Mind the Gap: the looming intergenerational crisis

9 May 2018 Nick Garbutt    Last updated: 9 May 2018

An influential think tank has just produced a policy paper designed to tackle the looming intergenerational crisis which endangers young people, children and those yet to be born.

The Resolution Foundation’s A New Generational Contract was two years in the making. It is bold and ambitious and clearly evidenced. However, as many of the policies proposed are, for the moment at least, politically toxic, unlikely to lead to change, yet.

But the clock is ticking and the issues are of such profound importance that it deserves to start a vigorous public debate. There was considerable coverage in the media this week, most of it concentrating on one aspect of the report. Whilst this led to some ill-informed criticism, it has got people talking, and that is good.

To get a fuller picture it is important to understand the context of the report.

The 18th Century Irish conservative Edmund Burke famously wrote: “Society is indeed a contract…It is a partnership in all science; a partnership in all art; a partnership in every virtue, and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”

This thinking animates the paper, and it is remarkable that its radical proposals should be drawn from the philosophy of the man often regarded as the grandfather of Conservatism.

The Resolution Foundation argues that the Welfare State itself is based on the principle of a contract between the generations- the idea that everyone is helped through the various stages of their lives. The young get education, later help with childcare, there is a health system for all and older people get pensions. It works because everyone pays in and everyone gets support.

The paper argues that this contract is under severe strain – it may even broken – and lays out what it believes needs to be done to resolve the crisis.

The evidence is stark.

Young people may be less likely to be unemployed than earlier generations, but low pay is endemic, work is often temporary and they are far less likely than previous generations to move jobs (the best route to a pay rise)

The Millennial Generation is half as likely to own homes by the age of 30, compared to the earlier Baby Boomers and those who rent are four times more likely to be in private accommodation. This increases housing costs, and instability.

Whilst the UK economy has performed better than some in the aftermath of the financial crisis of European countries only Spain has seen a comparable “boom and bust” between generations.

In contrast pensioners have performed well since the turn of the century. This to the point where median pensioner incomes are now higher than median working-age incomes after housing costs.

This is only part of the problem. The Baby Boomer generation is reaching retirement age. Baby boomers are so named because this generational cohort is much larger than previous and later generations. Even without factoring in increasing life expectancy this endangers the fundamental principle of the Welfare States promise to look after older people.

Combined with other pressures on health costs, this ageing population means public spending on health, care and social security is set to rise by £24 billion by 2030 and by £63 billion by 2040.

This is far too steep a rise for payment to be met by carrying on as present. It has been estimated that doing so would mean that babies born this year would be paying more than double the tax when working as their parents currently do. This is clearly not an option. 

Opinion polls tell us that the general population is very well aware of all of this. There is also widespread acceptance and support for the intergenerational contract, even though few of us use that term. And, in practice, people are trying to address the problems themselves. The Bank of Mum and Dad is now one of the biggest sources of personal lending in the UK and many grandparents are stepping in to help their children with child care.

Yet to date there has been very limited engagement by politicians and what little policy that has been developed has hit the rocks.

This despite the fact that conventional ways of responding look doomed.

They are:

  • covering the deficit by increasing the National Debt. This appears attractive but it would push the national debt above 100 per cent of GDP by 2040 and above 230 per cent of GDP by 2066. It also passes the problem on to future generations
  • cutting the Welfare State which would be unfair, cause widespread hardship and deprive future generations of benefits we have come to regard as rights
  • Increasing the tax burden for those in work which would put a disproportionate burden on the young and ultimately prove unsustainable.

The Resolution Foundation’s Chair is the former Conservative Minister David Willetts wrote in the report: “We have to tackle substantial long-term problems. They will not fix themselves.”

He’s also right in stating that we can’t expect political parties to embrace them straight away.

The starting point for the Resolution Foundation is for people to acknowledge that “Britain’s booming stock of wealth is increasingly concentrated in older generations and that it is also increasingly lightly taxed.”

Tackling this will take more courage than any political party has shown to date.

Proposals include:

  • Reforming the inheritance tax system to allow people to receive £125,000 tax free and then be taxed, in progressive bands on further amounts. The extra revenues received would provide the money to give all 25 year-olds a £10,000 “citizen’s inheritance” with its spending restricted to skills, entrepreneurship, housing and pension saving
  • Funding social care by reforming the rates system and ensuring people contribute to the cost of their care, but capping this at 25% of their assets.
  • Providing more funding for the NHS by introducing National Insurance payments for those working above the retirement age, and more limited National Insurance on pensions
  • A £1 billion “Better Jobs” scheme for younger workers and £1.5 Billion to improve technical education, these to be funded by withholding 1p from the reduction in Corporation Tax.

It is unlikely that there will be any progress on any of this in the short or medium term. But there does need to be a debate and political parties need to think, long and hard about all of this. And if none of the options presented by the Resolution Foundation are palatable they need to come up with some of their own.

After all the people who vote for them are already wrestling with the problem and trying to do the best they can.

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