Tag Archives: pensions

Age concern – the Liberal Democrats and generational equity

I wrote this article in Summer 2006 for Liberalism – something to shout about, published by Graham Watson MEP and edited by Simon Titley. I’m taking the liberty of republishing it here, but if you want to read the other articles – by Graham, Simon, Ros Scott, Jonathan Calder and Simon Bryceson, follow the above link for an order form.

Any article on this topic will inevitably date quickly, so please bear that in mind. In particular, “Hands off our future” is a reference to an abortive attempt of mine to set up a campaign website on the topic which in the end I didn’t have the time to keep going.

Demographic change is creating a dangerous situation, one where younger generations are suffering increasing economic injustice. A system of ‘neo-feudalism’ will emerge unless radical steps are taken. Do the Liberal Democrats have the courage to campaign for justice – or will they miss the boat?

Introduction
There’s no easy way to put this, and I can almost hear the shrieks of outrage as I type, but young people are being expected to shoulder too much of the UK economy while older people are getting away with shouldering too little.

That isn’t to say that pensioner poverty doesn’t exist, nor is it to deny that some young people are extremely wealthy. As in any discussion on economics, we are talking in generalities here. It is however to say that, as well as being unfair, it is having a deleterious effect on our economy and stands to reinforce class barriers and social immobility at a time when we are flattering ourselves that such things have been relegated to our past.

Young people are hit by a sextuple whammy of costs that older people do not have to worry about to the same extent. These are: graduate debt, credit, saving for the future, environmental taxation, income-based taxes and housing costs. We should take a moment to consider each one in turn:

The problems
Housing costs
The owner-occupier dream of the Thatcherite 1980s is coming to an end. Only 20% of 20-24 year olds are homeowners, compared with 34% in 1994. First-time buyers now make up only 38% of total buyers1.

Why is this? Simply enough, house prices have got out of control. According to the Department for Communities and Local Government2, the average house price across the UK is now £190,051; in London it is £279,418. Median earnings meanwhile are £22,412 (less than one-eighth of the average house price) across the UK and £28,912 in London (less than one-ninth of the average London house price)3. According to Nationwide, the median home loan is now worth 3.21 times the incomes of those buying the property, compared with just 2.39 in 19944. That of course means that half of new loans are being lent at even higher multiples. According to the Halifax5, public sector workers cannot afford average priced homes in 65% of towns, compared with just 24% five years ago. Mortgage repayments typically now use up 42% of take home income.

Unsurprisingly, 40% of first-time buyers now get parental help6. For many more people however, the solution is to simply rent. There again, the options available to people 20 years ago simply do not exist. The right-to-buy policies of the 1980s, which got so many people onto the housing ladder (earning many of them small fortunes in the process), were unsustainable as they depended on selling council housing that was not replaced.

One other option is buy-to-let: buy a house in a more affordable area than the one you live in and use the income from that as security. This in turn of course helps bloat the housing market even further, pricing even more first-time-buyers out of the market.

Ultimately, all of this must be unsustainable, although the bubble is still looking fairly robust at the moment. If the housing market does crash however, it is again young people who will predominantly suffer.

The obvious solution to all this is to build more affordable homes. Yet that has been official government policy for years now and little progress is being made. We cannot escape the fact that, under the current system, property developers have very little interest in building large numbers of affordable homes.

Graduate debt
People graduating from university this year owe an average of £13,500, according to the Association of Investment Trust Companies (AITC)7. As with many of these figures, it needs to be emphasised that this is an average: graduates from wealthy families typically have far less debt to repay, while poorer graduates will have significantly more. This figure also does not take into account variable top-up tuition fees, introduced this year: at a stroke, such fees will increase debt for graduates from the top universities by £9,000 to £12,000.

Liberal Democrat policy is to scrap tuition fees. This has been very popular, but it should be remembered that students from the poorest backgrounds don’t pay fees anyway while students running up average debts and paying full tuition fees would still end up graduating with £10,000 hanging over their heads.

One argument used to justify the increased burden that individuals themselves pay is that graduates earn more; the Dearing Report8 claimed that graduates would, on average, earn £400,000 more over their lifetime. Yet, as higher education has expanded, so the worth of each individual degree has fallen. The University of Swansea estimates9 that the ‘value’ of a degree for a male arts graduate is now just £22,000. Yet with degrees now a minimum requirement for so many jobs these days, non-graduates find themselves severely disadvantaged regardless of their ability.

Credit
71% of young people (aged 18-29) have an overdraft facility and one-in-five are permanently overdrawn10. 18.7% of all bankrupts were aged 18-29 in 2004/5, compared with just 7.8% in 2001/2.

There is a temptation to dismiss these figures as simply young people spending irresponsibly, yet that is to ignore how credit has been promoted quite as fiercely as it has been over the past couple of decades. It is also to ignore the fact that banks will tend to refuse lower interest loans to customers with little credit history while being quite happy to give them credit cards. Borrowing is treated as a rite of passage that young people are expected to go through and, whether individuals struggle or not, banks are guaranteed a profit.

