Lord Agnew of Oulton: What do you think we should be doing to encourage people to save for this longer age that they are going to live to? You made the point that most people do not anticipate living as long as they are likely to live, but how do we educate people to have greater self-awareness?

Professor Charles Goodhart: If they read Andrew Scott’s books and articles, they will be much better placed. At this point, I turn the question over to Andrew.

Lord Agnew of Oulton: Let us ask Professor Scott.

Professor Andrew J. Scott: Charles has always raised lots of great questions and insights. I want to pick up on some of those but, on your question, it is about trying to change the narrative around ageing. For whatever reasons, we have medicalised the concept of ageing, so it is seen as very negative. We have to find more positive ways of engaging with people about their future.

How do we do that? I am sure that there are lots of behavioural recommendations. One simple thing is that the Government should put a lot more focus on their cohort estimates of life expectancy, rather than their period measures of life expectancy. Period measures of life expectancy assume no further progress or change in mortality and tend to underestimate individual life expectancy. That is one reason why people are ill informed about it.

On the savings question, we have to distinguish two things. One is aggregate savings, which will of course change with the change in the age distribution of the population; Charles has written brilliantly on that. Then there are individual savings. If you think about living longer, it is a complicated question. How do you finance a longer life? First, we are living for longer and growth in life expectancy is slowing down, but even that is a little misleading. Look at the progress that has been made: although life expectancy gains are slowing down, that is because there is not much scope for improving survival rates up to 60. Now, nearly everything is being driven by improvements in life expectancy beyond 70, so, although the average number has gone down, it is now much more around longevity rather than getting through middle age.

That is a rather complicated thing but, if life is getting longer, how do we solve that problem? It is going to be a combination of saving more, taking on more risk, working for longer or getting someone else to pay for it. They are the solutions. It is not easy. As Charles said, there is uncertainty around when you might die. Although we focus on the average, very few people die at average life expectancy. The distribution is shifting to above average, in fact, and there is a lot of risk. As Charles rightly said, the key is health.

There is a very complicated problem here, which is likely to revolve around lots of dimensions of solutions. I am always nervous about starting with savings because, if life is longer, other than saving early so that compounding hits in, saving just shuffles when you have resources and does not create additional resources. It is hard to avoid the conclusion that, for living longer, we need more resources over our lifetime. That is going to come from either productivity growth or people being able to work for longer. I am not necessarily talking about after the state pension age here; a lot of people drop out of the labour market from the age of 50.

Ultimately, the key will be investing in human capital and not just savings, which is why Charles’s point about health is so important. Also, how do we keep people productive and engaged for longer? Although the financial system rather likes to go straight to savings here, saving would just lower your standard of living when you are younger and give you more when you are older. That is just stretching things more thinly. We need more resources.

The Chair: There is a quick additional question.

Q20 Lord Turnbull: As you say, most people assume that they will not get a neurodegenerative disease or that, if they do, someone else will pay for it. A lot of people I meet have precisely the opposite fear. They fear that they will get one of these diseases and, therefore, they are hanging on to money a lot longer than they need to because they are in fear of eventually having something that costs hundreds of thousands of pounds a year.

The other thing you have to assume is that someone else will pay. We had a scheme, the doughnut scheme, which was supposed to eliminate this precautionary saving through fear that might be unnecessary, but that seems to have been junked and I cannot see it coming back very soon. Is part of the fact that the elderly are saving surprisingly large amounts a long way into their retirement because they fear that they will get deep into high-cost care requirements?

Professor Charles Goodhart: I think the answer to that one is yes. People are generally quite surprised by the amount that people leave after their death and think that, if they had known what their circumstances would have been, they would have consumed more and left less. In many cases, that is indeed out of fear that they might become incapacitated and be a burden on others. As you say, doughnut economics tried to deal with this but it was not brought about. We still need to have some mechanism of insuring against the danger of getting one of these diseases. Life is going to be very difficult. It may well be—in fact, I think it already is—that you can now test for the probability of getting some of these diseases, although there is no cure. Would you like to take that test?

Lord Turnbull: Probably not.

Lord Davies of Brixton: I have a quick additional question for Professor Scott. Can I interpret what you are saying as that there is a distinction between individual saving and the saving that the economy as a whole undertakes; and that there is a risk—was it Keynes who called it “the paradox of thrift”?—that, if everyone in society was saving enough to provide for their own, comfortable retirement, this would be massively deflationary. Do we know?

Professor Andrew J. Scott: Charles has written a book on this. For me, this is where the macroeconomics get challenging. If people increase their savings and fewer people are working, you will see a fall in the rate of return on investment because you do not need so many machines and capital stock. The return will get lower and there is more weight of money in markets, so interest rates go down. If we finance a longer life by having people working for longer—again, I stress that I am not talking about working in your 80s or 90s; I am talking about from 50 onwards—there will be greater demand for productive capacity because you have more workers. People will be able to fund their lifestyle more from what they earn, rather than from their savings, and you will get an upward effect on interest rates.

I am sorry to give you that two-handed economic answer but that will be the way we go. We will see slower growth and lower interest rates but, if we are productive for longer, we will see continued GDP per capita growth and stronger rates of return. It will be about which way the system goes.

Professor Charles Goodhart: I agree entirely with Andrew, I must say. The real key is to get more older people working productively; that is far more important for the growth and development of this country than whether they save a bit more or a bit less.

Q21 Lord Blackwell: I want to dive a bit more into some of the distributional trade-offs of an ageing society but I presage that by picking up on your earlier comment, Professor Scott, that there is a lot of focus on the older population having enough savings to carry them through retirement. However, as you point out, that does not create more resources. Output depends on the working population and its productivity. In the absence of productivity improvements or more participation, the implications of a higher dependency ratio are that there will be more people sharing the output and that, therefore—again, in the absence of those two things—GDP per head and income per head will fall. Presumably, the offset of that is that the working population will fight for higher wages because they will be in short supply. On the other hand, the ageing population can save more or may have saved more.

I am interested in how you think that will play out. Will it be the older population who are spending too much, as it were, and depriving the working population of a decent standard of living? Or will the working population be able to drive up wages?

Professor Andrew J. Scott: That is a great question; I will try to give you a good answer. A lot of my work says that we focus too much on the phrase “an ageing society”, which is very much driven by a demographic insight around not just falling fertility rates and people living for longer but the sheer size of the baby-boomer population. I just creep in as a member of that; it is a really big cohort. There is a lot of focus on change in the age structure of the population and there being a lot of older people.

My focus is on what I call a longevity society. We have not adapted our behaviour, social norms, cultures, policies and institutions to the length of life we can now live, which is why we need a longevity society. When you as a 20 year-old have a 10% chance of living to 90, it is not very useful to think about what will happen if you get to 90. However, as is the case today—the ONS says that over 50% of children will live into their early 90s—you have to think much more about your future and society’s future and invest more in those. My biggest worry is that an ageing society is always seen as a conflict between the old and the young, whereas what has changed is that the young can now expect to become the old. That is a fundamental change that we have to try to achieve; the focus on old versus young is very static, whereas a really big thing that has happened is that now, over the life-course, the young can expect to become the old.

I am very focused on how we invest in and support living longer. I will give examples. In the 20th century, we literally created teenagers and pensioners; they did not exist before the 20th century. My father was never a teenager. The phrase was first used in 1937. We have adapted the life-course in the 20th century. We have to think about how to adapt it in the 21st century. The focus on a change in the age structure misleads us from the really big challenge: how we support ourselves over this longer life.

Professor Charles Goodhart: You cannot properly talk about age structure without raising the unfortunately difficult and contentious issue of immigration. When I, with a co-author, wrote a book about what was likely to happen in this economy from about now onwards, we thought that there would be far fewer workers relative to the total population and that, as you said, the wage rate would then go up because workers would be short. What we did not see was the much greater inflow of immigrants, which has meant that the shifts in the age structure and the dependency ratio have been far less than we thought. As the proportion of workers declines because of the lower birth rate, it will inevitably mean that wage rates will tend to be raised. This will mean that a lot of companies—to take one obvious example, care companies for the old—will seek to get hold of and import immigrants.

