Death and taxes
17 December 2015
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22 December 2015
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19 November 2024
George Orwell defined ‘doublethink’ as the ability to hold two contradictory beliefs at the same time and to believe that both are true. For example, most of us are at least vaguely aware that the ageing population has left us with a demographic time bomb. There were two million Britons aged 65 or over at the turn of the last century. That has since risen to ten million and it is expected to reach nearly twenty million by 2050. The number of people aged 75 and over is expected to double in the next twenty years, from less than five million today to nearly nine million in 2035.
This will put a severe strain on the country’s health and welfare budget. It is already doing so. The annual healthcare costs of a person aged 85 or over are five times higher than those of somebody in their early 60s and ten times higher than somebody in their 40s. The extent to which ageing has necessitated the spiralling budget of the NHS in recent decades is a matter of debate, but there is no doubt that it has been an important factor.
Significant though they are, healthcare costs are a relatively small part of the costs of ageing when compared to pensions and other old age welfare payments. When the basic state pension was introduced after the Second World War, life expectancy was 68. It is now 81 and is expected to rise to 87 in the next fifteen years. It may not be long before people spend more years of life out of work than in work. The Office for Budget Responsibility expects increased demand for healthcare, long-term care and state pensions – mostly caused by greater longevity – to gobble up an additional five per cent of GDP by 2065.
While acknowledging this fact, many of us are able to hold the separate and contradictory belief that people who lead unhealthy lifestyles are a drain on the taxpayer. We are told that efforts to prevent obesity, smoking and binge-drinking will save lives and therefore save money. Last week we were warned, once again, that obesity could ‘bankrupt the NHS’.
Leaving aside the fact that the NHS is a state monopoly which cannot be bankrupted, the central contradiction here is that people cannot be a drain on the taxpayer by both living too long and dying too soon. Either unhealthy lifestyles cost us a fortune by killing us prematurely or healthy lifestyles are breaking the bank by enlarging the ranks of the elderly. Which is it?
The bulk of economic evidence favours the latter of these two theories. Health economists have long argued that policies designed to extend life should be promoted on the basis that better health has intrinsic benefits rather than on spurious claims about saving money. Old age is associated with much higher costs than premature mortality. We all have to die of something and the cost of dying is not much different for a 90 year old than a 70 year old, but the 90 year old uses an extra twenty years of health care and takes an extra twenty years of pensions, benefits and subsidies.
While the treasury braces itself for more spending on the elderly, we are told that we must live healthier lives for the sake of the public purse. And yet it is precisely because we are living healthier lives – smoking less, eating better and breathing cleaner air – that more and more of us are living to a ripe old age. If we took more exercise and ate more vegetables there would be even more of us in nursing homes drawing our state pensions and awaiting our expensive hip operations.
Of course there are costs associated with treating diseases caused by unhealthy habits, but they are dwarfed by the costs of living a healthy life and making it to the age of 95. At that age – assuming you left school at 18 and retired at 65 – you will have spent less than half your life as a working taxpayer. You will have spent at least 48 years paying less in tax than you received in benefits and services.
When the government cut the UK’s £3 billion public health budget by £200 million recently, the Faculty of Public Health claimed that it would cost the NHS ‘at least £1 billion’ in the long run. This is based on the assumption that preventive health saves money, that a stitch in time saves nine. But while prevention may be better than cure from the perspective of health, the exact opposite is true from the perspective of government finances. In Death and Taxes, a report released today by the Institute of Economic Affairs, I cite numerous studies showing that prevention raises costs in the long run by creating a larger cohort of frail old people who need working taxpayers to pay for them.
It should go without saying that this is not an argument for poorer health and more death. The macabre business of counting financial savings from premature mortality would not be necessary if people stopped pretending that we can achieve an implausible win-win of longer lives at lower cost. The reality is that increased life expectancy has led to significantly higher costs to government budgets in the last fifty years and it will continue to do so.
To claim otherwise is to raise false expectations. There are many benefits from people living healthier and longer lives but those benefits are social, not economic. Throughout the western world and beyond, people are living longer than ever. This is to be celebrated, but it also has to be paid for. How we pay for it is one of the great economic challenges of our time. Blaming those who are least likely to get a telegram from the Queen is not the way to go about it.