To his enormous credit, Vince Cable MP has been making a noise11 about the problems associated with unsustainable levels of debt for some time now. The party should pay him more attention.

Saving for old age
Young people are now expected to save for their own old age in a way that their parents’ generation never need worry about. Final salary pension schemes are a thing of the past. The Turner proposals12, largely accepted by the government, offer some hope for the future, but there is no escaping the fact that, for them to work, people must contribute more out of their own salaries.

Yet as the importance of saving for the future has increased, in fact the opposite has happened. According to Pensions Minister James Purnell in July 200613, the number of young people saving for a pension has fallen from one-in-three to one-in-four since 2000. Purnell was quick to pin the blame on young people themselves for their “live fast, die poor” lifestyles. Can we really simply dismiss this trend as shortsightedness, or are young people simply expected to cope with debt? This is a vital question for politicians to answer if they hope to make opt-out stakeholder pensions – one of the lynchpins behind the government’s new pensions strategy – a success. If it is financial pressures that are putting young people off from taking out second pensions, there is a real risk that a disproportionate number will opt-out under the new scheme.

Income-based taxes
There is no denying that income taxes fell significantly during the 1980s and 1990s. I mention them here because it needs to be emphasised that this form of taxation is paid predominantly by economically active middle-income earners: the rich avoid them while the poor and economically inactive pay very little.

In the recent past, income taxes have begun to creep up again, under the guise of national insurance contributions. Liberal Democrat policy in 2005 would have added an additional 4p in the pound due to the introduction of a local income tax.

Climate change and resource taxation
It is now largely accepted that the human race is responsible for global warming and climate change. Because of inaction in the past and little scope of major improvements in at least the short term, significant climate change is also now regarded as all but an inevitability. Mean temperatures are expected to increase by two degrees Celsius by 205014. Today’s young people, their children and their grandchildren will be paying the price in the future.

Today’s young people, however, are also expected to pay the price now; environmental taxes will either creep up if the timidity of the current government continues, or significantly increase if a more environmentally responsible government takes control. Either way, today’s young people will be expected to bear the brunt, on top of everything else, in a way that their parents’ generation was never expected to.

The future – neo-feudalism?
What no-one should be blind to here is that these factors do not affect all young people equally. Families with assets are able to help their children out by subsidising student costs, housing and ultimately by passing on an inheritance. They help out in other ways too. A recent report from the Sutton Trust15 found that 54% of top journalists went to public school, up from 49% in 1986. Similar statistics can be found for the legal profession and other white-collar jobs.

One factor driving this is that, as more and more people have degrees, employers are increasingly dependent on other ways of assessing candidates. A simple mechanism used by a lot of employers is to offer internships and most young people who take up unpaid work experience in this way are dependent on their families to see them through. Thus the expansion of higher education seems to be doing little to improve opportunities for young people from poor backgrounds; indeed, it could actually be entrenching privilege.

There are other ways as well in which the ‘haves’ can consolidate their position. The subsidised loans available to students may be intended to help poorer students feed and house themselves at university, but increasingly they are used by wealthier families as an investment: invest the money in an ISA and pocket the difference. Inheritance tax, properly managed, is effectively voluntary, with wealth handed down the generations long before the aging relative dies – and the bigger the estate, the greater the likelihood that families will have made such provision.

The important question we should be asking ourselves is, where is this taking us? I have dubbed the (avoidable) nightmare scenario ‘neo-feudalism’. Through a combination of some talent, some hard work and a large amount of luck, some families are consolidating their position at the expense of other families. The current fad for buy-to-let could be the tip of the iceberg: there is every reason to believe that the people who play the system well will increase their property portfolios over time, pricing ever more people out of the property market in turn.

For the new underclass, the future is bleak, with the rising middle-class operating an effective closed shop in a way that would make the most militant shop steward baulk. Meanwhile, the children within these ‘landed’ families will be trapped in a cycle of dependency. These mini-Princes of Wales will be forced to wait impatiently for their inheritances to come through, conflicted by love for their parents and the desire for freedom and independence. Entrepreneurship, creativity and hard work will be stifled by an economy dominated by class and privilege.

Policy solutions
Higher education policy
The Liberal Democrats’ policy to scrap tuition fees has served the party well, but there are at least two major reasons for reviewing it.

A principled reason is that it doesn’t actually help the poorest. We may well wish to argue that students from lower middle class backgrounds can ill-afford the tuition fees they are forced to pay under the present system, but it is highly doubtful that scrapping fees will see a massive influx of students from the poorest backgrounds.

The pragmatic reason is that tuition fees have been with us for seven years now. Hundreds of thousands of young people have already paid them, and there is an increasing danger that this policy will decline in popularity as young people and their families increasingly ask themselves “well, we had to pay fees, so why shouldn’t they?”

One equitable solution to this would be to offer tax relief on student debt repayments. The full amount may not be affordable, but a significant proportion would not only amount to the same thing as paying full tuition costs, but would benefit all graduates.

Going further, we could replace our existing spending commitment to scrap fees with a return to the means-tested maintenance grant. This would target our funding at those least able to pay.