I have spent too many years going around dementia homes but the care home where my wife is now is more or less entirely serviced by immigrants. That raises a problem. On economic grounds, there will be lots of cases for companies to encourage immigration, but that has political and social problems. You cannot talk about age structure without discussing the question of immigration, which is a difficult and contentious subject. It makes life even more difficult than it otherwise would be in terms of the analysis that you want to make.

Lord Blackwell: As you say, that is a contentious subject; we may come on to it later, but there are obviously social questions around that. The rest of the world is also facing increasing dependency ratios so the supply of young workers will be short.

Professor Charles Goodhart: Not necessarily—not in Africa yet. There are parts of the world, particularly in sub-Saharan Africa, where the birth rates, although declining, are still remarkably high. Again, Andrew will correct me, but my recollection is that the population of Nigeria will, in about 10 years, be bigger than the population of the whole of Europe.

Lord Blackwell: If we can leave to one side for the moment immigration as a possible solution, because that is another topic, given the analysis that says that, without a significant increase in productivity, we will be sharing the output of the economy among a bigger group with more dependence, can you see a feasible combination of productivity growth and greater participation that will maintain or continue to increase living standards?

Professor Charles Goodhart: Productivity growth has declined quite considerably. Productivity growth in the 1950s, 1960s and 1970s—even into the 1980s—was massively overexaggerated by the shift of women from doing work in the home, which did not count towards GDP, to producing goods and services. The shift in the female population went from about 25% of married women working around 1945 to something like about 70%, which meant that there was an increase of 50% of women, more or less. That is 25% of the population, and it led to a huge exaggeration in productivity and GDP growth.

That has now completely changed. Older people like me tend to be less productive: we forget things, and we are not as competent as we used to be. Given that the age distribution will go more aged, various things could increase productivity. Who knows what is going to happen with AI? The great advantage of AI for the old is that AI never forgets anything; it is a form of memory, which is what we lack as older people. So AI may be a great boon to us.

Lord Blackwell: Could I turn to regional disparities?

Professor Andrew J. Scott: Sorry—can I just pick up on something? First, by the way, Charles is the most wonderful advocate for being productive as we get older. There is a reason you have asked him here today; it is because of his knowledge, insight and experience. We have to be very positive about some of this.

Going back to your point about the number of older people, I just want to say empirically that we are always assuming this is a major challenge but, over the past 100 years in the UK, the old age dependency ratio has tripled. I do not have any economic analysis that says that has been a major factor to its long-run growth. Over the next 50 years, it is not going to triple; it is going to rise by 50%. I am not saying that there are not big challenges and big problems but this suggests that, in the past, we have adapted. Charles mentioned the huge increase in female participation in the labour force. There are things to do. We know that demography is not destiny, so there still are ways to improve things.

I know that you have been on about immigration but, if the current system is unsustainable and everyone takes more out than they put in, bringing more people in does not solve the fundamental problem—it just postpones it. The real thing we have to try to make sure of is that, as we are living longer, we are productive and healthier for longer; that can be a source of growth. I am sorry to interrupt.

Lord Blackwell: No, that is very helpful. It sounds like the critical relationship is between the growth in productivity and the growth in the dependency ratio. Presumably, over the previous 100 years, there was quite a big growth in productivity.

Professor Andrew J. Scott: Yes, but we also think we need to think a bit about what is happening to GDP, what is happening to my lifetime standard of living and GDP per capita. Those three things may behave very differently. Unless you are running public finances, which I am sure we will get on to later, the important thing to focus on, if I am living longer, is whether my standard of living is increasing on average every year of my life. That has to be the key welfare indicator that we look at as a society.

Lord Blackwell: Thank you. Can I briefly ask you about your thoughts on any regional distribution trade-offs?

Professor Andrew J. Scott: I do not think that there are trade-offs. What has been striking to me, in the 10 years I have spent getting into this topic, is just how relatively uninformative chronological age is. People age enormously differently. An often-used statistic is that about 80% of how we age this side of 85 is driven by environment and behaviour. That is a stunning number. It is both a cause for great optimism and a cause for great pessimism, I think. What that means is that any socioeconomic inequalities or challenges will be enormously magnified and compounded as we live for longer. In my work, there is a concept of frailty. You can take someone who has fewer years of education and lower wealth and who lives in the north-east and see that their frailty is about 20 years ahead of a person of the same age living in the south-east, with a high income and high wealth. If ageing is malleable, we can influence how we age, which of course has phenomenal potential, but frailty traces right back to regional and income inequalities, which just get magnified.

Lord Blackwell: Do you have anything to add, Charles?

Professor Charles Goodhart: Not really. I agree entirely with everything Andrew has said, naturally, but one of the things that I think is going to be a great improvement and advantage, and which we already have, is that we seem to be able to deal with obesity. Obesity is largely an affliction of the poorer members of richer societies. When it is possible to provide obesity-countering drugs freely to all members of society, that will help with regional inequalities. Again, Andrew and I agree entirely: do not focus on just chronology. Focus more on health. Dealing with obesity is one of the great advantages of improving the health of our society. Let us hope that it improves the health of our societies in all regions and at all income levels.

The Chair: Thank you. We thought we would ask a former Chancellor, Lord Lamont, to talk about the fiscal implications of this subject.

Q22 Lord Lamont of Lerwick: Can I start with Professor Scott? What in your opinion are the fiscal implications of an ageing society? What are the most cost-effective means to offset the costs of an older population?

Professor Andrew J. Scott: Forgive me; I made some notes on this because it was a good question but I cannot find my notes at the moment. If we focus on change in the age structure of the population, and we assume no changes in behaviour, you get the normal doom and gloom that is the first chapter of every IMF and OBR projection—although not recently; the OBR did change its projection.

Clearly, if you have lots more old people, and we do not change how we age, you have fewer workers, you have a bigger pension payment and you have a health problem. If things are unchanged, the public finance implications are bad. Again, I think you need to unravel two things. The first is changes in the age structure of the population. At different points in life, some people may be contributing to the public finances and some will be drawing out. If you change the age structure, you will see a shift in that. The second bigger challenge is that, if we are living for longer and we do not adapt our patterns of behaviour, we may see a structural problem begin to emerge rather than a long-run or medium-run financing challenge. What are the easiest ways of trying to solve this? It is about making sure people are healthier for longer and can work for longer.

First, I think that that is an amazing welfare outcome for people. What I worry about at the moment is that most of the attention on public finance is around raising the state pension age, which is a pretty ineffective way of solving the problem. In some sense, it may solve a public finance challenge, in that it will limit pension expenditure, but it does nothing to help people work for longer. At age 50, around 80% of people are in work in the UK. At age 65, which is two years before the state pension age, it is down to around 25% or 30%. If you have only that many people working at 65, increasing the state pension age does very little. From a macro public finance point of view, everything has to be focused on how to keep people working from 50 onwards. That is a combination of health and active labour market policies, because people who are doing physical work cannot carry on working beyond 50 in some cases, so you have to think about how to re-equip and reskill people. I think it will be about tackling ageism and broader skill provision. Those are the targets that I would look for.

Investing in prevention in the health system is crucial. At the moment, we need a focus on healthy life expectancy, as Charles said at the beginning. The fact that the main indicator of the success of the health system is the waiting list for operations is so far removed from the concept of health as to be a major challenge.

None of these things is cheap so, rather than looking at cost effectiveness, I would look at return on investment. I would start with the 50-to-65 age group, given that dramatic decline.

Professor Charles Goodhart: As you might expect, I agree with everything Andrew said. I would add that we cannot just talk about—though we should talk about it—making the old healthier, more capable and willing to work more. The stage has come where we also have to think about whether we can do anything to reduce the continuing decline in the fertility rate. It is down to about 1.4 in this country. In some parts of Asia, such as South Korea, it is under 1: 0.7. If you get down to that kind of level, you are talking in effect about the disappearance of your population within 60 years or so.

One of the things we also have to consider is whether there are measures that could be taken to prevent the decline in the birth rate from going any further, and maybe even to raise it slightly. I am not saying to try to raise it over to 2.1 again, because I think it would probably be a good idea if the population of the UK and the world was slightly less. However, in some countries, the birth rate is coming down to levels that are putting their societies at risk; it could go down in this country to levels that would do the same here.

