UK needs pre-funded healthcare system to tackle demographic time bomb



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The UK has an ever-ageing population, with the ratio of people in retirement age to people of working age set to rise further. Currently there are 28 retirees for every 100 of working age. By 2064 this number will rise to 47 for every 100. Blaming the financial problems of the NHS on unhealthy lifestyles no longer stands up to scrutiny.

Introducing pre-funding to the system would defuse the demographic time bomb and put the healthcare system on a much more stable and sustainable financial footing. A new report from the Institute of Economic Affairs calls for the NHS to begin to build up an old-age reserve fund. This would require a one-off increase in taxes, or spending cuts in the non-healthcare budget, but it would mean that as the number of older people grows, the old-age fund would automatically grow alongside it.

It is rising life expectancy that is driving up healthcare costs, while falling birth rates decrease the funding base. The average healthcare costs of people over the age of 85 are more than five times higher than those of young and middle-aged people. It is therefore essential to make the current funding system of the NHS ageing-proof, otherwise we could see severe rationing, with a deterioration of standards, longer waiting times, barriers to access and a narrower range of treatments being made available.

Benefits of a pre-funded system

  • Old-age funds would earn a rate of return – since they would be used for long-term investments.

  • The rate of savings and investment would increase – thus increasing the economy’s capital stock, productivity and indirectly, wage levels.

  • More diversified funding base – which would decrease the risk of sudden and erratic changes in healthcare spending.

  • Improved quality of economic decision-making – as it would lead to greater transparency about the future costs and benefits of different policy choices.

  • Allow international diversification – as the funds would not all have to be invested domestically. They could be invested anywhere in the world.

How a pre-funded system could work in practice

  • The system could be financed through an earmarked healthcare tax. Revenue from that tax would have to be higher than current healthcare spending, leaving a surplus.

  • This would require a tax hike or reduction of spending in other areas but would prevent the need for even larger tax hikes in the future.

  • The mentioned surplus from this tax could be used to start building up an old-age reserve fund.

  • Funds would be pooled but allocated to individuals.

  • A capital stock would be built up on behalf of people of working age who would draw upon it when they reach old-age – until then they would pay more into the health system than they take out.

  • To build up reserves for today’s working age generation, the government would have to fill up the old-age funds with government bonds.

  • Over time the share of government debt in the reserve fund would decrease and the share of ‘real’ assets would increase.

Commenting on the report, author Dr Kristian Niemietz, Head of Health and Welfare at the Institute of Economic Affairs said:

“The NHS, like almost all Western healthcare systems, is a fair-weather system. It is currently financed on a pay-as-you-go basis, which means that it never builds up any reserves. This worked just fine at the time the system was created, because Britain was then a relatively young population. But it is not set up to cope with an increasingly ageing population. Healthcare costs rise exponentially in old age, and life expectancy is rising, while birth rates are low. And we cannot just keep increasing taxes or borrowing forever. Something will have to give.

“Ideally, governments should have started building up an old-age reserve fund for future healthcare costs years ago. But this can still be done, and the sooner, the better.”

Notes to editors:

For media enquiries please contact Nerissa Chesterfield, Communications Officer: [email protected] or 020 7799 8920 or 07791 390268

To download a copy of ‘A piggy bank for healthcare: Why the health system needs old-age reserve funds’ please click here.

Further IEA Reading: Universal Healthcare without the NHS

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.

The IEA is a registered educational charity and independent of all political parties.