The case for raising taxes on older people

This article first appeared as part of the Ben Zaranko on the economy newsletter – the big economic ideas and forces shaping our world, and the policies put forward in response. To receive it in your inbox, featuring content exclusive to the newsletter, sign up here.

The Office for Budget Responsibility (OBR) gets the most public attention when it’s acting as arbiter of whether the government has met its fiscal rules for borrowing and debt – especially if its forecasts accidentally leak to the press ahead of time. But fiscal policy is for life, not just for budget time, and the OBR’s wider analysis is far more interesting. 

Last week, the watchdog published its fiscal risks and sustainability report, which contained long-term projections for what might happen to the public finances over the next 50 years, under all manner of different assumptions. 

The top line is, things don’t look good, and something will have to change to put the public finances on a sustainable footing. Although the debt projections don’t get properly scary until the 2040s, the OBR was at pains to stress that early adjustments are desirable. The report’s main conclusion (repeated several times) is that “unsustainable fiscal outcomes that may not occur for some years are today’s challenge not tomorrow’s”.

So, policymakers need to do something. What? 

To think about that, it’s useful to start with the chart below, which shows how the average fiscal contribution (taxes paid in, minus spending taken out) varies by age. Children use a lot of schooling and don’t pay any tax, so are a net cost to the state. Between 20 and 70, the average person pays more than enough tax to cover the services they use, so is a net contributor. After that point, people retire, claim a state pension and make more use of the NHS and social care, and so the average net contribution goes negative again. 

People are living longer, and so we have more people on the right-hand side of the chart, as net recipients in old age. That’s what is pushing up health spending, pushing up pension spending, and making the OBR’s debt projections look so scary.

This helps to frame the options for the government. Do you raise taxes on working people, to try to increase the blue bars in the middle part of the chart? Do you try to reduce the amount of spending at older ages, through changes to the state pension triple lock, increases in the state pension age, or reductions in NHS provision?

Or, do you think about ways to raise more tax from older people, so that the blue bars on the right hand side are a little bigger? There’s a lot to be said for this. It would mean that when the older population grows, it doesn’t just push up government spending, but also pushes up revenues. The public finances would become more resilient to population ageing. 

Shifting some taxation away from employee national insurance and towards income tax would be one way of doing it (because you don’t pay national insurance on pension income, or after reaching state pension age, but you do pay income tax – see chart below). This was considered ahead of the 2025 budget, in the form of a ‘two up, two down’ switch of 2p from employee national insurance to income tax. That proposal could be dusted off and reconsidered by the new government. Or, a Chancellor who really wanted to secure their place in the tax reforming history books would think about fully merging the two.

Another option would be to raise taxes on wealth, including property, given that older households have so much more of it. Andy Burnham has spoken in the past about the need to overhaul the council tax system. But then, so did Rachel Reeves, when she was in opposition, and she’s done nothing of the sort as Chancellor. Talking about it and doing it are two very different things. 

Or, thinking outside of the box, we could raise more from older people through a special solidarity tax on boiled sweets and water aerobics classes (here, I admit that I could be over-indexing on the consumption choices of my own grandma).

The serious point is, if we had a tax system which automatically raises more revenue when the older population is growing and putting pressure on public services, that would strengthen the public finances. Not a clear and obvious vote winner, perhaps. But I suspect making large spending cuts or tax rises to head off an imminent debt crisis would be unpopular also – and that’s where we’re eventually heading if we do nothing. 

For more on this theme: I’m joining a great panel (in-person and online) at the Resolution Foundation this Thursday 16 July to discuss the UK’s public finance situation and how we can ‘break free of our fiscal chains’. Come!

Photograph by John Keeble/Getty Images