As well as talking about how to improve conditions for the aged, we must also think about whether there are measures that could be taken to halt the decline in the birth rate or maybe even raise it partially. I should add that almost all the measures taken so far often have a small but significant effect for a year or two, then it goes on going down.

Lord Lamont of Lerwick: I want to follow up on Charles’s reply. You slightly surprised me because you have rather, by implication, downplayed the fiscal consequences. In your book, The Great Demographic Reversal, you said, “The fiscal costs of ageing will be enormous, particularly looking after the old and incapacitated. We are in for a fiscal crisis down the road, and we do not know how to solve it”. You also said, “Trying to do it by borrowing will simply overburden the public sector debt market and lead at some stage to a crisis”. Pressed on at what point this might manifest itself, you said in an interview, “I have no idea. You know that something is unsustainable, but you do not know when the dam will burst. In macroeconomics, things can go on pretty much as normal because that is what people have come to expect, and then suddenly something happens”.

Professor Charles Goodhart: The two points are not inconsistent at all.

Lord Lamont of Lerwick: I am just surprised that you did not mention it.

Professor Charles Goodhart: The reason why they are not inconsistent is that, if we had a much larger workforce, the output and tax revenues would be much greater. We would be able to finance the pensions and the care that the old need. There are two equal parts to this exercise. There are more old and fewer young, and the two act in exactly the same way to cause a fiscal crisis. It is not just that there are more old; there are fewer young. Without immigration, the number of people working in this country would go down and do so increasingly relatively sharply—as it has in Japan, for example.

Lord Lamont of Lerwick: I very much agree with what you are saying on immigration. Immigration will obviously be necessary to fill some of the vacancies in care homes and some essential jobs in the labour market. However, at the same time, is it not the case that immigration on a mass scale cannot alter or shift the dependency ratio unless you go in for huge numbers? I saw some studies the other day that pointed out that, in Norway, a country of under 6 million people, you would need total immigration up to 1980 of something like 40 million people to significantly shift the dependency ratio. Is the dependency ratio crucial here or not?

Professor Charles Goodhart: The dependency ratio is crucial, and immigration has been on a very large scale. The proportion of people in this country who were not born in this country is much higher. I do not know about any of you but, when I travel by the Underground, most of the time I do not understand the languages the people next to me are talking. London has become a completely international city—more international than any other city that I have ever been in—and most of the people I travel with on the Underground and on buses are not English-born. The world changes, and people do not like that change; that is why it is so politically contentious.

Lord Lamont of Lerwick: Yes, but that change, which they do not like, may still be having only a marginal effect.

Professor Charles Goodhart: I do not think it is marginal.

Lord Lamont of Lerwick: Could I just quote another study that we had put to us? It said that, if Canada doubled its population, the old age dependency ratio would still continue to rise.

Professor Charles Goodhart: It will rise because there are so many more old, but it will not rise nearly as much as if we did not have immigration. The immigration rates are historically very high. Historically, they are the kind of levels that have in almost all countries, such as the USA, led from time to time to significant anti-immigrant political backlash.

Lord Lamont of Lerwick: Lastly, taking your book and the forecasts—the prognostications—you have made about savings, is not one of the implications that interest rates in real and monetary terms are likely to rise and be very different from our past experience?

Professor Charles Goodhart: One thing that we really got wrong when we wrote that book—it was written in 2019—was that we thought the levels of immigration that were then current would remain the same or be lower. In fact, the level of immigration after the Covid-19 pandemic was dealt with was much higher. I do not have the exact figures, but I think it was about double the levels that we had before.

Lord Lamont of Lerwick: What about interest rates?

Professor Charles Goodhart: One of the reasons why we thought interest rates were going to go up was that, as we discussed earlier, as the workers become scarcer, supply and demand means that they can bid for and get higher wages. As they get higher wages and productivity per head does not increase, inflation tends to rise and interest rates rise. That, again, causes problems because interest rates will rise relative to growth and that will cause fiscal problems.

Lord Lamont of Lerwick: Professor Scott, I am sorry, I did not mean to cut you out. I do not know whether you want to comment on any of that.

Professor Andrew J. Scott: If you focus on an ageing society and a change in the age structure, one quickly goes to immigration to smooth out the age structure. If the fundamental problem is that we are not being healthy and productive for a longer life, that is the fundamental challenge we have to address. Immigration may buy you time in that adjustment, but it does not solve that adjustment. That is where I start from. I tend to agree with you: if you are trying to fill out the gaps, the level of immigration required in many countries is too large for the society or population to adapt to, for reasons good or bad. However, I also do not think it addresses the fundamental challenge, which is not that we have too many old people but that we have not set up our institutions to invest in order to ensure that life is not just longer but healthier and productive for longer. That is the key issue that we must focus on.

Q23 Lord Burns: Going back to one of the earlier questions put to you about the implications or costs of the last 10 years or so of people’s lives for healthcare and social care, have those gone up significantly? Is there any evidence? Do we have any analysis of the extent to which, as people are living longer, the last 10 years are more expensive? I have a second question, but can either of you point us in that direction? There was some suggestion in what was said earlier that, because of the issues that might occur with people in age, there are increases in the cost of those final, in a sense, 10 years.

Professor Andrew J. Scott: Looking at the literature rather than at my own work, which I have not done in this area, there seem to be two separate conclusions that I can draw. The first is what in the literature is called the “red herring effect”, which is that the final years of life have always been expensive. As we are living longer, they remain expensive. For understandable reasons, at the end of life, people are prepared to spend a lot of money because hope and optimism are worth something to us. There has not been, in that sense, a major change.

What seem to be more dominant as having an economic cost are the implications of caring; that is why it is particularly important not to look just at people aged over 65 but at the over-80s, where you see quite a shift in the caring challenge. The interaction between work and caring is a really important way through which this ageing society has an effect on GDP. Given the fall in the fertility rate and the rising number of older people, that to me seems a key policy and private sector issue.

Professor Charles Goodhart: There are not enough care homes in this country. One of the problems of the NHS is that old people who cannot look after themselves and have nowhere to go take beds. They are bed-blockers. If it was not for them, the problems of the NHS would be far less. We do not have enough in the way of care homes. I do not know whether the real cost of running a care home has gone up or gone down over the past 10 years; it is not a subject that I have done any work on. What I do know is that we are not spending nearly enough money on care homes because, without spending money on care homes, the NHS will not work properly.

Also, because of the cost and the shortage of care homes, as well as the failure to deal with the Dilnot reforms, there is a huge amount of private informal care. It is only when you get to the stage where you are almost totally incapable that you go into a care home. Most care for the old is done within the family, in the home—usually by the partner—and that is not counted in GDP. It should be. An enormous amount of informal care is done. There is probably more informal care done within the home by elderly husbands and wives than there should be. It can be a total blight on living in your 80s. There is not much point in living longer if it is going to be either being incapable or spending your life looking after somebody who has become incapable.

Lord Burns: We will move on to the question of what we might be able to learn from other countries. The case that is often put forward is that of Japan; I would like to explore whether there are any lessons to be learned or traps that can be avoided. Both of you have suggested that there may be rather less to be learned from the Japanese case than might be thought. For example, one of the escape valves for Japan has been offshoring, whereas, following on from the present conversation, you cannot easily offshore care working. Is Europe currently in the front of the knowledge curve on this whole question or are there things that we really can learn from elsewhere, such as how to avoid mistakes?

Professor Andrew J. Scott: It is a question that I am always asked; I wish I could have a good answer for it. It is normally Japan or Singapore that is mentioned. They are probably the right places to refer to, but I would say that everyone is trying to work out how to achieve this. If I go back to my two different dimensions—the change in the age structure of the population and increases in life expectancy—those are very different challenges. They will also be very different in different countries. In Japan, for instance, the birth rate has fallen so quickly and so far that it has a falling population and a really big increase in the number of older people.

