Hamish McRae: There are plenty of things to worry our ageing population apart from pensions

Ageing is not just about pensions. The great splurge of attention last week, following the publication of Adair Turner's interim findings, was on the pension issue.

Ageing is not just about pensions. The great splurge of attention last week, following the publication of Adair Turner's interim findings, was on the pension issue.

That was fair enough: the formal title of the committee was the Pensions Commission. It quite rightly drew attention to other aspects of the problem, such as the case for increasing the pension age, the possibilities of higher taxation, and the need to encourage older people to stay in work, irrespective of the formal age of retirement.

What it did not pay attention to, understandably, were the non-pension issues. So here, to fill that gap, are some comments on three other issues. One is the extent to which tax and pension policies pushed people into early retirement. Next, the investment consequences of the baby boomers starting to run down their savings (and probably the size of their homes) as they moved from work into retirement. And finally there are the political consequences of an ageing electorate.

On the first matter the problem is surprisingly easily fixed: you just have to change the incentives. There is huge variation in the developed world in the implied rates of tax on the earnings of 60-year-olds should they decide to carry on working for another five years. And there is an equally huge variation in the "working-on" rates.

The problem is that in some countries people not only have to pay tax on their income, but also gain no pension advantage and may lose other benefits. Some work by the OECD earlier this year looked at this implicit tax rate in different countries. Some of the results are shown in the first graph. The rates are for a single worker on average earnings. In the Netherlands, this implied tax rate is very nearly 100 per cent, in Luxembourg nearly 80 per cent and in Belgium and France more than 50 per cent. At the other end of the scale in New Zealand and Iceland there is hardly any tax penalty at all.

Now look at the employment rates for people between 55 and 64 in the different countries (next graph). The highest rate of employment is in Iceland, and New Zealand also ranks high. At the other end of the scale, the countries with the lowest proportion of this age group still in jobs come Luxembourg and Belgium. The "fit" is not perfect: more Swedes are in jobs than you might expect, given their tax regime. But the message is pretty clear.

It is worth noting that the US and UK are towards the "better" end of the scale on both counts but not at the top. That suggests we may well have an opportunity here to make the small changes to the tax, benefits and pension system to try to get more people to stay in work until 65. That is a much less contentious matter than increasing the state pension age beyond 65. The tax and benefit system could be further tweaked to encourage people to go on working beyond 65, for example by abolishing higher rate tax or even cutting the basic rate, on elderly workers. Every year that someone continues in work helps: it brings in tax revenue that would not other come in and it cuts the pressure on pensions spending.

The next issue that received very little attention is the implication for asset prices of the retirement of the baby boom generation. The economics team at HSBC has dug out some US statistics that were new to me, showing the growth in the US baby boomer generation and plotting it on a couple of graphs against share and home prices. These are shown above. The group shown that rose in relative size is the 40-64 year-olds, the people at the top of their earning capacity and so presumably those most able and eager to build up a share portfolio or invest in property. The "fit" is by no means perfect, but it does give a certain feel for the relationship.

The good news, I suppose, for both classes of assets is that this block of earners carries on growing for another 10 years, so I suppose you might think that both share and property prices will be secure for a while yet. The bad news is that after about 2014 it could be downhill all the way.

Or rather downhill in return on investments. Countries' economies could still carry on growing, albeit more slowly, but savers would just have to accept that real returns would be low for a generation, rather as they have been in Japan. I suppose the danger is that people miscalculate potential returns, failing to take into account fundamental changes in supply and demand. A good current example of that rather as the flood of investment by Britons in gîtes in France has increased supply so much that properties lie empty and returns have plunged.

But perhaps the most interesting aspect of changing demography is the impact it will have on societies and more specifically on politics. You must remember that Europe, with Japan, is becoming not just the oldest society on earth, but the oldest society that humankind has known. This is an undiscovered land.

Our experience with democracy has been with much younger societies. Politicians have been trained to appeal to the young. So will the next generation of older people, who will of course have the preponderance of the votes, want the same approach in the future? They will certainly want politicians who pay attention to their interests, which naturally will include decent pensions, but the money for these pensions will have to come from the much smaller ranks of the people of working age.

In a static world this would be a recipe for tension between young and old. But we live in a dynamic world, where labour and to an even greater extent capital are mobile. We see in Europe great mobility among the young, particularly the professional young. We also see a brain drain to the US. It is not hard to envisage some countries starting to slither down a slippery slope, where the tax and spending priorities of older voters clash with the interests of the mobile young. The more workers that chose to move abroad, the smaller the workforce remaining to support the ranks of the retirees.

You could envisage a tipping point when the tax base becomes too small to service a country's debts as well as insufficient to provide the promised level of service that voters had signed up to. We don't yet face falling tax revenues here - though revenues consistently seem to undershoot the Treasury's forecasts. But tax revenues are falling in Japan and Germany, even without substantial outward migration of the young.

Of course this will have financial consequences. We assume that governments in developed countries pay their debts - at least in money terms, if not in real terms. I am not at all sure we can assume that in the future. A democratic government faced with the choice of paying pensions or paying full interest on debt would surely chose the former. Ageing is not just about pensions; it could also be about defaults.