28 July 2016
Breeding relative poverty
Public policy will need to move to favour Millennials.
by Frank O’Nomics
Many of us have suspected it for some time, but last week we got two studies to confirm our fears – the chances are, our children will earn less than us. Theresa May was thinking along these lines when she talked on the steps of No 10, about a growing divide between a “more prosperous older generation and a struggling younger generation”. The current generation of over-60s may be luxuriating in the benefits of having bought cheap housing, had free university education and a defined benefit pension, and it now seems that the next generation of retirees will have also earned more money.
It is reasonable to expect older people to have accumulated more wealth, but the fact that those aged 65-74 hold more wealth than all those under 45, despite the latter group being twice as large is disturbing. Much of it has to do with the movement in property prices and there is little that can be done about that – but it is the difference in income, rather than wealth, that is the real worry. The Institute of Fiscal Studies has produced a report which shows that, since the financial crisis, the income of 22 to 30 years olds has fallen some 7% in real terms, while that of the over sixties has risen around 11% – and these numbers do not take account of movements in housing costs, which are more of an issue for the young than the old. The conclusions of this report are compounded by one from the Resolution Foundation, which showed that so called “Millennials” are set to become the first generation to earn less over their lifetimes than their predecessors. The studies raise some important questions regarding what has driven this turn in a very long–term historical trend, and more importantly what the implications are likely to be. One might argue that, if these changes are part of a process that leaves fewer people in poverty, we should not be too concerned. Sadly, this does not seem to be the case and, as the spending of wealthier generations influences the expectations of the young, this raises the prospect of many of them running ever greater debts in an effort to emulate their elders.
For the purposes of clarity, it is worth outlining the generational groups that are being assessed. There has been an outbreak of buzz-word bingo which can be confusing. What we are looking at is a comparison of the earnings of the “baby boomers” (born between 1946 and 1966), “Generation X” (born 1966-1980) and the Millennials (born 1980-2000). Those under 35s will have earned, according to the Resolution Foundation, £8,000 less in their twenties than Generation X, and this could deteriorate if we are to enter a post-Brexit recession. The situation is made worse by the spending patterns of the young, where rent has become a key expenditure as they cannot raise the deposit for a mortgage (the average for which is now over £33,000 according to the Halifax). Millennials wll have spent £44,000 more than baby boomers did on rent by the time they reach 30, and £25,000 more than Generation X. Is this all a product of the financial crisis? Not really – it seems that the income and expenditure trends were well in place prior to 2008 and have merely accelerated since.
The Institute of Fiscal Studies does give us some clarity over the drivers behind the increasing income gap between the young and the old. A significant factor for the over-60’s has been a strong growth in benefits. Since 2010, the state pension has been increasing at the higher of inflation, average earnings, or 2.5% (the so-called “triple lock”). On top of the old have benefited from winter fuel allowances, free bus passes, free prescriptions and free TV licenses (if over 75). It would appear that successive governments have made great efforts to woo the grey vote, but have focussed very little on the income disparity created. The other key factor has been the increase in the number of over-60 year olds who are still working; for now this is of less concern. If people are fit and healthy enough to carry on working and wish to maintain their levels of spending that is a good thing – at least while we are in an environment of steadily falling unemployment (which has just broken 5% for the first time since 2005). For now the young may not criticize the old for having jobs that should rightly be theirs, and it seems that many older people are still working so that they can help their children and grandchildren.
If we were just talking about a frustration at having to rent, or at not being able to afford to join the silver surfers on the beach, the debate would be of only passing interest. However, the data produced by the IFS does raise issues about increasing poverty. On the positive side, the proportion of children who live in a workless household has now fallen to 1/6 as opposed to ¼ in 1994/5, but 2/3 of children that are classified as poor have a parent in a job. The IFS describes the “new poor”, where half of the families rent rather than own a property, and middle-income families with a child now get 30% of their income from the state (via tax credits) compared to 20 years ago when this was 20%. As with the Resolution Foundation, the IFS raises the prospect of this state of affairs deteriorating as Brexit has an impact on living standards.
David Willetts (a former Tory minister) chairs the Resolution Foundation and has launched an “intergenerational commission “ to examine how much young people are likely to miss out. “Fairness between the generations is something that public policy has ignored for too long,” he argues – and it seems that he has a strong point. Having just come through an experience (the Brexit vote) which risked driving a wedge between the generations, we are now faced with a potential shift in policy that needs to favour the young. Whether older people are prepared to accept this will depend on just how much they are asked to pay.
If you enjoyed this article please share it using the buttons above.
Please click here if you would like a weekly email on publication of the Shaw Sheet