Whatever achievements that we can do through what I would call the longevity society agenda will be swamped by the fact that we have a lot more older people and fewer young. In the UK, because our fertility rate trends have been slower to change—they have happened over 200 years and have fallen less—and we have had more immigration, we face a very different set of issues from Japan. However, Japan is worth looking at for several reasons. The first is that, if you look at GDP per capita and not GDP—it is important to do that—Japan has done a pretty good job, given how dramatic its changing age structure is. The question is: how has it done that? One of the things that people often forget about when we come to how an economy finances more older people is that we talk about saving but we do not do depreciation. You just say, “I do not need such a large capital stock because I have fewer people”. So you eat your capital. We have seen that in Japan but we are probably less likely to see it in the UK.

Where Japan has done well is in finding ways to keep people in employment for a few years after what used to be the state pension age. It has created a much more flexible working practice that may sometimes force people to work but is more about how to create an environment where people want to carry on working in a flexible way. The notion of retirement as a hard stop is beginning to dwindle. People are beginning to work much more part time. The way I see it is that, in the 20th century, we took a lot of leisure after retirement, but, in the 21st century, we will see a bit more leisure being taken this side of retirement—whether that is younger people starting careers earlier or older people working part time in their last role. Japan has done a very good job with that.

The other thing that is interesting in Japan—it goes to the issue of inequality—is that it has very high life expectancy, with much stronger life expectancy trends than the UK, but it does better on healthy life expectancy. That is partly to do with it having less inequality as well.

Professor Charles Goodhart: Japan is an excellent example to us. The basic figures in Japan are that its working population is going down by 1% per annum and its output is going up by 1% per annum, which means that its productivity per worker is going up at 2% per annum. This is far better than almost any other western advanced economy. Japan is streets ahead of us. People tend to think that, because Japan is growing slower in aggregate, it is somehow not doing very well. In fact, it is doing brilliantly in productivity per worker, which is the crucial issue.

I get very upset in listening to the Government’s emphasis on aggregate growth. With a declining working population, growth is likely to remain very low, if not decline. What you can improve is productivity per worker and getting more of the old to work, as Andrew was saying. That is what you can do. If you are going to have a declining working population, particularly if immigration goes down, you cannot—unless there is a miracle—expect to have faster growth. In a sense, the Government’s focus on aggregate growth is misconceived.

Lord Burns: What are the specific lessons that we might learn from the Japanese case?

Professor Charles Goodhart: I am like Andrew in this: I wish I knew more about Japan. It is a very different society in many ways. I do not know enough about Japanese society and how it runs its system to be able to answer at all properly. I cannot do it.

Q24 Lord Lamont of Lerwick: On whether we should look at Japan as doing quite well, given the circumstances or not, I saw that the Prime Minister of Japan was quoted in the Financial Times as saying, “Japan is standing on the verge of whether it can continue to function as a society”. That seems a pretty alarming and chilling thing for a Prime Minister of any country to say. Are you so sure that some European countries are not going to go the same way as Japan? There are predictions that the population in some southern European countries, such as Italy, will soon go into decline. I am interested in what you think will be the differences, compared to the challenges we now face, if we have a shrinking population. What will that do to the dependency ratio?

Professor Charles Goodhart: You are exactly right. South Korea is far worse than Japan. If Japan’s society is going to break up, South Korea is going to run into severe problems pretty soon. That goes back to my point about fertility, rather than just worrying about old age. The problem with Japan and South Korea—and, potentially the problem in any European country, including our own—is that, if fertility and the replacement rate are significantly below 2.1 for long, this ultimately leads to an implosion of society.

Professor Andrew J. Scott: I would like to add to that one. I am so glad to see that the debate is beginning to shift when you mention an ageing society from the problem being that there are too many old people to saying, “Well, there are not enough younger people”. The declining fertility rate is striking. It is interesting that most policy initiatives view the fertility rate as something to change in order to safeguard social security institutions. We probably need a much greater understanding of why people choose to have fewer children. I do not think it is a good policy to try to get people to do something they do not want to do. The question is: how can you create an environment where people do want to have children? It is striking to see that fall.

There are several issues here: living longer, which we can adapt to; a change in the age structure of the population, which leads to some temporary problems that could last 30 or 40 years; and declines in the population. When you have big declines in the population, the ability to provide public services and so on becomes sorely threatened, particularly when you have migration patterns. That is a really big problem. Ageing societies and falling populations are a big challenge. That is what marks out Japan as different from what we have in the UK. We have a more modest ageing society and, at the moment, we do not have a declining population.

Professor Charles Goodhart: That is because of immigration. We would have a declining population fairly soon without immigration.

Lord Blackwell: I want to pick up on your point, Professor Scott, on the increasing proportion of the working population who will be needed to provide caring services. As you and Professor Goodhart say, the important thing is GDP per head. As we discussed earlier, a higher dependency ratio means, in the absence of productivity improvements and participation rates, that the output of the working population is being shared among a bigger group. If more of those working people are required to do caring, the number of people left to produce the goods and services that we currently rely on for our standard of living is even smaller. I understand that it means that, the more people who are needed for caring, the higher the productivity improvement or participation rate increase that is needed to maintain the standard of living—or the things we currently think as part of our standard of living.

Professor Charles Goodhart: Exactly so. I believe—although I would not like to swear by it—that, in Japan, the proportion of the workforce in caring activities is 20%.

Lord Davies of Brixton: One of our previous witnesses pointed out that increasing the fertility rate, which people talk about, is a long-term strategy. The first 20 years makes the problem worse because there are more dependants who are not being productive. You need a longer-term perspective even if we find that magic formula, which no one has managed to find yet, to increase the birth rate.

Lord Turnbull: It is a slightly different way of looking at this boundary between caring and working. If we take a group of largely women, now highly educated, who have worked for 30 years very productively but are suddenly faced with reverting to becoming a carer. For society, the best solution may be that they carry on with their work but we bring in a carer who will do the work for half the price and half the sacrifice of GDP of requiring professionally qualified people to withdraw into a caring role. That is a good use of immigration if it enables us to keep highly productive people carrying on working in highly productive roles.

Professor Andrew J. Scott: I want to back up a little. I will answer the question, as I think it is a really important question, but one of the things I find so interesting about this phenomenon of ageing is that, when it comes to AI and climate change, we are prepared to talk about really quite radical adaptation and adjustment, but, when it comes to ageing, we do not think about how to keep people healthier for longer and how to minimise the caring burden if it is going to be such an economic cost, as opposed to how we can meet it most effectively and cheaply. I am not saying that a policy does not require everything across the fold, but this is where investing in prevention is so important.

I mentioned earlier the socioeconomic determinants of healthy life expectancy. You can reduce the amount of caring that is needed by keeping people healthy. You can also enable GDP to be supported more by introducing more flexible working practices. Not all of this is a government responsibility; I am seeing some of it happen already in the private sector as it starts to experience a shortage of workers. It will have to be about flexible working. Also, how do we go about minimising the ill health of people and their original caring needs? We know that there is a lot we can do to keep people healthier for longer.

Professor Charles Goodhart: May I give a personal response? One of my nieces is a very highly trained practitioner in psychotherapy and things like that. Her husband has developed MND—motor neurone disease. She wants to look after him; until very recently, when he reached a very rough stage, she did. If one of your family gets one of these diseases, your immediate response is to look after them. It is a human response. On the idea that I will go on working and bring in a carer, I understand the logic of it, but it goes against the human relationships that we have. Yes, we can do it to a degree, but we must realise that, when one of the family gets ill, the family tends to coalesce around trying to help.

Q25 Lord Londesborough: Can we come back to this crucial objective of what can be done to encourage and support people to remain in work for longer, particularly in light of what Charles has said about our productivity problems—that we have barely seen, certainly across western Europe, any movement on productivity per worker as measured per hour in the last 15 years? What can the Government do to promote people working longer into their 50s, 60s or 70s and what should employers do, or what should Governments do to encourage employers, to show less age discrimination? Do not recent technology advances—to use a very basic one, remote working from home—open up a new area of opportunity for those between 55 and 75 to still be in employment or certainly in part-time employment?

