Economics

We need to talk about pensions

The young are paying more than their fair share—and patience is wearing thin

August 18, 2016
Work and Pensions Secretary Damian Green arrives in Downing Street, London, for the first Cabinet meeting of the new government.
Work and Pensions Secretary Damian Green arrives in Downing Street, London, for the first Cabinet meeting of the new government.
Read more: Can Britain afford the Triple Lock?

Try talking about pensions to young people and see how far you get. More often than not, student loan repayments, high and living housing costs and precarious employment are occupying their minds, leaving pensions far off in the future. But what many young people do not realise is that they are already paying for a pension—it’s just not their own.

Younger workers are increasingly having to fund over-generous spending on older people’s pensions—both the state pension and occupational public-sector pensions—from which they themselves will never benefit. Each year, the Intergenerational Fairness Foundation publishes the Intergenerational Fairness Index. As the 2016 index reveals, since 2000 the pensions sub-index has increased, or rather worsened, by more than 60 per cent.

And there appears to be no sign of spending slowing down. In the last year alone, the cost of paying for today’s state pension per UK worker rose by 1.4 per cent to £2,846 per year. Meanwhile, the annual liability for public-sector occupational pensions rose by 12 per cent to nearly £44,000 per worker. The total liabilities of both the state pension and occupational public-sector pensions amount to more than £4 trillion, a cost that is being unfairly passed down the generations.

While these two indicators are offset to a small degree by progress made in auto-enrolling younger workers into pensions, young people are still being unfairly left with the burden of pensions for our rapidly ageing population, leaving them little opportunity to build up enough assets and savings to see themselves through their own old age.

With pensioner incomes now higher on average than the rest of the population, the Foundation, along with others, has been calling for urgent reform of the triple lock (where the state pension increases annually by either inflation, average earnings or a minimum of 2.5 per cent, whichever is the higher). But our new prime minister could do much more to spread the cost of ageing more fairly.

It seems inequitable that 1.6m people over pensionable age are exempt from paying National Insurance contributions although they are still working. It also seems unfair that wealthier older people should still be able to claim the state pension—which was only meant to be an insurance; not an entitlement—when they are already in receipt of gold-plated final salary pensions. Of course, too often such solutions lead to howls of protest from older people defending their contribution histories—“I’ve paid in, now pay up,” they say. But patience may finally be wearing thin in Whitehall and perhaps the time has come for “woldies” (wealthy oldies) to take less so that poorer oldies can have a little more and younger generations can pay a little less.

The pensions avalanche is not the only burden bearing down on the young. Another key problem is government debt, which reached an all-time high of £1.6 trillion in 2015. Debt per UK worker now stands at more than £50,000. Government debt represents an economic cost which future generations will be burdened with; in countries where the national debt has been exceptionally high, such as Greece or Japan, it has been associated with stagnations in prosperity and living standards which have harmed young people disproportionately.

The cost of health spending is also disproportionately falling on the young. The health indicator, which measures the ratio of NHS hospital services used by the over-60s compared to the working-age population, has risen 50 per cent since 2000. While we would expect to see higher health spending with an ageing population, as older people tend to have more chronic long-term conditions, again, it is being paid for disproportionately by younger generations.

While spending on pensions and healthcare for the old has increased, real-terms spending on primary and secondary education has fallen by ten per cent since 2010. GCSE attainment levels are also down, reversing a long-term upward trend. Higher education participation is also starting to fall, and likely to fall further now that help for poorer students through maintenance grants has been withdrawn. As for housing, an increase in new builds has helped the index a little this year. But average house prices are still at ten times average median annual incomes.

If we want the social pillars between the generations to be secure there must be a fair settlement between them. The pillars are held up by a social contract—one that helps us from birth to grave. If one pillar is overloaded, damaged or undermined, the entire structure is at risk. At present, in too many areas, we are overloading younger generations with our debts.