It is unlikely to amount to much while the massive expansion of higher education continues however, and this leads me to consider an even more radical proposal. Why not remove the universal state subsidy on university tuition altogether, replacing it with means-tested cover for both tuition and maintenance? This more targeted approach would enable us to help students most in need, while giving the market a greater role in determining demand for higher education.

There are bound to be howls of protest regarding this proposal and I have to admit I am not fully convinced of it myself: how would we preserve liberal arts departments for instance? How can the market determine how many medievalists the country to fund? I am merely throwing these ideas in to provoke a discussion I believe the party desperately needs to be having.

The bottom line for me is that, at the next general election, we need to have much more to say to both graduates and the poorest students. With the party committed to keeping spending commitments down to a minimum, this cannot be done without significantly changing our existing policy of tuition fees.

Taxation
Just as we are sometimes guilty of portraying our policy of tuition fees as a social justice issue when the poorest are unaffected, so the same is true with our policy to replace council tax with a local income tax. The claim is frequently made that it would benefit the poorest, and specifically pensioners. Yet the poorest are entitled to Council Tax Benefit and are thus exempt.
We aren’t, to be fair, alone in this. Help the Aged’s website16 claims that an elderly couple with just £182 per week income “could end up paying the same level of Council Tax as their neighbours, a young and wealthy couple with an income of tens of thousands”. Yet if you look elsewhere on this website, it helpfully explains that an elderly person on that level of income is exempt from the tax. A curious game of deception is at hand here, and unfortunately the Lib Dems bear much responsibility for it.

The real problem with our existing policy is that it represents a massive tax cut for the owners of some of the most valuable properties in the country, while shifting the entire burden of taxation onto economically active young people. This makes no economic sense at all and will help to increase property prices still further, enriching the wealthy and pricing even more people out of the housing market.

We are frequently told that this policy is important because it helps old people who may have large wealth, but have little income. In fact, asset rich, cash poor pensioners form a tiny minority. In his submission17 to the Tax Commission report, Prof Iain McLean cited research from Warwick University, which shows that just 1.2%-2% of the population fits into this category. There are other ways to ensure that this small group does not unduly suffer without introducing a system that would unfairly penalise others.

The signs coming from the party’s Tax Commission unfortunately sound remarkably confused. By the time you read this essay, its final report18 will have been published but, at the time of writing, it looks as if it will be a strange mix, calling for national income taxes on the one hand while introducing even higher local income taxes on the other. This strange, hybrid ‘pushmepullyou’ is unlikely to please anyone and is likely to confuse seriously both journalists and the general public.

So what’s the solution? Simply put, our new taxation policies have a property tax-shaped hole in them. We should fill it with our historical commitment to introduce a system of land value taxation. This would encourage greater efficiency of land, lower property prices, and discourage second home ownership and buy-to-lets. Safeguards could be introduced to ensure that old people would not be taxed out of their homes, such as a system whereby people could voluntarily choose to defer tax payments until after they realise the asset.

Funding the future
Britain is appalling at squandering its assets. North Sea oil, now rapidly drying up, has been used as a cash cow by successive chancellors for the past 30 years, with Gordon Brown using it to fund spending commitments last winter. Yet once this natural resource is gone, it’s gone.
Other countries have a more enlightened view. Since 1995, Norway has invested its North Sea oil receipts into its National Petroleum Fund (recently renamed the National Pension Fund)19. This fund, worth 1.48 trillion Kroner (about £125 billion or €185 billion) in 2006 and administered by the Central Bank, is designed to ensure that this short-term windfall is enjoyed by future generations.

Alaska operates a similar scheme called the Permanent Fund20. Though much smaller – $32 billion (about £17 billion or €25 billion) at the end of 2005 – the fund is enough to pay out a dividend to Alaskan residents of around $1,000 per capita per year.

It is mostly too late to put Britain’s North Sea oil receipts into a similar fund, but as climate change is taken more seriously, this could be a useful way to handle receipts from environmental taxation.

Using environmental taxes to fund general expenditure is problematic at best, particularly at high levels, because if they are successful we can find ourselves with a shortfall. Climate change is likely to make the twenty-first century a very unstable period. Establishing a fund in this way would help give future generations a helping hand.

Getting our message across
One major objection to the party shifting its policy more towards young people is that older people vote in greater numbers and should therefore be our main target. I would repeat that I am not calling for us to ignore old people in elections, and strongly support our policy positions on a Citizens’ Pension and increasing the basic rate.

But, despite the fact that we all but stuffed their mouths with gold coins in the last election, old people did not generally vote for us. This is partly because of tribal loyalty, and partly because of a perception of the party brands – indeed, where we do well amongst older voters it is because they recognise our strengths as community campaigners. By contrast, younger people flocked to us in the last general election, despite us having very little to offer them. We have a real opportunity here not simply to capitalise on the votes of under-40s but to create lifelong Liberal Democrat supporters.

For such a campaign to work, however, it cannot simply be conducted by the occasional press release. At the moment, the media is largely unaware of this issue, normally reporting rises in property prices as an unequivocally good thing. For us to make an impact on this issue, our frontbench team must be seen championing it. It should get mentioned in every speech Ming Campbell makes between now and polling day.