Professor Andrew J. Scott: I think it is crucial to focus on 50 up to the state pension age. If you are going to raise the state pension age, you must support people to be able to work for longer, not just say “You have to work for longer”. How we do that and who does it will be a mixture of government and state. I want to emphasise health and prevention in particular. If people leave the labour force at 50-plus, it is very hard to get back in again, so keeping people working in situ in their 50s is crucial. Some of that is around health. If you have a heart attack at 50, you are six times more likely to leave the labour market than if you do not. There are relatively straightforward and new versions of moderate statins and Charles was talking about obesity drugs, all of which I think will help people stay in work for longer.

The other thing is that the labour market has adapted well to the number of older people. If you look across the OECD countries, on average about 75% of employment growth—and it varies from country to country—over the last 10 years has come from workers aged over 50. If you go back to what we have been saying about productivity trends, that means that GDP growth is now mainly the consequence of an increase in people working from 50 up to the state pension age. Making sure that we maximise that channel seems to me politically fair. I do not think it is fair to say to people: “You must work for longer but I am not going to keep you healthy or productive for longer”. That seems a really bad social contract. A focus on prevention is utterly key.

The other thing to point out is that work has become more age friendly. I have done a lot of empirical work on this. You tend to find that older workers prefer work that is more flexible, gives them more autonomy and is less physical. Labour market trends have been quite supportive of those age-friendly jobs. Some of that is simply the way in which the market has gone anyway with technology and some of it is that firms are increasingly thinking about how to adapt the workforce because they will get fewer and fewer younger workers and will have to keep more and more older workers.

What can the Government do? They can absolutely focus on prevention and health, with active labour market policies, which we tried at other ages and they can be successful, to help people transition from one role to another. There is a tendency to assume that older people cannot adapt and change and, to be honest, there is not that much evidence to support that. In particular, as I said earlier, if you are doing a physical job, to be expected to carry on doing that after 50 may be very challenging. It is easier as an academic to carry on in the role for longer. How do we support people to shift from a job that may not be age friendly to something that is? I am not talking about retraining people so that they become economics professors but there are lots of skills that people have that can be repurposed into other areas.

Technology will be helpful. Charles picked up on this earlier. In Asia there is a lot of use of robotics in manufacturing, because it tends to have an older workforce and robotics really help support the productivity of older workers. I also agree with Charles that things such as AI can help as well.

Some of the employment trends may be supportive for older workers. Ageism is definitely a challenge but I go back to the fact that if the majority of employment growth in the last 10 years has been in workers aged over 50, although ageism definitely exists, it is a more subtle and complicated issue than just that older workers cannot be employed.

Professor Charles Goodhart: Andrew is the world expert on this issue and I have nothing to add. I agree with everything he says.

Lord Londesborough: Do we have any examples internationally? We have talked about Japan and South Korea, but which countries have set the pace in being most supportive to having older worker engagement? Is it all basically happening in Asia or do we have any examples in Europe, in countries such as Italy, which has a very low birth rate? You would think they are already under more pressure than we are in the UK to address this matter.

Professor Andrew J. Scott: Italy definitely has the falling population problem that makes things very complicated. It is remarkable how the labour market has already absorbed lots of older workers without noticing it. It is quite phenomenal, with the demographic ageing that has occurred, the number of workers from 50 to 65 who have been absorbed into the labour market. It is really quite impressive. I am not saying that markets solve all problems, but it has certainly tackled some. The challenge, of course, is that you will have problems around inequality because people with resources and education tend to be able to adapt and adjust much more easily, hence my comment about active labour market policies.

What you are seeing in some countries, and Singapore is the obvious example here, is a forward-looking case to say, “How do I help people in their 45s and 50s and what works?” We are beginning to see some of that in the UK. Manchester and Newcastle are leading the way in some of these local experiments. That is a really important thing to see happen in the UK. We have never had to deal with these two problems—the length of life we can now expect and the number of older people—so we need to do some experimentation. We can look around to find out what is happening, and we talked about Japan and its ability to support workers after retirement age, but I think we also need to do some regional experimentation to find out what works, which is what Singapore is doing.

The Chair: In what respect are Newcastle and Manchester leading?

Professor Andrew J. Scott: They have a lot of local initiatives around the ageing society and trying to find out what keeps people not just working but engaged, healthy and having a good life. Although I am an economist and I keep coming back to economics, the challenge we have is that how we age is the most important and personal thing and it needs to change pretty rapidly. It is about having a good life, not just about the economy. You are seeing a lot of local experimentation through groups in Newcastle and Manchester, just literally finding out what to do at a local level that will work. I think that is really promising.

Q26 Lord Davies of Brixton: Professor Scott’s recent answers have addressed a lot of the issues that are raised in my question, which is about what we do about changes in productivity as people become older. There is an assumption that our productivity falls as people get older. Do you think that is actually a phenomenon?

Also, we have had discussions with the ONS about how we measure productivity and it has significant problems there at the moment. Perhaps, as people become older, the sort of work they do is less amenable to accurate measurement of their productivity, plus the issue raised by Professor Goodhart about the extent of family care. The whole issue of older people’s productivity is possibly open to question. Do you agree? That is coupled with ageism, which Professor Scott talked about, which is clearly a big problem. To what extent is the problem self-imposed ageism—that people’s expectations mean they are not as productive as they could be? How do we address that?

Professor Andrew J. Scott: On the relationship between age and productivity, I do not want to sound too professorial here but it is super complicated. The simplest punchline is that there is surprisingly little empirical support for the very widespread opinion that productivity automatically declines with age, from an early age. It is really complicated. It varies enormously from sector to sector, from occupation to occupation and from individual to individual. In general, the effect of education is more important than age and I think that is one reason why we have a stereotype that older people are less productive; historically, my grandparents left school at 12 and my parents at 14. They would not have had much education. We are now seeing older people with, on average, much more education. There are a lot of different issues here behind the stereotype but clearly, if you are doing something that is highly physical, there comes a point when your productivity will decline.

What is interesting is that there is no one age at which all your skills peak. Some skills peak at a younger age. I am well past my physical prime, but there is also experience. There are a whole bunch of different things and people’s skill sets shift as they get to the thing that is most important. As we see a broader range of skills and ages in the workplace, we will see some of those new roles and shifts come to the fore. What is absolutely clear is an “If you don’t use it, you lose it” result. With numeracy and literacy, if you keep using those skills you can maintain them. There was a very strong, interesting paper based on German establishment data recently that shows that very clearly.

You talked about internal ageism. At 59, I probably need to think about my life differently from my father and my grandfather at 59 because, if I look at the life expectancy trends, I have more time ahead of me. That is one of the bigger challenges we face in rethinking age. I do not want to wax too lyrical on this point, but I have recently discovered something fascinating. The Elizabethan Poor Laws—I do not know how far back you want to go in this House of Lords inquiry—were set up to relieve people in poverty and people who were old, but old age was not defined chronologically because they simply did not know what people’s chronological age was. Old age was purely defined by, “You have been around for a long time and you now cannot look after yourself”. That was the definition of “old”, so there was a test of whether you could look after yourself. That was very invidious. People did not like it, so we switched to chronological age, and one of our really big challenges is that we define ourselves through chronological age. As we are changing how we age—there is a lot of evidence that people are healthier for longer—and as we see the diversity in how people age, that is a real problem.

The paradox of ageing is that, the more interested we get in ageing, the less useful chronological age is as an indicator, which is why we must be very careful with the assumption that with lots of people aged over 65 we are inevitably heading for a problem. Auguste Comte said that demography is not destiny. Chronological age really does act as a blocker for policy purposes. People are really different at all ages and we tend to think that under 65 we focus on socioeconomic outcomes and that over 65 old age defines everyone. I do not think that is the case any more.

Professor Charles Goodhart: I agree with almost everything that Andrew has said, except that if we all live and work longer there will not be a fiscal problem. I think there will be a fiscal problem because those over 65 will get pensions and, unless we deal with the health problems as we get older, the proportion of the population who cannot look after themselves rises quite dramatically. The problem of old age, going back to what I said at the very start, is not chronology. I agree entirely with Andrew on that. It is health. Many of the economic models that I see, and many of them are largely nonsense, imply that you work for so many years and then you retire for so many years and at the end of that time you just die. There is no health in it at all; there is none of that.

