Have older people stolen their children’s future? | Deloitte UK has been saved
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Fairness between generations is a hot topic. There’s a widespread sense that older and retired people have come through the last ten years in better shape economically than younger people.
Some believe older people, and the state, have virtually rigged the system for their benefit. The titles of a recent an influential book by David Willetts, a former Conservative Minister, sums up the mood: “The Pinch: How the Baby Boomers Took Their Children's Future - And Why They Should Give It Back”.
It is certainly true that, on average, older people have done better than the young in terms of wealth, incomes and benefits in the last decade or so.
The financial crisis has borne down hard on wages, especially for younger and less skilled workers. Meanwhile pensioner incomes have risen, supported by inflation-protected benefits, rising employment rates for older people, the maturing of defined benefit pensions and growth in rental income. For decades pensioner incomes lagged behind those of younger, working people. Today, as the Resolution Foundation, a think tank, observes, the average pensioner household has a higher income than the average working age household.
Older households have also done pretty well when it comes to wealth. The policy response to the financial crisis, in the form of Quantitative Easing (QE), has injected money into the system and driven up asset prices. This has raised the value of the pensions, mutual funds, equities and housing assets heled by mainly older households.
This comes on top of, and has reinforced, a longer running tendency for house price inflation to outstrip wage growth. High house prices increases the wealth of predominantly older homeowners and made it harder for younger people to buy property. A baby boomer born between the mid-1940s and mid-1960s was, at the age of 30, 50% more likely to own their home than a 30-year-old Gen Xr, born between 1965 and 1979.
Since wealth accumulates over a lifetime it is not surprising that older households tend to more asset rich. What is new is the way in which, QE, sluggish income growth and the accumulation of mortgage and student debt have slowed the pace of wealth-accumulation for younger people.
Some seem to see what has happened as a result of negligence or complacency on the part of older generations. To me it looks more nuanced, accidental and, in all probability, transient.
Let’s start with incomes. Wages have been squeezed by the financial crisis and by all sorts of longer running structural change in the labour force – everything from globalisation, to technology and changing working practices.
More skilled and experienced workers, have done better than less experienced, often younger workers. This isn’t solely about age. The income of lower skilled workers, especially men, have suffered – men are working fewer hours, their employment rates have fallen since the 1970s and almost a third of working age men are not working.
All governments have struggled with the issue of how to cope with the dampening effects of globalisation, technology and labour market changes on less unskilled workers.
What is pretty clear is that QE and a squeeze on wages have helped preserve jobs and kept young people in work through a deep recession. The UK has weathered the worst recession since the 1930s yet escaped 1930s-style mass unemployment. Youth unemployment never rose to the levels seen in the far milder recessions of the ‘80s and ‘90s and prospects for temporary and part-time work are better. The UK has avoided the ‘scarring’ effects of high unemployment which hit the young hardest – the loss of work experience, confidence and motivation that keep people out of work for years.
One of the big drivers of opportunity for younger people is whether women are able to get and keep jobs through their career. Women’s workforce participation has continued to rise and it is among the highest in the developed world. The wage gap between men and women remains, but has narrowed.
It is true that the benefit system has sought to protect pensioners through, for instance, the uprating of the state pension by the higher of wage or income growth. This is the product of a longstanding political consensus. For many decades the UK has suffered from relatively high levels of pensioner poverty. Policy has worked, quite reasonably, on the basis that pensioners are less able to work or cope with adverse shocks than younger people.
But policy changes and in recent years has focussed on raising incomes and opportunities for lower paid workers, many of whom are young. The National Living Wage (NLW), and before, it, the minimum wage, have raised incomes at the bottom of the wage scale. April saw the introduction of the apprenticeship levy, a 0.5% tax on pay bills of large employers to fund training. Pension auto-enrolment, which requires a minimum employer’s contribution of 1% of relevant earnings, will rise to 3% by October 2018. In July a government-commissioned report into the effects of new working practices, such as the so-called gig economy, argued for greater protection for workers. A new consensus seems to be forming around the need for a marked increase in the number of homes being built.
Despite the squeeze on wages it’s worth noting that take-home incomes for those in the bottom 20% of wage earners have risen faster than for those in the top 20% in the last ten years. Lower income households have been helped by rising employment rates, especially for women. Meanwhile tax credits have boosted in-work incomes for those on low pay and tax rises since 2008 have borne disproportionately on people on higher income.
What of the point that baby boomers had their education paid for by grants whereas the average graduates faces debt of over £40,000? Education may have been ‘free’ – or, more correctly, paid for by taxpayers - for earlier generations, but far fewer people went into higher education. In the 1950 only 5% of went into higher education and in 1980 12%. Today the figure is about 50%. Crucially, student loans are not actually loans since repayments are conditional on graduates reaching an earnings threshold.
We should be wary of thinking there was some sort of golden age for young people. In the ‘70s and ‘80s young people were more likely to be unemployed, less likely to go to university and, for women, far less likely to have a job. Nor should we underestimate the welfare-enhancing effects of reducing pensioner poverty and of record employment rates.
None of this is to underestimate the challenges facing the younger generation. The issues are real, though at least some of the causes – such as QE and the effects of the financial crisis – will not last forever. The prominence of intergenerational issues, especially in the recent general election, shows that society is alive to the challenges, not indifferent to them. Societies, like families, tend to be focussed on the welfare of the next generation. It seems overly pessimistic to believe that that intergenerational compact has broken down.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.