Britain tends to be preoccupied by issues of inequality more than most other countries are. People get very het up about what others are earning or how much wealth they have got. The fury over bankers’ bonuses is at least in part a reflection of that. We may not be a particularly ideological country but we are very sensitive about ‘fairness’ and we are certainly obsessed with class.
Mostly concerns about the distribution of income focus on how the national cake is divided up at any one particular time. But there is another way of looking at the issue: how income and wealth are shared out over time. Is one generation eating too much of the cake at the expense of another?
This question has tended to get overlooked because we have usually taken it for granted that the gradual increase in prosperity overall will mean that our children will be richer than we are and their children even richer in turn. But this assumption has recently been challenged and by a perhaps unexpected source – a senior member of the Conservative shadow cabinet, David Willetts.
Mr Willetts has written a book, The Pinch, in which he says the Baby Boom generation (born between 1945 and 1965 and of which he is a part) has done peculiarly well for itself and that the prospects for the generations immediately following it are nothing like as rosy. The question his book raises is what this very fortunate generation, who still happen to be in charge, should do about it.
The Willetts’ case is that the babyboomers have taken full advantage of the opportunities made available to them during the period of huge growth in the world economy after World War two and especially in the era of ‘globalisation’ since around the middle of the 1980s.
The early part of that period was characterised by bouts of high inflation, just when the babyboomers were at that time of life when they were incurring debts. Inflation is good for debtors because it erodes the real value of their debts. In particular the real value of the babyboomers’ mortgages fell sharply but house price inflation proved the exception to the general rule of falling inflation so the babyboomers enjoyed huge increases in their paper wealth as their houses became more valuable.
The babyboomers in the early years of adulthood benefited too from a climate in which employers were able to offer them generous pension deals providing them with guaranteed final salary pensions. And globalisation gave them high rates of return on any additional savings they were able to invest.
A few statistics show how well the babyboomers have fared. One third of the value of all UK pensions is held by people aged 55 to 64; a further quarter is held by those aged 45 to 54. A quarter of the population commands 58% of pension claims. Similarly the housing wealth of people aged between 50 and pension age is twice as much as any other group and a quarter of the population owns 48% of the housing wealth.
With regard to the welfare state, babyboomers have been doing well too. Most welfare benefits, including state pensions, are unfunded, meaning that when they are drawn they have to be paid for out of the tax charged on people working at that time. When the babyboomers were the workers paying the taxes to finance the benefits, there were far more of them relative to the numbers drawing the benefits than there are going to be in the future. In other words the children of the babyboomers are going to have to pay more per head in tax to finance benefits being enjoyed in large part by their parents’ generation. Mr Willetts estimates that the babyboomers will end up taking out 118% of what they have put into the welfare state.
The next generations are going to be unlucky in many other ways too. Mr Willetts says the babyboomers have put “too many debts on them”. These debts manifest themselves in several ways. In the first place, even after the huge levels of government debt being incurred in the current recession have been reduced, the overall level of national debt is set to be much higher than it has been during most of the period when the babyboomers’ tax revenues have been servicing it. So the next generation is going to be saddled with much higher national debt to pay the interest on.
But individually too many members of the next generation have incurred debts unknown to their parents. There were far fewer university students in the babyboomers’ generation than there are now but those that there were had grants paid them by the government. This generation leaves universities with personal debts incurred through student loans often amounting to £30,000 each. If any of them can manage to get a mortgage in the early years of working, then the value of that debt is likely to be far higher than the equivalent debt their parents incurred simply because house prices are relatively so much higher.
Those who do have such mortgages, however, can count themselves the lucky ones. That’s because the overall economic climate makes it harder for them in other ways to get on the property ladder. Large-scale immigration since the mid 1990s has tended to depress wage levels which means that the next generation is earning relatively less than their parents did. This means they have less opportunity to save even if they are not already burdened by student debt and that in turn means they can’t even begin to get on the property ladder. As for starting a pension fund, that is unimaginable to many young people starting out in work.
This picture of inter-generational inequality has one other aspect to it which bears on our more usual ways of thinking about inequality. Because the next generation overall has, relatively, such a raw deal, individuals in it are bound to look for help where they can. That means that wealthy middle class parents will tend to try to offset these problems by putting their hands into their own generously-proportioned pockets. This may take many forms: financing second degree courses, putting down the deposits on their children’s homes and so on. That will increase inequality and reduce social mobility within the next generation. It is already being claimed that many of the professions are even now no-go areas for working class youngsters.
So what should be done? Mr Willetts himself does not pretend to provide a blueprint though he does argue for a voucher system in education weighted in favour of the poor. Nor are other politicians, in this pre-election period, rushing to offer solutions. That’s not surprising since any effective policies are likely to need to penalise the fortunate babyboomers who also happen to be enthusiastic voters.
Two obvious areas come to mind. A massive increase in house-building would relieve house price inflation and help the next generation on to the property ladder but, in our crowded island, such a policy would be certain to raise the nimby issue among babyboomers. Similarly, reducing welfare claims by the elderly (ie ageing babyboomers) would in theory at least redress the balance a bit. But at a time when we are discussing increasing what the state spends on personal care for the elderly it is obvious that such talk is political dynamite.
Mr Willetts calls his own generation a “selfish giant” which has “stolen their children’s future”. But can anything be done to tame the giant?
