“The War of the Generations” would be a dream come true for many a reporter. The Baby Boomers are portrayed as uncaring. They have benefitted from a boom in house prices and are spending it! This idea underpins ageism and harks back to the whole “early retirement” era. That assumed that older people were taking jobs from the young. This was never demonstrated in any data (See Newsletter #063 “Baby Boomers versus the Millennials”). In the same way most of this debate on intergenerational fairness takes place in the absence of data.
The UK Resolution Foundation set out to remedy this. They have recently promoted a set of “Intergenerational National Accounts” with leading academics. This has tracked all the transfers between generations in the UK. It covers the private sector transfers such as gifts and inheritance. It also covers transfers through the tax system between the young and old.
They are interested in intergenerational inequality. They ask:
"Can the current younger generations have the consumption levels enjoyed by earlier generations".
To answer that, they looked at the various sources of “income”. These include money earned in the labour market. To that they add transfers from the older generation. They also included transfers through taxation and benefits.
Share of Earned Income
They calculated the share of all money earned accounted for by different age groups. They did this every five years from 1990. They wanted to know if the older generation was taking too big a share. Was the pattern changing? It turns out that the shares are broadly similar. Especially when you account for the current generations starting work later in life but will retire later. The old are not taking a bigger share of the labour income pot. They are not “hogging” the jobs. They do point out that the return on the extra education undertaken by the young is minimal. In 1980 less than fifteen percent of people went to university. Today it is over 50%. but this not reflected in the share of the labour income pot.
There may be no intergenerational impact but timing is everything. The economic recession of 2008 had a disproportionate impact on certain generations. The recession plus the collapse in productivity growth combined. Together they precluded the kind of wage rises enjoyed by other earlier generations. This has reduced the likelihood of later generations being able to buy a house. The timing is unfair but the problem was not caused by the older generations.
The Transfer of Wealth
The current older generations have benefitted from a home property boom. Their "pension pots" have increased in value. Both have been driven by sustained low interest rates over the past twenty years. The assets may have grown in value but the returns on those assets are much lower.
There is good news. The older generations are passing down that wealth. They are making lifetime gifts and bequests. In the UK that is running at about £110Bn per year. The project estimates that if this continues the total will approach £4Tn. That is the same as the value of the current housing stock.
It appears that the older generation are behaving fairly. There will be enough transfers for younger generations to maintain their consumption. The only issues are the Government transfers and inequality.
Maintaining Consumption Levels in the Face of Public Transfers
The problem comes in the public transfers. All over the world, those transfers are now heavily weighted in favour of the older generation. UK Government investment in education has remained flat so the young have not benefitted. Both pensions and healthcare costs have exploded. Both favour the older generations. There has been a structural shift in the allocation of government spending. The ageing population has driven both pensions and health care costs. We are living longer and need more pensions. Healthcare is providing us with the means to live longer healthier lives. This seems to have caught governments unaware. This is surprising since the impact of the demographic shift is totally predictable.
At the moment, the Government numbers balance but are unsustainable. The government has high debt levels and an increasing, hidden, pensions liability. Any attempt to fix this problem may unbalance the private sector flows. Certainly it is will disproportionately hit the younger generations with increased taxation.
The Government is taking action. In the UK the entitlement age to state pensions has already risen from 65 to 66. It will rise again to 67 between 2026 and 2028. The Government plans to reach 68 in the following decade. That will mitigate the old age dependency ratio. That is the ratio of the working age population to the number of people over retirement age. Increasing state retirement age changes both sides of the ratio. Instead of increasing it will remain relatively flat at todays levels. This relieves the pressure to raise taxes to cover pensions.
At the moment there is not logical plan for constraining the healthcare costs. In previous Newsletters we have seen some ideas (see Newsletter #085 “Thought Provoking Week”) . There is pressure to move from “treating people when they are sick” to prevention. At the moment no one knows how to fund that change. Social care costs can mean older people selling their homes and reducing any inheritance.
All this analysis has been done in the aggregate. It takes no account of the huge variability and inequality within Society. There are huge gaps already between the top and the bottom (see Newsletter #052 “The Opportunity of Equality”). Going forward we will be in a world of “inheritance”. The ability to sustain consumption at your parents level may depend on those parents. Because people are living longer the transfer between generations will take place later. For many an inheritance may not come in time to buy a first house. It may come at 60 in time to pay off the last mortgage! But there are huge numbers of people with no hope of a gift or inheritance. This can only increase the inequality.
The Myth of the Generational Wars
COVID 19 demonstrated that the animosity between the generations is a myth. Young people all over the world restricted their movements to protect the “old”. The Intergenerational Accounts prove that the old are “doing their part”. The problem is the government allocation of resources. As Lord David Willetts of the Resolution Intergenerational Centre has put it:
“We may have been good parents but bad citizens”