Once again Fraser Nelson has tweeted graphs he doesn't really understand and drawn the wrong conclusions from them. Here's the first graph he tweeted, with his comment:
One day, nonsense graphs like this will stop being made in recognition of fact that the over-65s also work & pay tax. pic.twitter.com/0xnHwrfSYw
— Fraser Nelson (@FraserNelson) November 9, 2013
It's from this article by The Economist. The source matters, as will become apparent shortly.
And he then went on to say this:
This shows heroic contribution the over-65s making to UK economic recovery. Graph the @economist should have printed. pic.twitter.com/WVuXphvvs0
— Fraser Nelson (@FraserNelson) November 9, 2013
The first chart is the dependency ratio - the ratio of working to non-working people in the population. And the second shows the rising proportion of over-65s in the working population. On the face of it, the second should influence the first. But actually they aren't related - and neither of them is much use.
The usual calculation of the dependency ratio assumes that people are working between the ages of 16 and 64. The Economist's chart doesn't say this, but it is reasonable to assume that it has been created on this basis. This of course is wrong at both ends. Fraser Nelson rightly points out that a rising number of over-65s are remaining in the workforce, or re-entering it. But neither Fraser Nelson nor The Economist mention that the number of 16-25 year olds in the workforce is falling rapidly as more and more of them spend longer in education and training. This more than offsets the increase in over-65s working.
However, the main reason for the rising dependency ratio is that people are living longer. The Economist points out (my emphasis):
Between 2013 and 2037 the nation’s population is expected to grow by 10m, to 73m. But the growth is not evenly spread between the generations—which means that a demographic crunch is coming. The number of people aged 75 and over will increase by 87%, to 9.3m. The number of people of prime working age (between 30 and 60) will increase by just 3%.This is The Economist's main point - that the proportion of non-working people in the population is set to rise significantly due to increasing longevity. This rests not only on the assumption that immigration and fertility levels don't change, but also on the assumption that over-65s remain economically dependent. The Economist has actually left this question open: there is a large gap between its "prime working age" and the age at which it assumes no-one is working, which is 75. It's probably fair to assume, therefore, that The Economist knows that some over-65s work and is expecting more to do so. The question, therefore, is whether over-65s working would make a significant difference. We know that more of them are choosing to work. Does this mean that fewer over-65s are, or will be, economically dependent?
Well, not really. Fraser Nelson's second chart shows that just over 250,000 over-65s have re-entered the workforce since 2010 - hardly a majority. But what the chart doesn't show is that most of these are working part-time, they all receive a state pension and other benefits, and many are also receiving corporate and private pensions. They may be working, but overall they are still dependent. To eliminate their economic dependence there would have to be far more of them and they would collectively have to be earning enough for their pensions and benefits to be taxed away. That is a simply huge cultural shift. The fact is that the vast majority of over-65s expect to live primarily from pensions, including the state pension, and work is simply a means of topping up their pensions. The currently planned rise in the state pension age is not enough to make a huge difference to the hours collectively worked by over-65s, especially as many people gradually reduce their working hours long before they actually retire. The state pension age would probably have to be at least 70 for there to be a significant reduction in over-65s' economic dependence.
But actually the dependency problem is far more widespread than the dependency ratio chart shows. Those of working age who are economically inactive because they are students, or incapacitated, or full-time carers are counted in the working population, distorting the ratio considerably. And even more worrying, many people who ARE working are net recipients of benefits, because their wages are so low that they have to be "topped up" with state benefits which effectively wipe out their tax and NI contributions. These people are not contributing to the support of the elderly. On the contrary, they are competing with them for a share of tax revenues. And there are a growing number of them due to the bifurcating labour market and the decline of middle-income skilled jobs.
So Fraser Nelson is correct that the first chart is nonsensical - but not for the reason that he gives. The dependency ratio is a crude measure that takes no account of the actual economic contributions made by people in different circumstances and at different stages in their lives. A few over-65s working mainly part-time to top up their state pensions doesn't invalidate the ONS's dependency ratio calculation. But a large number of people dependent on state benefits to top up their wages does. We don't just have a demographic problem. We have a low wage problem.
Britain's demographic crunch will arrive suddenly - The Economist
Global greying - FlipChart Rick, Pieria
Bifurcation in the labour market - Coppola Comment
Analysis on the living wage - IFS
Workers kept their jobs but one third faced nominal wage freezes or cuts - IFS