It is not like that. As you get into your 80s, particularly nowadays, the proportion of people who cannot cope starts rising dramatically and it is not worth thinking that you can get out of this fiscal problem as long as that continues. Andrew is absolutely right—do not think about chronology but do think about health. Health is very strongly related to age, certainly at the moment.

Q27 Lord Burns: A very recent report of this committee looked at the whole issue of labour markets—the withdrawal from the labour market and the relationship of that to disability. One of the things we found was that the data is in quite a mess. Here we are talking about how we keep people working from 55 or 50 onwards and yet there seem to be problems in getting people working at younger ages. People in their early 20s seem to be withdrawing from the labour market, some of it possibly a health issue. The most recent short-term effect has been that the over-50s post-Covid have not got back into the labour market in the way that we had hoped.

All of this is caveated by the fact that the data is in a mess, but do you have any observations on how some of these longer-term ambitions relate to the real worries people have in the short term about our failure to adjust to Covid? An earlier report of this committee was called Where Have All the Workers Gone?, and that was some years ago. You are almost saying that there is this requirement in the longer term for some big changes in keeping people at work, and yet there also seem to be short-term problems in keeping age groups who should be working today in the labour market.

Professor Charles Goodhart: You are absolutely right. There is a health problem, and in particular a mental health problem, which has grown and is now greater than it used to be and I do not know why.

Professor Andrew J. Scott: The data is incomplete, so it is hard to know why this is happening, but we do seem to be in a very regressive direction compared to what needs to be done. The distinction you have drawn is important. Often when we talk about an ageing society we go straight to thinking about older people, but my perspective is about longevity. The real change is that the young can now expect to become old, which is quite a new thing in human history. Most people did not expect to get to 70, let alone 80 or 90. Therefore, a life-course approach is important.

In the UK, trends in mental health and musculoskeletal challenges at younger ages are an enormous problem, not just now but longer term, which again goes back to my belief that, with an ageing society, the integration of health and the economy gets ever stronger. We are used to the notion that in an emerging market if you invest in health then it is good for growth and that healthy younger people means you have a good pipeline of workers. That is what we must realise will also happen when we have an ageing population.

One of the remarkable things that has achieved this ageing population is the medical system’s ability to keep us alive for longer. That is fine, but when you start to get beyond the age of 50, when diseases become chronic, keeping people alive does not keep them healthy. We need a fundamental shift in our health system that focuses upon health and not disease. The fact that we even call it prevention shows you how strongly focused on disease the health system is. We must focus on health. Not only is that important for us, going back to all the discussions we have had on a personal level—Charles’s experience, and I am here because my father-in-law has just passed with dementia—but health is incredibly valuable in its own right.

As we are living for longer, there is a big shift in the health challenges we face and we are not seeing an equivalent shift in our health system. Health is key as a welfare measure but also will be crucial for the success of the economy. Bringing those two together is something we will have to do macroeconomically. I was delighted that the Office for Budget Responsibility recently did a report that, rather than say, “Oh, look there are all these old people; there is going to be a problem”, said, “If we can improve the nation’s health, look at the benefits to GDP”. That link will have to become incredibly important.

Q28 Lord Liddle: Professor Scott, you put a lot of emphasis in your earlier remarks on designing more effective active labour market policies to keep more people between 50 and 65 in the labour market. Then we have this problem of our younger people, 25% of whom do not gain any significant qualifications and 10% of whom are NEET, with all kinds of problems. Is there also an argument for trying to devise active labour market policies for these younger people, of which perhaps a significant element would be trying to get them into care roles for the elderly?

Professor Andrew J. Scott: You can see a sort of matching going on there. It is very important to recognise that the demographic story of an ageing society says that the problem we have at the moment is temporary, but will last for decades, of too many old people and not enough young. But, as I say, the more fundamental challenge is that we have not adapted to the length of life that we have. Of course the young today will face, if you look at current trends, longer lives than the generations before. If they have ill health, whether it be mental or physical, or a chequered employment history because they cannot get good work, the long-term consequences are huge. With a longer life, you have more chances to give people the opportunity to recover, but if you do nothing the problems compound over time. This is absolutely not just about what you do with older people. You must focus on younger people. I agree with you about active labour market policies.

The other thing that will be important here—this may have government policy implications but also big private sector implications—is that if more older people work it does not create unemployment for the young, just as when women entered the workforce it did not create unemployment among men, but what it will do is change the structure of organisations and work. If you have very hierarchical organisations, you may start to form career blockages at younger ages. How do we create more flexible structures and more age-diverse committees, including this one, and how do we get that represented? We used to have a demographic structure of a pyramid and now it is a tower. In Japan it is an inverted pyramid. We have much greater age equality at all ages but how we create social institutions or design policy institutions so that age equality is represented is a fundamental challenge.

Professor Charles Goodhart: There will have to be a lot of change in our occupations over time—due to AI, for example. Almost all the technological changes in the past have replaced muscle strength. AI is replacing memory and brain knowledge, so it will change the structure of society very considerably. In future I think that universities will be less useful because they are teaching how to think and a lot of that will be in AI. We will need much more in the way of apprenticeships so that people can be mechanics, nurses and technicians of various kinds. If I had a 20 year-old and was asked whether they would do better to become an accountant or a plumber, I think the answer would be a plumber. Accountants will have their jobs removed by AI and you cannot get a computer or anything else to deal with a blocked lavatory.

The Chair: Thank you for giving us the most interesting quote so far.

Q29 Lord Turnbull: We started, Charles, with your dichotomy between life expectancy and healthy life expectancy. I think we have come through to a kind of four-box analysis of it. Let us call box B the most numerous: healthy and working. Above it is the box that Professor Scott has talked about: healthy but, as they get to the top end of that range, at 65, working less and less. Then you have box D, which is people who are dependent and also not working. I would add what we might call the Burns little box, which is younger people who are healthy but underemployed and not fully engaged in the labour market. What can you do?

Most of the attention and optimism has been around what I would call box C, which is people who are healthy but are retiring too soon. The first thing to do is to try to encourage them to stay working longer. Rather than talking about supporting them after retirement, you support them from one job into the next job. What policies could we do? One is to look at all those early retirement incentives in pension schemes and tax. That is still all 1960s stuff. When they want to reduce employment the first thing a number of employers say is, “Let’s have a trawl for early retirement”. That may be the wrong answer.

To get more people, the most productive seam is this “healthy but not working nearly as much as they could”. At the young end there are a lot of people who are not getting the right qualifications; they get into the gig economy and do not have a good relationship with an employer. I think a lot of them get quite disheartened and it is doing a lot of damage to their mental health. They need a lot more support as well. Each of these blocks needs further work but I suspect we are right in thinking that the fall-off from 50 to 65, which Professor Scott started with, is probably the thing that we can do most to change and will have the most benefit.

Professor Andrew J. Scott: It is the nearest thing to a macro free lunch that I can see. Early retirement may often be a choice, but it may be ill health, having to care for someone who is ill, or skills being out of date or perceived to be out of date. There are a lot of deep issues to tackle there.

Going back to the question of younger people, I have done a lot of studies of the ELSA dataset in the UK, which looks at people from the age of 50 upwards. If you look at how they age, everyone roughly ages at the same rate but the level they start from is really different. If you want to do something about how people age, you can do it when people are 60, 70 or even 80 but you really must go further back to tackle some of these issues. That is why I think that this focus on longevity is useful, because it says: “Wow, I have more time ahead of me. How do I make sure that I”, or the population, “will survive for longer in good health and be productive?”

That is the critical one for me, but, if you are looking for large numbers, perhaps the easiest one to act on is 50 to 65. I go back to the figure that, at age 50, you are six times more likely to leave the labour market with a heart attack. If at age 49 you can stop that 50 year-old having a heart attack, you can see quite quick impacts in the labour market. Of course, if you can make the 48 year-old more likely to be in the labour market at 49, you make the impact at 50 even bigger. This is the thing that we have to grapple with when we come to an ageing society. It is about younger people and not just the older people.

I gave a talk to a Chinese business school recently, some executive MBA students, all around their early 30s, and I showed them China’s demographics in 35 years’ time. You have probably seen it; it is very dramatic. The population falls by 400 million and 45% of the population is aged over 65. I asked them how they felt about this and they said, “Oh, it is terrible”. I asked why and they said, “There are all these old people. They are a problem. They get ill. They need a pension.” I said, “Who are these old people?” and they said, “Well, they are old people”. I said, “No, they are you”.