The good news about a campaign aimed specifically at young people is that much of our target audience is web-savvy. What’s more, the people whom these issues affect are getting increasingly organised – see websites such as housepricecrash.co.uk, pricedout.org.uk and Hands Off Our Future. It is clear from reading the forums on sites such as these that there is a real sense of injustice out there and that people are crying out for a political party to take these issues on. If we miss this opportunity now, we may find ourselves paying the price in the future.

References
1 BBC (2006). How hard is it to afford a house? BBC News Online, 6 July; http://news.bbc.co.uk/1/hi/business/5145090.stm
2 UK Department for Communities and Local Government (2006). House Price Index – May 2006 (DCLG Statistical Release 2006/0051). Press release, 10 July; www.communities.gov.uk/index.asp?id=1002882&PressNoticeID=2197
3 Bachelor, L. & Flanagan, B. (2005). On average, you can’t afford it. Observer, 4 December; http://money.guardian.co.uk/houseprices/story/0,1456,1658132,00.html
4 BBC (2006). ibid.
5 Halifax plc (2006). Halifax Key Worker Housing Review. Press release, 29 July; www.hbosplc.com/economy/includes/KeyWorkerAffordability(UK).doc
6 BBC (2006). ibid.
7 AITC (2006). Press release, 9 August; www.aitc.co.uk/press_centre/default.asp?id=5439
8 The National Committee of Enquiry into Higher Education (1997). www.leeds.ac.uk/educol/ncihe/
9 O’Leary, N. & Sloane, P. (2005). The Changing Wage Return to an Undergraduate Education. IZA Discussion Paper No. 1549. http://ssrn.com/abstract=702781
10 Credit Action (2006). Debt statistics. www.creditaction.org.uk/debtstats.htm
11 Cable, V. (2006). Press release, 23 July; www.libdems.org.uk/news/young-peoples-debt-spiralling-out-of-control-cable.html
12 The Pensions Commission (2005). Second report. www.pensionscommission.org.uk
13 Purnell, J. (2006). Speech, 12 July; www.dwp.gov.uk/aboutus/2006/12-07-06.asp
14 UK Department for Environment, Food and Rural Affairs (2001). Literature review of the implications of climate change for species, habitats and the wider UK countryside. www.defra.gov.uk/wildlife-countryside/ewd/rrrpac/lreview/06.htm
15 The Sutton Trust (2006). The Educational Background of Leading Journalists. www.suttontrust.com/reports/Journalists-backgrounds-final-report.pdf
16 Help the Aged (2006). www.helptheaged.org.uk/en-gb/Campaigns/PensionsAndBenefits/CouncilTax/
17 McLean, I. (2006). www.libdemsalter.org.uk/archives/000078.php
18 Liberal Democrats (2006). Fairer, Simpler, Greener. Policy paper 75. www.libdems.org.uk/media/documents/policies/PP75%20Fairer%20Simpler%20Greener.pdf
19 Wikipedia (2006). The Government Pension Fund of Norway. http://en.wikipedia.org/wiki/The_Government_Pension_Fund_of_Norway
20 Wikipedia (2006). Alaska Permanent Fund. http://en.wikipedia.org/wiki/Alaska_Permanent_Fund

The demographics of Um?

I meant to blog about the Centre for Um discussion paper on demographic change by Alasdair Murray a couple of months ago, but I ended up getting distracted. As part of my general post-holiday catch-up, I thought I’d get my comments off my chest now, but as it was a while since I read the paper, I’m a little rusty.

On specifics, I don’t quibble with a lot of what the paper is saying. It is surely correct to point out the problems of simplistically emphasising how the aging population will lead to more elderly dependents on the economy without looking at how other dependents (the young, the economically inactive) effect the economy at the same time. I don’t think any liberals question the need to scrap the fixed retirement age of 65 (socialists are another matter – I seem to recall Labour activists queuing up to denounce this at their last autumn conference). I agree also with the need to bring more young people into the labour market – a stark contrast with Labour’s obsession with giving 50% of the population a (potentially worthless) university degree and raising the school leaving age to 18. There certainly should be an emphasis on skilling young people, but that should be done in the workplace, not in pseudo-universities (on which point, can I recommend Geoffrey Wheatcroft‘s article on the subject last week: “Those who insist that expanding higher education is virtuous in itself never stop to say why this should be so. And they never explain why it should be better to be a third-rate media studies graduate than a first-rate carpenter.”).

It is the wider arguments of the paper that trouble me. First of all, the bland claim that “pessimistic predictions about Europe’s demographic future overstate the problem in most countries and ignore the potential to adapt.” That is half true, but how are we to adapt if we ignore the pessimistic predictions? Alasdair Murray points out that a number of countries have already dealt with the “pensions time bomb” in their policies, but this has to be at least partially because of the scare reports that have been dribbling out over the past 20 years and more. This doesn’t prove them wrong: it proves their worth.

More irritatingly, I can’t go along with his bald assertion that inter-generational conflict isn’t worth bothering with. He bases this on two lines of argument: that there is little evidence of an emerging conflict, and that young people are better educated, richer and have higher rates of employment than their parents.

