Will families suffer from a demographic time-bomb?

It will not be long before the burden of the number of over-60s falls on a far fewer number of young earners

Kate Harris and Tony Yeo are grappling with an age-old problem: they would like to have another baby but they cannot afford to.

Mr Yeo, 28, earns £26,000 a year as group development manager for a logistics company in Barry, South Wales. His fiancée Ms Harris, is 21 and in the last year of a hairdressing course, so she is earning nothing until she qualifies next summer. Even so, she would like their two-year-old son, Jack, to have a brother or sister.

"I'd like to have more children, but whether I could afford to is the big problem," Mr Yeo says. "Jack was a bit of a surprise, although I wouldn't swap him for the world. But in our present situation there's no way we could consider having another one. And we don't know what the state is going to charge for next; schooling, maybe? The future is pretty bleak, with not many positives around now."

Mr Yeo and Ms Harris are among thousands of couples going through this dismal exercise. Consequently, Britain's birth rate is plummeting. The number of children per woman has dropped from 2.4 to 1.6 in the past 30 years, which means we are not replacing ourselves. Although there have been occasional upward blips there is no sign of the trend reversing.

At the same time, the baby boom generation born in the 1940s are heading for retirement in 10 years, raising the prospect that the long-dreaded demographic time-bomb is poised to explode.

This year, for the first time in Britain, the number of people over 60 exceeded those under 16. This means when those teenagers enter the workforce they will find there are fewer of them than in previous generations, yet, collectively, they will be expected to support a record number of pensioners because the state pension system is based on the principle of pay-as-you-go.

Instead of the state building a retirement pot for today's pensioners, as happens with personal pensions, their state pension is paid from the taxes of today's workers. That was fine as long as there were more workers than pensioners, but lengthening life expectancy and the falling birth-rate has shredded that cosy equation.

David Willetts, the Conservative work and pensions spokesman, raised eyebrows among women this week when he said we should counter the crisis by having more babies.

He said: "It is good news that life expectancy is improving. These are not extra years of miserable incapacity; if anything, we die fitter than before. Anyway, life expectancy has been improving steadily for 150 years.

"The problem is not longevity. The problem is that there are not enough young workers coming along. After the baby boom of the 1950s, we have had the baby bust. Europe's real demographic crisis is not longevity but birth rates."

One pithy female reaction this week was: "Maybe he should try having a baby and see what it feels like." But the agony of childbirth is only one deterrent. Another is the loss of freedom that goes with the automatic fall in a couple's standard of living. And career women are becoming increasingly reluctant to step off the promotion ladder to start a family, returning to find their male former contemporaries are several rungs above them.

But Mr Willetts said: "This is not a matter of forcing traditional roles on women: countries where the feminist revolution has advanced furthest also have higher birth rates. Nor can people be forced to have more children than they want. But we have created an environment where people are not having as many children as they would wish because it takes so long to create a nest within which to raise a family."

And even if the birth rate suddenly recovered, it will be, arguably, too late to prevent a crisis. Today's newborn will not enter the workforce for nearly 20 years, by when the baby-boom retirement party will have been in full swing for quite a while.

"I think anyone in the 25 to 45 age bracket now is stuffed," said Mark Dampier, financial adviser with Hargreaves Lansdown in Bristol. "They will be taxed to pay for the growing number of pensioners, and they can expect to carry on working until they are in their 70s. The only answer is to put more into savings, which means giving up the standards of living they have now. Most people have to put away a fifth of their gross salary, and they don't want to do that, because it means giving up that second holiday or that second home.

"But if everyone does that the consumer boom will shudder to a halt and the economy will go into recession. The only ones who are smiling are those in final-salary pension schemes, mainly workers in the public sector and, of course, MPs."

The Economist magazine yesterday called for the £3,600-a-year stakeholder pension to be made compulsory for all employees, and for the state retirement age to be increased. "There are few good reasons why more healthy people in their 60s should not be holding down jobs, rather than sitting idle at younger taxpayers' expense," it said.

But Jason Butler of Bloomsbury Financial Planning does not believe there is a demographic time-bomb. He said: "Yes, the population's getting older, but if you look at Japan they have the lowest birth rate in the world and an ageing population but they also have more wealth per head than anywhere else. But people are going to have to work longer and they are going to need more assets, which means taking more responsibility for your own finances.

"The most important distinction younger people have to make is between buying assets and buying liabilities. A house is a liability, never mind about prices going up. People have to take control of their finances, and the best way to do that is to set goals."

A recent survey by the Future Foundation for Saga, the retirement financial group, showed working longer is not an unpopular prospect for many. It found 40 per cent of over-50s have delayed retirement for financial reasons, and 73 per cent of that age group expect to be still working by 2020.

Janet Thomson, Saga's director of corporate development, said: "Given the present economic climate and stock market conditions, it is inevitable that some are going to be forced to work past the statutory retirement age, because they can't afford not to. But the increase in workers aged 65 and over is, in part, due to a considerable number of people wanting to work on as late as they can. We believe people should be given choice and flexibility when considering working later in life."

Simon David, senior consultant at the accountant BDO Stoy Hayward, believes parents need to lay down a savings portfolio for their children early. He said: "We all need to benefit from having more children, but it hits the pockets of individual parents. You need to start savings for them from the day they are born, using stakeholder pensions and grandparents gifting to grandchildren." (see opposite page).

CONTACTS

* Age Concern www.ageconcern.org.uk

* The Annuity Bureau www.annuity-bureau.co.uk

* BDO Stoy Hayward 020 7486 5888 www.bdo.co.uk

* Bloomsbury Financial Planning 020 7375 7281 www.bloomsburyfp.co.uk

* Hargreaves Lansdown 0845 345 0016 www.hargreaveslansdown.co.uk

* Help the Aged www.helptheaged.org.uk

* Pensioners' Guide www.info4pensioners.co.uk

* Saga Group 0800 414 525 www.saga.co.uk