Tuesday 13 December 2016 4:20 am

From public sector pensions to social care, the government is scarily ill-prepared for major demographic change

The gap between private and public sector pensions in the UK is the worst in the developed world, according to the OECD.

New civil servants can expect to receive a 6 per cent pay rise when they reach retirement, while private sector workers can expect a cut of nearly 50 per cent. Mounting pressures on social care, meanwhile, mean that politicians are planning to allow local authorities to increase the social care precept of Council Tax above 2 per cent in order to make up the funding shortfall.

Both of these stories demonstrate the severity of the demographic headwinds that the UK – and indeed most major economies – is sailing into. People are living for longer than the systems designed to look after them in older age ever accounted for, and reform has been elusive.

This has left taxpayers paying for expensive public sector pensions for several decades after an employee retires. We still haven’t decided on how best to sustainably fund social care for the elderly in the long term in a way that affords them the dignity and service they deserve.

So what can be done?

First, there is a real need to mend the public finances now so that we are prepared for the demographic challenges that Britain will inevitably face.

Unfortunately the government is going in the wrong direction: the chancellor abandoned George Osborne’s (albeit usually missed) fiscal targets so that he has more flexibility for fiscal loosening should the situation require during Brexit. But failure to tackle the deficit now means that we are continuing to add vast amounts of money to the national debt – leaving our children and grandchildren paying higher taxes than they otherwise ought to.

Second, we need to get to grips with the real size of the challenge, which is often opaque. For public sector pensions, for instance, Michael Johnson, a pensions expert with the Centre for Policy Studies, has calculated that the future cost of public service pensions to taxpayers could be as high as £41bn a year. That is made up of employer contributions and covering the cash shortfall between pensions in payment and pension contributions.

Johnson also identified almost £10bn of new costs from the interaction of the Public Service Pensions Bill and the single-tier pension. Higher annual costs and a failure to tackle the final salary element of public sector pensions – which has all but disappeared in the private sector – mean that not enough is being done to meet future challenges. Add to the mix the fact that public sector pension liabilities are kept off official measures of national debt, and it becomes really scary.

Third, we need to start talking about real reform of how local councils raise and spend money. Former minister Norman Lamb was right to say yesterday that proposals to allow Council Tax increases to pay for social care are a “sticking plaster”. Given that social care is not pre-funded, taxpayers are on the hook for much bigger costs in the future. Other issues, like potential changes to immigration levels and the minimum wage, will heap additional pressure on the sector.

So, while healthcare is itself in need of reform, it is also time to start serious discussions about local authorities being given greater fiscal responsibility. Councils should be able to experiment with what services they offer, making them much more responsive to local concerns. It would hopefully see councils focus on business-friendly policies that would allow for greater economic growth.

Allowing councils to keep business rates is a good first step, but a local income tax – to replace a portion of the national version – and a local sales tax should also be considered as part of a broader package of tax reform.

This may strike fear into the hearts of those who experienced the “loony left” councils’ management of finances in the 80s, but with a substantial reduction in central grant funding, there would be an enormous incentive to cut rates and stimulate business growth over the long term.

The big demographic challenges require big ideas to solve them. Tweaking at the edges simply won’t do.