This will put a severe strain on the country’s health and welfare budget. It is already doing so. The annual healthcare costs of a person aged 85 or over are five times higher than those of somebody in their early 60s and ten times higher than somebody in their 40s. The extent to which ageing has necessitated the spiralling budget of the NHS in recent decades is a matter of debate, but there is no doubt that it has been an important factor.
Significant though they are, healthcare costs are a relatively small part of the costs of ageing when compared to pensions and other old age welfare payments. When the basic state pension was introduced after the Second World War, life expectancy was 68. It is now 81 and is expected to rise to 87 in the next fifteen years. It may not be long before people spend more years of life out of work than in work. The Office for Budget Responsibility expects increased demand for healthcare, long-term care and state pensions – mostly caused by greater longevity – to gobble up an additional five per cent of GDP by 2065.
While acknowledging this fact, many of us are able to hold the separate and contradictory belief that people who lead unhealthy lifestyles are a drain on the taxpayer. We are told that efforts to prevent obesity, smoking and binge-drinking will save lives and therefore save money. Last week we were warned, once again, that obesity could ‘bankrupt the NHS’.
Leaving aside the fact that the NHS is a state monopoly which cannot be bankrupted, the central contradiction here is that people cannot be a drain on the taxpayer by both living too long and dying too soon. Either unhealthy lifestyles cost us a fortune by killing us prematurely or healthy lifestyles are breaking the bank by enlarging the ranks of the elderly. Which is it?
The bulk of economic evidence favours the latter of these two theories. Health economists have long argued that policies designed to extend life should be promoted on the basis that better health has intrinsic benefits rather than on spurious claims about saving money. Old age is associated with much higher costs than premature mortality. We all have to die of something and the cost of dying is not much different for a 90 year old than a 70 year old, but the 90 year old uses an extra twenty years of health care and takes an extra twenty years of pensions, benefits and subsidies.
While the treasury braces itself for more spending on the elderly, we are told that we must live healthier lives for the sake of the public purse. And yet it is precisely because we are living healthier lives – smoking less, eating better and breathing cleaner air – that more and more of us are living to a ripe old age. If we took more exercise and ate more vegetables there would be even more of us in nursing homes drawing our state pensions and awaiting our expensive hip operations.
Of course there are costs associated with treating diseases caused by unhealthy habits, but they are dwarfed by the costs of living a healthy life and making it to the age of 95. At that age – assuming you left school at 18 and retired at 65 – you will have spent less than half your life as a working taxpayer. You will have spent at least 48 years paying less in tax than you received in benefits and services.
When the government cut the UK’s £3 billion public health budget by £200 million recently, the Faculty of Public Health claimed that it would cost the NHS ‘at least £1 billion’ in the long run. This is based on the assumption that preventive health saves money, that a stitch in time saves nine. But while prevention may be better than cure from the perspective of health, the exact opposite is true from the perspective of government finances. In Death and Taxes, a report released today by the Institute of Economic Affairs, I cite numerous studies showing that prevention raises costs in the long run by creating a larger cohort of frail old people who need working taxpayers to pay for them.
It should go without saying that this is not an argument for poorer health and more death. The macabre business of counting financial savings from premature mortality would not be necessary if people stopped pretending that we can achieve an implausible win-win of longer lives at lower cost. The reality is that increased life expectancy has led to significantly higher costs to government budgets in the last fifty years and it will continue to do so.
To claim otherwise is to raise false expectations. There are many benefits from people living healthier and longer lives but those benefits are social, not economic. Throughout the western world and beyond, people are living longer than ever. This is to be celebrated, but it also has to be paid for. How we pay for it is one of the great economic challenges of our time. Blaming those who are least likely to get a telegram from the Queen is not the way to go about it.
