Should we Link the Standard of Living of Older People to Economic Performance?

SUMMARY

• The Pensions Commission's 2026 interim report treats ageing as a fiscal, adequacy and design problem, but it is fundamentally a political economy problem.
• With more beneficiaries and fewer workers, only economic growth can ensure the pension system is adequately funded in the future.
• Yet because older voters care more about their pension than about long-run growth, the investments that growth requires are electorally difficult to deliver.
• Only linking older voters’ standard of living to economic performance can make pro-growth policies politically viable.

By the 2070s, 28 per cent of the population will be over 65 and pensioner benefits will cost 9 per cent of GDP. Yet over 40 per cent are not currently saving enough, and over 10 per cent will not afford the minimum standards in pensions.

The Pensions Commission's impressive 2026 interim report correctly points out that minimum pension contributions will need to rise; that not enough people are enrolled in workplace pensions; and the challenges for the self-employed and for the many retirees who will be living in rented accommodation are likely to be even more acute. However, the report largely treats ageing as a fiscal, adequacy and design problem, when it is fundamentally a political economy problem.

Economically, the question is how to achieve higher economic growth in a country with mounting beneficiaries and fewer workers. Politically, as I argue in my forthcoming book, the paradox is that ageing makes it harder for governments to adopt precisely the policies needed to increase growth.

What is this political economy problem, why do the Conservative and Labour parties struggle to address it, and what should be done?

The political problem of ageing

With fewer working-age people supporting more elderly, they need to become more productive to avoid cuts to living standards. Workers face a difficult simultaneous need to support the growing costs of existing pensions and to save more privately for their own future retirement. Any long-term solution that protects the living standard of both workers and pensioners will need to secure economic growth. Yet, as the report makes clear, the UK's recent economic record has moved in the exact opposite direction. Changing the UK’s productivity and growth path requires confronting the main political problem of ageing: as the population grows older, it becomes harder to assemble the political coalition needed to sustain such efforts.

Nearly 20 per cent of the population is over the age of 65. Turnout among the over-65s was 73 per cent in the 2024 election against 37 per cent among 18 to 24-year-olds. Even those in their 50s and 60s who are not yet retired will logically weigh their long-expected retirement heavily in their priorities. If we include people in their 50s as part of the older voter group, they are already a majority of the voting-age population in more than half of parliamentary constituencies.

The political problem of ageing takes on a different form for the Labour and Conservative parties, because older people vote for the latter more than for the former. Figure 1 shows the R-squared of a regression of the Conservative vote on a constituency's age profile. Age accounted for about a quarter of the variation across English seats in 2010, and this rose to almost half of the variation by 2019, making the age profile of a constituency a crucial factor in the party's electoral success.

This helps make sense of the somewhat skewed priorities of the Conservative Party since the global financial crisis. While it protected pensions with the triple lock, the young and middle-aged have borne the brunt of adjustment in the form of stagnant wages, precarious or insecure work, underemployment and unemployment, an unaffordable housing market and still largely insufficient childcare and family policies.

By contrast, the triple lock alone now costs around £16 billion a year more than uprating by earnings would have done since 2010. The Department for Work and Pensions forecasts that 55 per cent of social security in 2025-26 goes to pensioners, £146 billion of it on the State Pension alone, against £145 billion for everyone of working age and for children combined. The result of grey power shaping economic and welfare-state policies is what I have called a gerontonomia: a political economy that is primarily organised around the preferences and needs of an ageing electorate.

Despite the relatively lower importance of older voters to its electoral success, Labour similarly struggles to contain spending on pensions for at least two reasons. First, it would clash with their ideological commitments to the welfare state. Second, Labour cannot afford to antagonise the sizeable group of less well-off and non-home-owning pensioners who are much less reliably Conservative. At the time of writing, the new Prime Minister has so far declared that he will keep both the fiscal rules and the manifesto commitment not to raise VAT, income tax or national insurance, leaving Labour with almost no margin to carry out substantial social and public investments.

We risk entering a downward spiral whereby successive governments protect the living standards of pensioners and workers in the present, at the expense of public and social investments, and hence economic growth in the future. Projections suggest that national debt could rise from 94 per cent of GDP today to above 275 per cent by 2074, ‘driven mainly by the fiscal pressures of an ageing population’.

Three recommendations follow from my diagnosis

1. Any plans to put our pensions on a fair and sustainable footing should make clear what rate of productivity and output growth are assumed and how they are achieved.
2. Decisions on the evolution of pensions, most notably indexation, and choices about public and social investments should be taken together rather than separately or sequentially.
3. Pensioner incomes should be protected in a way that gives older voters a stake in the economy that funds them. Among several possibilities, a return to an earnings link, possibly with a clawback mechanism, or even indexing directly to economic growth, would most strongly realign electoral incentives, whereas the most recent proposed reform to the triple lock risks making the political problem worse by reducing the linkages to earnings while keeping the inflation and 2.5% protection unchanged.