UK dependency ratio: what
is the impact on your
retirement plans?

UK's rising dependency ratio is bad news

Low birth rates in the UK and rising life expectancy are leading to a rapid aging and a decline in working age population. That means that the dependency ratio is gradually moving up.

If the ratio is, say 25, it means that there are 25 people at the age of 65 or older for every 100 people of working age.

Does it matter? You bet it does!

Obviously, the higher the ratio, the fewer working people there are to pay for the elderly. If that continues, than at some point the cost of supporting the elderly will become unsustainable.

George Magnus, recently wrote a book entitled The Age of Aging which describes exactly this problem. His suggestions:

  • public spending cuts,
  • increased individual savings, and
  • retirement age increase.

Mr Magnus is rather pleased with the 2009/2010 economic crisis which he believes will compel the West to move away from its culture of debt, and start saving more instead. In his own words:

"For ageing societies (-such as ours-), that's (-the
economic crisis-
) a good thing because too many
people have too few savings and too little
preparation for retirement"

Let me give you an example:

Japan Is "Toast" With Europe To Follow Swiftly

Did you know that no other country is aging as quickly as Japan?

Stuck with a large number of old age pensioners already (the dependency ratio is currently 35!), Japan's ratio will grow to an astonishing 50 in 2050!

The problems in Japan are well publicised and are often blamed on failed policy measures and frequent changes of leadership.

I just wonder how big a role the worsening demographic situation in Japan has actually played a role in all this. And whether this is a sign of things to come for the rest of us, particularly Europe.

From the outset, the outlook for Europe doesn't make for easy reading where a large and increasing part of the population already consist of old-age pensioners.

You may even argue that we are worse off than Japan given our lower savings rate, raising serious questions about the sustainability of our entire welfare model.

I believe, that at some stage several European countries may well be forced to scale down substantially, or abandon altogether, their welfare standards in order to cope.

As Is The United Kingdom!!

As I mentioned before, the United Kingdom has high labour costs, an aging population and a shrinking workforce to support this aging population.

We should be hugely concerned what this means for care of the elderly in years to come. And how you are going to be effected by this.

Assuming that the fertility rates of UK women remains unchanged going forward, a conservative UK's dependency ratio is likely to increase from 32% in 2010 to 34% or more in 2050.

Over a forty year period, UK's dependency ratio doesn't appear to change that much.

To put that in perspective, by 2050 there will be at least 343 people of pension age for every 100 people of working age. Or, the other way round: there will be 292 people of working age to support each 100 of the elderly population

That doesn't sound too good, doesn't it?

To reverse these worsening dependency ratios, we may well need to start considering some rather radical "solutions", such as:

  • introduction of substantial financial incentives to increase the birth rate,
  • import more labour from countries with high birth rates (hugely unpopular), or
  • "simply" reduce old-age benefits.

With the political influence of the elderly on the rise there will be more older voters out there in ten, twenty years, who are likely to be voting.

It should therefore become increasingly more difficult over the next 25 years to pass draconian legislation to reduce old-age benefits.

Is there any way out of this?

Unless we accept severe cut backs in the near future, it's our children and their children who will have to pay for our ballooning pension, health and elderly care system.

Are you ready for all this?

It is clear to me that the current welfare state will have to change. The state pension, company pension and long term care system as we know them today will most likely have to disappear as we simply cannot afford them any longer.

As an individual you need to make sure that you are well prepared for what's heading your direction and that you are able to withstand the tumultous times ahead of you if you want to Retire Early and Rich.

Return from UK dependency rate to State Pension Crisis
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