The first argument is just plain daft; it’s the Nelson defence (“I see no ships”). To start with, it depends where you look and what you’re looking at. What’s more, the fact that there is little tension now is not to say that there won’t be tension in the future.

The second argument misses the point that it isn’t incomes that we are quibbling about, but assets. Those subsidised right-to-buy homes people bought in the 80s simply do not exist. Greater earning potential is one thing, but if the economy drives people into habitual debt – thousands just to get “credit rating”, tens of thousands on graduation, hundreds of thousands of mortgage debt – that leaves very little at the end to build a nest egg. I’ll come onto the underlying assumption in the paper that population growth is an unalloyed good in a moment, but assuming that is the case for a moment, it is surprising that he appears to have missed the growing evidence that one of the main reasons that people are starting families later in life now is because they struggle to afford the housing; indeed housing is barely mentioned either in the paper as a whole, or in the section on inter-generational conflict.

Worst of all, he parrots that old canard about wealth cascading down the generations. I’ve lost count of the number of times I’ve said this: that’s the problem. Because people don’t, as a general rule, spread their wealth evenly to the younger generation: unsurprisingly they favour their children. This entrenches privilege, deepens the divide between rich and poor and, by putting wealth in the hands of ever fewer families and individuals, is a potentially catastrophic cause of social immobility. No-one is questioning that the millionaire couple who profited from the buy-to-let boom will eventually hand their assets over to their children; what we’re questioning is whether they should be the beneficiaries and what economic impact it will have further down the line.

The biggest single omission however is that this paper does not mention the environment, climate change and the management of natural resources. At all. I’m amazed that you can even write a paper on demographics without mentioning these things. A dry debate about immigration is one thing, but what do we do if Bangladesh goes underwater and Africa becomes an arid dustbowl? Where do the people go? What if they decide to come here? Cheery forecasts about pensions is one thing, but what about peak oil? Europe’s stagnating population is one thing, but global population is expected to reach 9 billion by 2050 (it seems like only yesterday when we reached the 6 bn mark – now we’re at 6.6 bn).

You may argue that all these big questions go beyond a simple paper on the economics of European demographics; I accept that they would have lead to a substantially different paper. What I do seriously question however is how the paper can assume that population growth is a good thing that policy makers should aim for. The paper does not oppose pro-natal policies, just the practicalities of the more crude of these (such as Germany’s tax system). Instead, it recommends policies that “best create the conditions where fertility rates might rise by removing structural obstacles to female labour market participation”.

I’m not in favour of radical anti-natal policies such as China’s one child policy, let alone anything more draconian. Nor do I believe in putting obstacles in the way of “female labour market participation” with a view to reducing fertility rates. I do however feel that population growth and environmental sustainability are heading for a full on collision, that one will have to give way to the other and that if the species is to survive in the long term, it had better be the latter. How do we develop genuinely liberal anti-natal policies? And if those policies are successful, won’t they exacerbate the problems associated with an aging population (if fertility rates dropped significantly, the average age would increase quite rapidly)?

In short, while he has some good points, Alasdair Murray’s pamphlet is exactly the wrong paper at the wrong time. It sets out to deal with a problem which, from the outset, it asserts has already been solved, and fails to answer the important questions relating to demographics that we need to be answering in the 21st century.

“Pity the poor rich old ladies!” Oh dear, here we go again…

In recent months, I’ve noticed a marked increase in media stories about intergenerational equity, pointing out that young people today are up to their eyeballs in debt and struggling to get onto the housing ladder. I suspected there would be a backlash against this, and it would appear that the Observer has started a rearguard action. Apparently we are to believe that Baby Boomers are “broke, ailing and anxious” while Mary Riddell wants us to know that “not everyone can grow old gracefully“. The implication of both these stories is clear: older people need big cash payouts from their kids, and fast.

Some of this stuff stretches credulity. The first story is based around a book called “The Maturing Marketplace: Buying Habits of Baby Boomers and their Parents” by Professor George Moschis. He claims that “boomers are not as financially well-off as their parents; boomers are in worse health than previous generations were at the same age.” This is appears to go against almost everything we know about demographic trends, which indicate that people are increasingly living longer. If Moschis is correct, surely we should have amassed evidence by now to indicate a reversal of this effect, or at least a dramatic levelling off? Or has some new phenomenon emerged that I was previously unaware of, in which poor people in poor health live into their hundreds en masse? Clearly we will have to read the book to find out; the Observer is only interested in the scare story.

Reading between the lines, the pattern that appears to be emerging is that the issue is less that Baby Boomers are deprived compared to their parents, but that they have squandered the opportunities that many of their parents literally died to bring them. They aren’t financially insecure because they lacked opportunities, but because “they have enjoyed spending their money more than saving it” (I still don’t see how this squares with the amount of property owned by Boomers). They eat poorly due to over-indulgence, not malnutrition. They live stressed, vain existences and are terrified about the prospect of old age.