That is the remarkable thing we have to grapple with in an ageing society. We always think of older people as being the other, but the real change is that the young can now expect to become old, which requires a big life cycle perspective on lots of issues, whether it be health, education or employment. If we are going to change how we age, we have to think early. That is where things such as government debt restrictions become a challenge. If you want to invest in prevention, you will see some benefits within the first few years but they tend to come through after more than a five-year period. There are a lot of big challenges here.

Lord Turnbull: Is it a cause of optimism that many people who are finding it difficult to leave one job and move into another ended their lives in pretty heavy manual factory-based work, and there are fewer and fewer of them? Now people will be probably in the service economy and having to move from one bit of the service economy to another bit of it. This whole business about physical labour may be less of a constraint and it is more about what is in people’s heads and their expectations of what they can do.

Professor Andrew J. Scott: Yes, and possibly experience becomes more valuable too, although it cuts different ways. I have done some work on what I call age-friendly jobs with Daron Acemoglu and Nicolaj Mühlbach. We looked at the US, where something like 90% of the jobs created over the last 10 years fit into the category of age friendly, so the labour market trends have been supportive. I think Charles said at the beginning that there was good and bad news about an ageing society. We do often focus on the negatives but there are lots of ways in which society has adapted and is adapting and adjusting—not fast enough, but there are some signs of it being positive.

Professor Charles Goodhart: When you were 25, Andrew, did you ever believe you would get to the age of 75? I do not think I ever did. One of the important issues relevant to the young and to fertility is housing. If you cannot afford a house and have to live with your parents, it is very difficult to get married, it is very difficult to change jobs and in many ways it is rather soul-destroying. If we can make housing a lot more available and a lot cheaper, that will help with fertility and the conditions of the young. It will also help with changing jobs, because to change jobs you often have to change where you live. At the moment, with the housing shortage, the cost of housing and silly old stamp duty, it is extremely difficult and expensive to do that.

One of the things I really want to do is to change the structure of taxation from taxes on incomes to taxes not just on every asset but on land. A lot of the cost of housing is not the cost of building the house; it is the cost of the land on which it is placed. In a crowded society, small country that the UK is, the cost of land is effectively enormous. If we tax it, the cost will come right down and the cost of housing will be a lot less. We need to get away from stamp duty, get away from the present structure of council tax and introduce a land tax around the country. That will help a lot of our problems. It will help with fertility, job change and even the conditions of the young.

Lord Turnbull: I think you are creating the next task for this committee. To answer your question, at 25 I did not even ask that question, but I do remember at about that age I went to a football match at Wembley, England versus Scotland, and I came home and said to my mother that the greatest thing was that this old woman ran on to the pitch. She said, “How old was she?” and I said, “Oh, between 45 and 50.” She was not very pleased with that answer.

Q30 Lord Lamont of Lerwick: You have both been terrific and made us look at it in a rather different way and not too negatively, but I am slightly concerned. We are the Economic Affairs Committee and I am slightly concerned, notwithstanding your remarks about land tax, about the fiscal problem that we have. The OBR alarmed a lot of people by saying that on the present trajectory—of course, it could mean a lot of things—the debt to GDP ratio could reach 270% by the 2070s. The world we are facing seems very different from the post-1945 world where debt to GDP was 250% and came right down to around 40% by 2010, but that was against a background of baby booming and the Berlin Wall falling. The world helped that happen.

Without being unduly pessimistic, it is quite possible, as I think you hinted in your book, that interest rates will be higher than the growth of GDP. That does not seem deeply pessimistic or improbable, and yet, without a primary surplus of 1% of GDP, debt is going to go up very sharply. This is a very serious situation, is it not?

Professor Charles Goodhart: It is indeed, and we have the added problems of the greater need for defence expenditure and of dealing with climate change. One of the issues, as I am sure you are well aware, is that our way of charging companies for electricity means that they get charged much more than almost anywhere else, so we are in a sense shooting ourselves in the foot a bit. There is no point in being net zero if in practice you import stuff from countries that use much more fossil fuels. That does not help the world.

Yes, we are potentially in a serious situation in which the rate of interest is greater than the rate of growth. This is all relatively new. At an American Economic Association meeting, a presidential speech was given by Olivier Blanchard, an extremely eminent and very good economist, who argued that until about 2019 growth had been greater than interest rates. With growth greater than interest rates you could go on running deficits for ever and it did not matter. Now that has changed dramatically. If you get this shift in interest rates rising for one reason or another, they could rise quite sharply. What is happening in America is likely to lead to a considerable upward shift in yield curve. Long-term interest rates have been going up and growth rates going down. It is more dramatic in America now than almost anywhere else but it will have its effect on the rest of the world. We are in an extremely difficult situation. What are we going to do about it?

I think it will be a severe problem. The scale of the adjustment needed is very great, and the problem is always that the problem of dealing with ageing and the rest will occur relatively slowly over time. That means you can always put it off and it is easier to put it off than to deal with it. It is not made easier by what is happening in the US at the moment. It is actually made a lot more difficult. So where we are going to go? I do not know.

One of the things we have to do is to change the structure of taxation from those that adversely affect the willingness to work and invest and put it on, again, land, which has no adverse effect on productive potential. That is one of the great advantages of it. It is one of the bees in my bonnet, but we have to change the structure of taxation to deal with the present problems.

Professor Andrew J. Scott: I do not want to be too Panglossian here because I share Lord Lamont’s concerns about the future of public finances. However, I will try to add a little ray of sunshine. I think that Charles implicitly referred to it earlier. There was an economic adviser to President Nixon who said that something that sounds sustainable will not carry on for ever. The question is: how does it not carry on and does it end in a public finance disaster, or do we adapt and change our institutions to avoid the problem? As Charles said, the challenge with demographic change is that it is a very slow-moving phenomenon and it is better to get ahead, but the political incentives are always to delay things.

On projecting public finances, before I got obsessed with this topic of longevity and ageing, I used to do a lot of work on public finances. To be honest, if you asked me to predict the government debt 30 or 40 years ahead, I could say it is anything between 0% of GDP and 500% of GDP. The standard error bands are huge. What we tend to do when we look at long-run public finances is to fix on things we think that we can predict better, and demographic change is something we think we can predict better. We say: “This is the demographic change; here are the public finance consequences”. Again, that seems a very demographic story because we know that we will adapt and adjust. The question is how we do so. Marc Freedman, who runs Encore in the States, says the only natural resource we are not running out of is older people, and perhaps if we invest in them then in 80 years we can make this system sustainable. I think that is the key.

The question is whether this ageing society is our problem or partly the solution. Macroeconomics is too obsessed with assuming that the only thing that has happened is changes in the age structure. It does not think about how we redesign the life course and policy institutions to support a longer life. A health system that has done an amazing job to raise UK life expectancy on a cohort basis to about 87 is not set up to make sure we stay healthy to 87. We need to rethink that.

We think about what I call a three-stage life: education, work and then retirement. Work is much more complicated now. Career structures are beginning to shift and change. There is a whole bunch of social institutional changes, some of which will have to come from Governments, some from individuals and some from the private sector.

Over the last 100 years, the UK old age dependency ratio has tripled. I am not sure that has had a significant impact on UK growth, so the question is how we make sure the 50% increase to come does not have a significant impact as well. There are things we can do to seize opportunities, but we do need to change. If we do not change what we do, we will have the problems we foresee.

Professor Charles Goodhart: I do not think that your tripling (of the dependency ratio) is really fair. If you go back to about 1800, the ratio for those over 65 was probably zero. You can triple very easily from zero. In fact, you can grow infinitely from zero.

Professor Andrew J. Scott: I agree, Charles, but it has gone from 8% to 25%, so what is the magic number? Is it 26%? Is it 24%? There are either nonlinearities or that tripling—surely it has been a negative headwind, but it has not been a subject of discovery. I think that focusing on over 80 right at the beginning is a challenge. Going back to your point, Charles, there is a lot we can do to keep people healthier, but once we start to get into the 80s it becomes more challenging based on current technology. That is perhaps the key statistic, because many of the things we have talked about, personally, economically and socially, are really about that.