10 thoughts on “Death and taxes”
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If someone lives to the age of 95, having left school at 18 and retired at 65, he or she will not necessarily have ‘spent at least 48 years paying less in tax than [they] received in benefits and services.’ I myself retired more than ten years ago; but I seem to be (still) paying very large sums in tax. We could argue about the value of the benefits I am receiving from the state; but if the government offered to cancel all my taxes in return for me paying in full for all the benefits and services I am receiving from the state, I would jump at the offer!
Whatever the situation the stats are not able to pinpoint what is beneficial because conclusions drawn a complete muddle and favour whatever answer the politicians care to provide.
Does a smoker and heavy drinker have a greater cost to the NHS than an abstainer given that taxes on smoking and drinking are in the ‘tax the rich’ league.
Do the poor as a Keynesian “aggregate” provide a greater level of revenue to the exchequer than the rich?
Nobody actually knows because nobody actually cares, It’s just another soundbite
There are a couple of factors that Christopher Snowdon hasn’t taken into account in his analysis. Firstly, people with unhealthy lifestyles are far more likely to suffer poor health during their normal working lives, thus negatively impacting both GDP and tax contributions. Indeed, if you die early, it is much more likely that the taxpayer will subsequently have to support your family. Secondly, he doesn’t take into account that many people are now retiring later or working part time after the age of 65 (and the statutory retirement age is increasing anyway) and so continue to make an economic contribution.
HJ,
Those points are addressed in the report. The evidence is quite clear that by the age of 65 the average person receives more in benefits than they pay in taxes.
Chris – My points are not addressed (at least not properly) in the report. It says that rising retirement age will not compensate for greater pensions costs, but pension costs are not the whole story as you ignore the greater tax/NI contributions generated by a later retirement age. You also don’t look at costs generated by people dying early and the taxpayer cost of supporting their family.
Your comment about the average person receiving more in benefits than they pay in taxes before the age of 65 is irrelevant – we are looking at the tax/benefit CHANGES caused by better health and greater longevity.
HJ – The main change that has come about from better health and longevity since the welfare state was created has been a huge rise in the number of people who are old and very old. There is no reason to think that this will not continue to be the main effect in the future. Since 1948, life expectancy has increased by 13 years. When the current reforms are finally put in place, the retirement age will have risen by 3 years. Clearly, the pensionable age is not keeping place with life expectancy and it would be biologically and politically impossible for it to do so.
Increasing the retirement age will mitigate the cost of ageing to the public purse (and the increased tax/NI is, I agree, one way it will do so) but it will certainly not cancel it out, let alone reduce it on net (which is the claim of those who think extending lives lowers costs).
Chris – You miss my point. It may be that the extra costs of living longer are the bigger factor, but that is no excuse for simply ignoring in your analysis counterbalancing factors such as longer and more productive working lives. You only looked at one side of this equation – and this means that even if you are correct, you may overstate the extra costs.
Incidentally, your figure of 13 extra years of life expectancy is, on its own, meaningless in the context of this discussion. From that figure alone – which is presumably an average (mean) figure, we cannot tell whether this is mainly because people are living much longer once they get to 65 or whether it is accounted for by, for example, lower child mortality (and lowering of child mortality rates would, per death avoided, have a bigger impact on the mean).
Chris – I have done a little research and come up with the following: “In 1948 period life expectancy at age 65 was 12.6 for men and 15.0 for women. In 2010, this had increased to 18.1 for men and 20.7
for women”. This puts the increase in life expectancy once someone has reached 65 at less than 6 years over this period – a rather more modest and relevant figure than your 13 year average life expectancy increase. Then take into account the rising retirement age and better health (and therefore productivity) during working lives and the effect on costs may be somewhat more modest than you imply.
Heres the source: http://www.ilcuk.org.uk/files/Linking_state_pension_age_to_longevity.pdf
Chris – I also forgot to mention that women’t retirement/pensionable age has risen by rather more than 3 years. Not so long ago, women received a state pension from age 60, so their retirement age has increased by more than the rise in their average longevity at age 65.
HJ, you’re quite right that life expectancy at birth is not really the basis of comparison we need, but nor is life expectancy at 65, since more adults used to die before they reached that age but after years of paying contributions to fund other people’s old age.
Do you have an idea of the comparative life expectancies at age 15 (or 18)?