The problem with this story, and Mary Riddell’s piece, is that it doesn’t seem to be telling us anything particularly new, but is nudging us to draw startlingly bad conclusions. We’re supposed to have thought that there is no such thing as geriatric poverty. Has anyone ever said that? The conclusion we are invited to draw is that the young must bail out the young. Mary Riddell smugly points out that “more than 40 per cent of the electorate is over 50,” clearly implying that if the young don’t give it away, the old will simply vote in a government that will take it from us. But the fact of the matter is that while geriatric poverty exists, so, undeniably, does geriatric wealth. Yet Mary Riddell is also quick to point out the so-called scandal that anyone with more than £21,000 in assets is forced to pay for their own social care. Presumably she would prefer it if their wealth could just sit there growing, untouched, while their every whim is cared for by the state.

Dig a little deeper and you often find that the people who shout loudest about pensioner poverty (including, sadly, the Lib Dems in the last General Election), are in fact set on tax breaks and handouts which disproportionately benefit pensioners in a much more stable position. Free nursing care? Of no benefit whatsoever to poor pensioners. Local Income Tax? Ditto. Citizen’s pension? Limited. Yet the cost of such proposals have the effect of making it harder for the next generation to save or to acquire assets, leading to more dependent, asset-poor pensioners in the longer run. Meanwhile the untaxed assets of pensioners that we dare not touch eventually passes down to their children, creating an entrenched them-and-us society of social immobility and an elite able to lord it over an emerging serfdom. We are sliding back into feudalism.

It is precisely this sort of monstrous short-termism that Prof Moschis appears to associate with the Baby Boomers, so don’t expect any great change any time soon. The challenge is for the next generation to develop a wider consciousness. Linked to that is an awareness that our parents appear to lack of the fact that we will get old at some point, and that we need to be prepared – both financially and spiritually.

That spirituality is the key factor. You don’t have to be religious to recognise the limits of materialism (indeed you only have to look around yourself to see that organised religion is riddled with materialism itself). If we are going to survive the 21st century, we are going to need to replace the cult of the individual with a renewed emphasis on co-dependency. It’s anyone’s guess how we do it though.

Tossers and John Hutton

Now that my various major work crises are out of the way for another calendar year, I will hopefully have more time to spend on this blog.

Right now, two things leap out regarding Intergenerational Equity.

The first is John Hutton’s call today for raising the pension age to 68.

I have to say, I’m with Hutton on this.  The choice really is as stark as raise the retirement age, or force our children to pay the price.  Personally, I’m prepared to accept that there is some give and take on this.

Unfortunately – and unsurprisingly – Labour’s paymasters, the Trade Unions do not share this view.  Indeed, the Labour Conference actually voted down proposals to raise the retirement age back in September.

Malcolm Sage from the GMB union, led the opposition to “any suggestion that the state pension age should rise before health inequalities in the UK are eradicated and improved longevity is equally shared by all.”

Well, actually, the proposal is to phase in raising the retirement age over 40 years.  Is he seriously suggesting that longevity won’t be significantly higher across the UK in 40 years?

Barry Camfield, from the TGWU, added to the criticism: “We want to abandon this threat to voiceless children today that they will have to wait until 68 for their pension and I nor my union are prepared to mortgage and sell out children in years to come. We stand up now for those children.”

No, you’re selling out those children by forcing them to pay massive extra taxes just so you can squeeze a bigger pension out of them.  Trust me, mate, they don’t want your “help”.

Speaking of Tossers, the Tories have launched this new viral marketing ad, which must work because I’m linking to it.

On the one hand, it is true that many people are lured by cheap credit into buying tat they don’t need.  That’s all fine and dandy, and obviously these people should be discouraged.  But if you think that is the be-all and end-all of the current credit culture we have, you are sorely mistaken.

Take me for example.  I resisted getting a credit card for as long as possible.  Eventually I succumbed because of a combination of an employer shitting me about, and the fact that no bank would lend me a responsible loan until I had “improved my credit rating” – i.e. got myself a credit card.  Later, when I sought to consolidate my loan, the same company wouldn’t help, forcing me to get a loan somewhere else.

I’m not claiming to be entirely blameless here, I freely admit to making mistakes, but I’m really not that profligate.  Most of my debt mountain was accrued during particular crises when I needed credit at short notice.  And it was accrued using credit cards with high interest rates because no-one would give me a cheaper loan.

The bottom line is, a lot of the current credit crisis is rooted in the fact that young people are being clobbered by a combination of student debt and exorbitant house prices.  The Tories have precisely nothing to say about either issues.  Until they do, they should watch who they go around calling tossers.

Labour: young people are feckless. Lib Dems: no, they’re just dumb.

Labour and Lib Dem spokespeople have been competing on how best to insult young people struggling to pay for their own pensions this week.

Speaking at an Institute of Public Policy Research meeting, Pensions Minister James Purnell highlighted the fact that the number of young people saving for a pension has gone down in the past five years from 1-in-3 to 1-in-4. His explanation is simple:

“At the moment, young people are acting as if they expect to be able to fund a longer and longer retirement with less and less saving.”

Meanwhile Lib Dem Shadow Chancellor Vince Cable has been highlighting the huge levels of credit that young people are currently taking out:

“This research highlights the fact that there is a pressing need to help the young when it comes to financial understanding.

