We Know Zero

When I started writing this blog in April, one of its main purposes was to highlight how poor we are at forecasting things, and suggest that our decision-making would improve if we acknowledged this fact. The best example I could find at the time to illustrate this point were the Office of Budget Responsibility (OBR) Gross Domestic Product (GDP) growth forecasts over the previous 3 years.

Eight months on it therefore feels like we have come full circle with the publication of the December 2013 OBR forecasts in conjunction with the Chancellor’s Autumn Statement. Little appears to have changed in the interim, the coloured lines on the chart below of their various forecasts now joined by the latest one all display similar shapes steadily moving to the right, advising extreme caution in framing any decision based on what the current crop of forecasts suggest.

However, the worse the forecasts are revealed to be, the keener it seems politicians of all the three main parties are to base policy upon them. The Autumn Statement ran to 7,000 words, of which 18 were references to the OBR, with details of their forecasts taking up at least a quarter of the speech. In every area of economic policy, from economic growth to employment to government debt, it seemed that the starting point was what the OBR predicted on the subject. The Shadow Chancellor appears equally convinced that the OBR lends credibility to forecasting, pleading for Labour’s own tax and spending plans to be assessed by them in the run up to the next election.

I am a little mystified by all of this. The updated graph of the OBR’s performance since 2010 does not look any better than it did in April, the lines always go up in the future and so far they have always been wrong. If they turn out to be right (or, more likely, a bit less wrong) this time, then that does not seem to me to tell us anything much about their predictive skill. It takes great skill, as Les Dawson showed, to unerringly hit the wrong notes every time. It just takes average luck to hit them occasionally.

For another bit of crystal ball gazing in his Statement, the Chancellor abandoned the OBR to talk about state pension ages. These were going to go up to 68 by 2046. Now they are going to go up to 68 by the mid 2030s and then to 69 by the late 2040s. There will still be people alive now who were born when the state retirement age (for the “Old Age Pension” as it was then called) was 70. It looks like we are heading back in that direction again.

The State Pension Age (SPA) was introduced in 1908 as 70 years for men and women, when life expectancy at birth was below 55 for both. In 1925 it was reduced to 65, at which time life expectancy at birth had increased to 60.4 for women and 56.5 for men. In 1940, a SPA below life expectancy at birth was introduced for the first time, with women allowed to retire from age 60 despite a life expectancy of 63.5. Men, with a life expectancy of 58.2 years were still expected to continue working until they were 65. Male life expectancy at birth did not exceed SPA until 1948 (source: Human Mortality Database).

In 1995 the transition arrangements to put the SPA for women back up to 65 began, at which stage male life expectancy was 73.9 and female 79.2 years. In 2007 we all started the transition to a new SPA of 68. In 2011 this was speeded up and last week the destination was extended to 69.

Where might it go next? If the OBR had a SPA modeller anything like their GDP modeller it would probably say up, in about another 2 years (just look again at the forecasts in the first graph to see what I mean). Ministers have hit the airwaves to say that the increasing SPA is a good news story, reflecting our increasingly long lives. And the life expectancies bear this out, with the 2011 figures showing life expectancy at birth for males at 78.8 and for females at 82.7, with all pension schemes and insurers building in further big increases to those life expectancies into their assumptions over the decades ahead.

And yet. The ONS statistical bulletin in September on healthy life expectancy at birth tells a different story which is not good news at all. Healthy life expectancies for men and women (ie the maximum age at which respondents would be expected to regard themselves as in good or very good health) at birth are only 63.2 and 64.2 years respectively. If people are going to have to drag themselves to work for 5 or 6 years on average in poor health before reaching SPA under current plans, how much further do we really expect SPA to increase?

Some have questioned the one size fits all nature of SPA, suggesting regional differences be introduced. If that ever happened, would we expect to see the mobile better off becoming SPA tourists, pushing up house prices in currently unfashionable corners of the country just as they have with their second homes in Devon and Cornwall? Perhaps. I certainly find it hard to imagine any state pension system which could keep up with the constantly mutating socioeconomics of the UK’s regions.

Perhaps a better approach would be a SPA calculated by HMRC with your tax code. Or some form of ill health early retirement option might be introduced to the state pension. What seems likely to me is that the pressures on the Government to mitigate the impact of a steadily increasing SPA will become one of the key intergenerational battlegrounds in the years ahead. In the meantime, those lines on the chart are going to get harder and harder for some.