Lord Davies of Brixton: That is bad news for many of us.

Q31 Lord Blackwell: This discussion has focused around the demographic challenge of a potential shortage going forward of healthy working population relative to dependants. As a result, you were just explaining the number of challenges in making substantial changes to the way individuals live their lives and think about their lives and government and societal structures. The experience is that society changes most easily when there is a shared narrative or a shared imperative. I am struck by the contrast between the conversation we have been having and the headlines that one saw quite often recently about AI meaning that there was going to be a shortage of jobs and everyone would be unemployed. We still have an industrial structure where a large part of the union movement is focused on preserving jobs and structures of work in the way that it did 100 years ago. Is there any chance that we will get a consensus among the economics profession that allows us to have a shared narrative on which of these is the right answer?

Professor Charles Goodhart: Having a shared narrative in academia would be absolutely the opposite of what we like to have. I think that AI will mean that quite a lot of people in jobs that require certain mental abilities rather than physical work will find it very difficult to maintain their jobs. AI can write advertisements. It can do accounts. It has got rid of paralegals already. However, the people who will lose out from AI will be very different from the people who lost out from technological changes in the past, though not entirely. When all the cars become driverless, as some people, like Mr Musk, believe will happen, what happens to the lorry drivers, Uber drivers and taxi drivers? The people who will lose their occupation will be a very different group of people. The Tolpuddle Martyrs of the future will be very different from the Tolpuddle Martyrs of the past, but there will be Tolpuddle Martyrs.

People will lose their jobs as a result of technical change, but there will be a need to care for ourselves and look after each other. Empathy will be much more important than either physical strength or a certain degree of mental ability, and you cannot teach empathy.

Professor Andrew J. Scott: Your point about a shared narrative and a shared imperative is key, and I cannot resist mentioning that my last book was called The Longevity Imperative. I think that we have to change the narrative.

As Charles says, it would be very disappointing if academics agreed among themselves. It might be useful for policymakers but it would change the nature of the world a little bit. However, economics is pretty unified that an ageing society is only bad news, and I think there is beginning to be a shift that that might be too simplistic a story and there are things that can happen. I talked about the Office for Budget Responsibility saying: “If we keep people healthier, we will change things an awful lot in terms of GDP implications”. Last week the IMF produced the World Economic Outlook. It has a chapter on an ageing society. It again stressed that there are policies, adaptations and adjustments that mean we can get positives. The OECD has done something similar.

I think that we are beginning to see a shift. What is interesting is that it is a highly multidimensional issue, because it is about every aspect of life. We need to try to arrange some order of priorities and preferences as to what the most important things are that we need to tackle. I am a little bit long-run optimistic about this because, looking at the social changes we made in the 20th century, we invented teenagers, retirement, pensioners and even middle age. The middle-age crisis was labelled in 1965. It takes a long while, but you can already see society beginning to adapt and adjust.

I will leave a little ray of sunlight on the table. I think that we can do these things, but it is a very big social change. Some of that will be around our narrative. What I find interesting is that no one fist-bumps the air when they mention the phrase “ageing society”, which is strange because it is one of the greatest achievements of the 20th century. It opens up whole new possibilities, and that more positive approach is necessary.

I can see people beginning to adapt and adjust. The trouble is that when they do adapt and adjust they do not draw attention to age. It is only when age becomes a problem that they draw attention to it. I do not know if that is a sign of success or a sign of a problem, but we have already adapted considerably to some of these changes. It is certainly working out differently from when I was an undergraduate writing essays 40 years ago that everything would be terrible. It has not been terrible.

Q32 Lord Londesborough: I have a quick question on changing the narrative. Should we be drawing encouragement from South Korea, which has this extraordinarily low birth rate of 0.7, barely a third of the replacement rate, yet is still churning out positive GDP growth rates?

Professor Andrew J. Scott: Demography is not destiny, yes. It is worthwhile separating out living longer, having fewer children, changes in the age structure of the population, changes in how we age and falling population. Those five dimensions make this very different in different countries. What South Korea has done is extraordinary, given that fertility trend, but that is not the situation that the UK is in, so we can potentially do even better.

Professor Charles Goodhart: Remember what the Prime Minister of Japan said, which was quoted, about how their society could collapse. It has not happened yet; let us hope it does not happen. Let us hope that Andrew’s optimism is well founded. I am a natural pessimist because it is so nice when I am proved wrong. On South Korea, let us wait and see what happens.

Q33 Lord Burns: First of all, I like your slogan about adapting to a longer life rather than talking about an ageing population. I think that is a rather more positive approach to all this.

My question has been touched on, but how far are consumption patterns likely to change against this background? Everything we have heard, it seems to me, points towards an even greater mix of services in our economy. I have noticed this already in my own life with the things that I spend money on. It suggests less trade. It suggests a slightly more closed economy, that we are doing more for ourselves than has typically been the case through our lifetimes. The potential is for quite a substantial move away from goods, but is this fanciful and too much just reflecting what I seem to be spending my money on?

Professor Andrew J. Scott: I think that is right. Again, it comes back to this issue of how much we change how we age; whether 70 is the new 50, and all those arguments. However, I think you are right and we are seeing a shift anyway towards services.

The other issue is to what extent we see a shift towards low value-added services. We have talked a lot about caring, and although caring is an incredibly important human thing, to the extent to which we outsource it, it tends to be low value-added activity, which is one of the real challenges we have in this sector. If we go towards, say, tourism and so on, is that low value added or high value added?

Whenever I give a talk about the ageing and longevity society, I am normally followed by a consultant who shows the same charts as me and tells people to invest in cruise ships and adult diapers, basically. That is what I would call the silver economy, and that is important. I talk in my work about the evergreen economy, which is that we will see more and more money being spent on keeping us healthy. We mentioned obesity drugs earlier, which are an interesting example. I think there will be a shift, but it is hard to avoid the notion that it will not be goods but a lot more services.

Professor Charles Goodhart: The shifts are remarkable. Twenty years ago, if I was travelling on the Underground, I would see everybody reading a paper. Now I see nobody reading a paper; they are all looking at their mobile phones. I happen to think that this is deleterious for our society and in many ways a backward trend. On the other hand, one of the great advantages that I find is the ability to use Zoom, and not only to see Andrew. I have Zoom meetings with my children three times a week—one of them is in America—and that is a huge advance. Those Zoom meetings are not included in GDP at all. The only thing that gets included in GDP is the ability to—

Lord Burns: Your subscription.

Professor Charles Goodhart: No, it is the payment for the advertisements. That gets into GDP, which is again deleterious. The last thing that I like when I am on my computer is goddamned ads. Yes, things will change and change a lot, and it will make some of us who are over Andrew’s age of 87, when he says he will give up, and that means me—

Professor Andrew J. Scott: I did not say you or anyone else gave up.

Professor Charles Goodhart: Things will change a lot. I end by saying that for Andrew and me the key is improving health. That is really what you want to focus on. That is the most important story and point that I think both of us want to get over.

Professor Andrew J. Scott: Yes, that is right. I certainly would never say that people give up in their 80s; that is not true.

I think that what we cannot afford to do is underestimate the capacity of older people or our own later years, because that is where we are seeing the growth in the population and the growth in our life. That is why it is important to try to be positive and to ask how we invest to make sure we see fewer of the problems and more of the advantages. In a world where we did not have much chance to become 90, that did not make much sense. In a world where the ONS says half the children born today will live to be into their 90s, it is really important. That is a challenge with age. We medicalise the concept of old age to define it only as decline, and that is a really big problem if we say we have an ageing society. We turned a positive into just a negative, whereas in reality there are opportunities and there are problems. This is a big policy agenda to make sure we minimise the problems and maximise the opportunities.

The Chair: Thank you so much, both of you, for an incredibly wide-ranging and stimulating session. Professor Scott and Professor Goodhart, we are very grateful. Professor Scott, particularly given the reasons that you are in the US, please accept our best wishes for you and your family.

Professor Andrew J. Scott: Thank you very much.

The Chair: With that, thank you again. The meeting is now concluded.