“All the signs point to a huge shift in the financial knowledge of young people now compared with their parents.

“The Government’s university tuition fees, high house prices and the aggressive marketing of credit are all contributing factors.

“Although there is some financial education and help for people when they are in difficulty, the focus should be on tackling this problem before it occurs.

“There should be a genuinely independent financial advice network to help people before financial hardship takes hold.”

To be fair on Vince, he does at least refer to contributing factors such as house prices and graduate debt, but he doesn’t propose doing anything about them – he magic bullet is simple more education. James Purnell doesn’t even go that far. His explanation are “Three Cs” – confidence, complexity and culture. All three may well be true, but that is to pretend that pensions are wholly divorced from everything else.

The reason a “live fast, die poor” culture has emerged is that credit and depending on parents is the norm for young people these days; it’s how you get on in life. Lecturing people about depending on too much credit is a little rich in a country where it is government policy to have every young person in hundreds of thousands of pounds of debt before they hit thirty.

And are we really expected to believe that the previous generation were any more careful with money than we are? Last time I looked, they spent their youth on drugs shagging anything that moved. The generation before, that grew up in the 1920s and lived through World War Two, certainly knew the meaning of saving for the future. I’ll take lectures from them, but not their profligate children.

Granny Temper Tantrum

The phantom council tax payer has struck again, this time thwarting Jo Rooney’s campaign against litter. Previously, Sylvia Hardy’s protest was undermined in the same way.

Council Tax has struck a deep emotional chord amongst the public, not quite to the same extreme that the Poll Tax did, but the fact that so many pensioners are willing to get locked up over it suggests something is going on.

It is a very silly tax that doesn’t seem to achieve anything and it is curious that both the Tories and Labour have lined themselves up to defend it with their dying breath. Strictly speaking, it can hardly be described as a property tax as (in England at least) properties haven’t been revalued since 1991, meaning that it has very little to do with the actual value of your property. What’s more, the 8-band system means that effectively it is capped: those who own the most expensive properties pay the least proportionately. A random, regressive tax is pretty indefensible.

But one thing is does not do is hurt poor pensioners. Prof Iain McLean has calculated that just 1.2%-2% of the population is ‘an owner-occupier with below 60% of median income living in a house in Council Tax bands E to H’ (the majority of whom will be pensioners). What’s more, pensioners on a fixed income are entitled to Council Tax Benefit. The still smaller minority this does not apply to could (whisper it!), always downsize to a smaller property.

Don’t tell Help the Aged however. Apparently, council tax affects people “below the poverty line” – how? They claim that an elderly couple with just £182 per week income “could end up paying the same level of Council Tax as their neighbours, a young and wealthy couple with an income of tens of thousands”. Yet, according to entitledto.co.uk, (which the Help the Aged website links to elsewhere), that couple won’t have to pay any council tax at all.

Help the Aged also bleats about how council tax has increased out of step with pensions – but that just means that more pensioners are entitled to council tax benefit. It then goes on to cheekily complain that very few pensioners are aware they are entitled to council tax benefit. Well of course they aren’t if organisations like Help the Aged go around pretending they aren’t entitled!

Pensioners like Rooney and Hardy are being goaded on to make themselves martyrs not because of a serious issue that is effecting thousands of pensioners, but because a number of relatively comfortably off pensioners resent paying a tax that pays for basic local services. These women really don’t appear to realise what they are letting themselves in for by going to prison; they probably believe the Daily Mail’s claims that it is akin to spending a couple of weeks at Butlins.

The Lib Dem local income tax solution I’m ashamed to say is to let pensioners off the hook entirely and simply increase the tax burden onto that wicked rich young couple with an income of “tens of thousands.” The fact that those wealthy young wasters may be bringing up a family and have an enormous mortgage to pay is neither here nor there.

The irony is, pensioner poverty is a real issue, but council tax is a total red herring. The income-poor, asset-poor pensioners (IPAPPs) have been let down by a system that has squeezed them throughout their lives, left them with nothing to call their own and then does not support them in their dotage. Money spent on subsidising the relatively wealthy pensioners is money that can’t be spent on the truly needy. The IPAPPs are our allies and a warning of what millions of younger people have to look forward to under the current system.

Assets should count for something – the current government was wrong to put so much stock into the pensioner credit and thus create a disincentive to save. But it’s time we recognised that the culture of encouraging people to lock all their assets into property causes all kinds of social problems; specifically a restriction on the housing supply which screws over the following generation, depopulates villages and towns and subsequently leads to increased pressure on local public services that old folk depend on. Emotive arguments about turfing old people out of the family homes notwithstanding (and what about the emotive argument about people not being able to get a foot on the property ladder?), pensioners and their families benefit from property taxes. The issue is making them fairer and taking off their harshest edges, not scrapping them.

Social mobility and housing

(apologies for the lack of posts on this thus far – I’ve been remarkably busy over the past few weeks and that is set to continue. But I’ll do my best to keep this updated when I can).

