The rising cost of growing old

It is only human nature to be afraid of growing old. But for all those worries about failing strength and mental alertness, at least recent generations looked toward the autumn of the years with a comparative sense of financial security. For many, a generous occupational pension supported by the state looking after the sick and infirm, fostered high expectations of a decent old age with something left over afterwards for the kids. But this is increasingly sounding like folk-history now.

To all those instinctive worries about ageing, that of how to cope financially has suddenly assumed dramatic urgency. The state is in full retreat from the ideals, and the costs, of the post-war public welfare system. The pull-back is being accompanied by a massive educational campaign, which is intended to drive home to the people that they are going to have to do a lot more for their own old-age provision. To meet the sort of retirement expectations that are now common, the vast majority of those working today must save a great deal more of their disposable income.

The most recent bearer of this tough message is John MacGregor, the former cabinet minister and now a backbench Tory MP and non-executive director of Hill Samuel, the merchant bank. He has been lashing anyone who cares to listen with grim warnings of retirement timebombs and pension crises unless people wake up to the reality of taking much more of their future into their own hands.

No doubt with one eye to his new paymasters in the City, he warns of the need to pay substantially higher contributions into pension schemes if we are to be sure of a decent standard of living later on. People will also have to get used to paying for insurance policies which will cater for the eventuality of costly nursing home care, he insists.

Much of what he says is fair enough. If future expectations are to be maintained, then current ones will have to be lowered. That is economic reality. Politically, however, you can only go so far by trying to shock people into saving more. The task facing this government, and its successor, is to devise new ways of encouraging people to change their ways. On the whole, the British are poor savers, preferring to put most of what they have earned into housing, and spending the rest.

Mr McGregor's prescription, abolishing the tax incentives for short term saving schemes like PEPs and Tessas and loading them onto long term schemes is only part of the answer. It can reasonably argued that the tax incentives for pension savings are already quite good enough. Changing the tax incentive structure might nonetheless go some way to changing peoples' habits. But ultimately, a culture of long-term saving requires a conducive economic environment.

If the government wants to introduce a new social contract - with people providing more for their own futures - then it must be serious about its side of the bargain: keeping inflation away from our savings.