From what little feedback I’ve had about this website so far, a lot of people seem to think my main hobby horse is pensions. This is probably partly because of launching this site during the same week that the government announced their new pension plans.

In fact, personally I think pensions are a bit of a red herring. For a long time people have been awake to the emerging problem of what to do about the “pensions timebomb” and I think Adair Turner got the balance about right. If there is still a problem, it lies in the fact that financial pressures will force a number of people to opt-out of their second pension.

Where do those financial pressures come from? Rising graduate debt doesn’t exactly help, but if I were to pick out what I think is Public Enemy Number One it is simple: the lack of affordable housing.

Housing is a remarkably equal opportunities social issue. Well, lack of housing doesn’t seem to be affecting those at the very top of the tree, but for everyone else it is a problem, affecting both middle and working classes alike – worse, it is forcing the middle classes to scrounge off the working classes.

In London, the average house price is now £306,664. Back when I was at school, we were taught that you could only borrow up to 3.5 of your income. Under this quaint old rule of thumb, you have to be earning £87,618 p.a. in order to get a foothold on the housing ladder.

In reality of course, people have a broader range of options. There are graduate mortgages, where a bank essentially lends you more on the basis that your future earnings are set to increase. If you are a “key worker” you can get some support from the government. A growing number of more entrepreneurial people are resorting to buy to let. In essence, if you can’t afford to live in the area where you work (common in London), buy a property somewhere else and live off the rental income. This in turn of course means that the pressures on London property prices essentially seep out across the rest of the country, exacerbating the problem.

For most people however, it means getting a top up from their parents or other relatives. That’s if they have parents/relatives who can afford it. It doesn’t take a genius to work out that means that how well you are likely to be able to get on is going to be increasingly dependent on your social background.

In short, the options available to young people attempting to get some long term security are some combination of scrimp and save, pass the problem onto someone else and depend on inherited wealth. Is it no wonder that social mobility has taken a nose dive?

The papers have been rife over the last few days about a new study published by the Sutton Trust about how professional careers are now dominated by public school educated people. Lots of theories have been floating about as to why this is in an era where class is generally perceived to no longer be particularly relevant. Once again, much of this boils down to housing. As Will Hutton writes:

Another factor is that London has become more expensive and the growth in starter salaries has not kept pace. Having parents who can support you early in your career is more crucial. London house prices prop up the middle class’s closed shop as effectively as independent schools.

I don’t think you can underestimate this factor. Many professions – from law to journalism to party politics – are propped up by an internship system that relies on the fact that people are prepared to work for free in the expectation that it will get you a rung on the ladder. The think tank “sector” (such as it is) that I work in is incredibly nepotistic and extremely dependent on unpaid interns. Even for a tiny organisation like the one I work for, competition for places is considerable. We’re all too aware that getting an internship gives people a major advantage in terms of getting paid work in the sector, yet the only people who can afford to take an internship tend to have comfortably off and understanding parents. It’s a conspiracy of convenience that quietly and surely gives the comparatively wealthy a clear advantage regardless of talent.
The mass expansion of education was supposed to create a more level playing field but in fact the opposite has happened – because so many more people have degrees now, employers need other ways to differentiate potential applicants. Bizarrely, we’ve created a system whereby young people are forced to get themselves into tens of thousands of pounds of debt for a degree that is worth far less than its free equivalent 30 years ago (John Harris has some interesting related statistics here: the argument for tuition fees was always that graduates would earn, on average £400,000 more over their working life; in fact, an arts grad can expect to earn £22,000 more).

To cut a long story short, lack of housing is starting to have a severely detrimental effect on social mobility. Far from realising the Eighties dream of everyone being a homeowner, what is instead happening is that we are creating a landed middle class with almost impenetrable power over an unlanded underclass. While this is good for those families who got on the housing ladder over the past couple of decades, it’s bad news for everyone else and it’s dreadful news for the economy.

So, what’s to be done? Unfortunately, the problem is not as simple as “build more houses.” No developer wants to build affordable housing when they can make vastly more money on more expensive housing for the same cost. Speculation has a stranglehold over the property market – indeed, as a society we worship this fact. That speculation leads to over-inflated housing costs and an artificial limitation of the supply of available land. In short, developers are quite happy to sit on land and wait until the price is right. But land is not capital, which loses value over time. Indeed, sitting on land can be a very profitable business indeed.

We have to end this nonsense. The simplest mechanism I have come across for doing this is an annual tax on land values. This tax would be levied on landowners whether the land was in development or not; sitting on land would cost and thus the supply would be much larger. And because land values are entirely based on external factors such as accessibility to public services and transport links (as opposed to the capital costs of property such as bricks and mortar or double glazing), it is a virtuous tax as the money raised is created by society and not the landowner in any case. What’s more, the money raised from it could replace taxation elsewhere. The most obvious candidate is council tax, but most people agree that land value taxation could raise much more than that.

The alternative? Well, we can sit back and watch the concept of a dynamic, meritocratic society go down the toilet, or we can spend billions of pounds of taxpayers money enriching the very people who are sitting on land and causing the problem in the first place. I’m open to other ideas, but I haven’t heard anything better.