Written evidence from Professor John Macnicol (IGF0020)

A race to the bottom? The call for intergenerational fairness

by John Macnicol, London School of Economics.

1. Recently there has been yet another revival of concern over intergenerational equity – put simply, the view that each generation should receive a ‘fair’ allocation of public resources, compared with those that went before and those that will follow. Against a background of austerity and recession, the burden of debt that will be passed on to future generations has become highly controversial. Are pensioners sharing the misery felt by others? Have they escaped the stagnation in living standards that has affected other groups?

2. It is undeniable that, in the last ten years, young people’s prospects have worsened: youth unemployment, though falling recently, is still high; the housing bubble seems to have ended the prospect of young people ever becoming owner-occupiers and has earned them the luckless sobriquet ‘generation rent’; what the labour market now offers young people is frequently poor quality part-time work, insecure work or unpaid work via spurious internships; and rising university tuition fees will mean average debts of at least £25,000 per graduate, carried forward into middle age. That much is uncontested. However, the key question is: are older people to blame?

3. Three general points need to be made at the outset:

(a) The intergenerational equity debate may be but the tip of a much more disturbing iceberg – the dystopian prospect that each future generation will experience declining living standards, putting an end to the idea of progress which has sustained Western societies since the Enlightenment.

(b) The idea of intergenerational equity is highly relevant to the topic of climate change and what kind of world we leave to our children and grandchildren.

(c) Generational analysis can be useful, especially at the level of the extended family which is a forum in which intergenerational tensions and rivalries are worked through and resolved. It also raises the question of how far membership of one particular generation determines identity, consciousness and action. An analysis of society ‘according to age’ can be moderately useful: for example, youthful societies are more expensive than ageing ones (youth correlates with high levels of crime, out-of-wedlock births, unemployment, housing stress, political instability, and so on).

4. For much of the twentieth century, there was an all-party agreement that retired people should be protected by the state. Hence state pensions absorbed a much higher proportion of total social security expenditure in the early 1970s than they do now (c.75 per cent as against c.42 per cent) because other benefit expenditure was proportionately lower – yet this aroused little comment about intergenerational unfairness. However, things changed following the economic upheavals of the 1970s. In the USA, concerns about intergenerational equity were articulated by pressure groups like Americans for Intergenerational Equity and the Concord Coalition keen to privatise Social Security and justified by arguments very similar to those of today – mainly, that pensioner poverty had been reduced ‘too rapidly’ compared with child poverty and that a future ageing population made the funding of Social Security unaffordable. Interestingly, in this debate it was the baby boomers who were seen as the innocent victims and the preboomers who were the villains. Hence David Thomson wrote in 1991 of ‘witnessing the declining prospects of my contemporaries and successors as they sought careers, families and homes in deteriorating circumstances and in the face of increasingly unsympathetic governments’ - a quote that could have come from the UK’s Intergenerational Foundation yesterday. The fact that the finger of blame could be pointed at an entirely different generation should raise concerns that the debate was highly opportunistic and part of a wider political project during the Reagan years to downsize the US welfare state. Why, then, are we now witnessing a second iteration of concern – this time with the baby boomers as villains and young people as victims? There are short-term and long-term reasons.

5. The most obvious short-term reason is that UK pensioners appear to have been more protected than other groups in the recession, particularly under the ‘triple lock’ mechanism. Pensioner poverty has been reduced since the 1990s faster than poverty among children and the working-aged such that, according to statistics offered up by the IFS, the median weekly income after housing costs for pensioners is now higher (£394) than for the non-retired (£385). There has also been critical comment about the Freedom Pass and Winter Fuel Allowance, although these absorb only a tiny fraction of public expenditure on retired people.

6. However, the IFS did point out that their calculations were ‘once housing costs and family composition are taken into account’. Retired people are highly unlikely to have young children and large mortgages, so the comparison is flawed. ONS data show that, in 2012/13, the average gross income for non-retired households was £35,822, where that for retired households was only £21,237 – some 40 per cent lower. Again, several economic problems faced by retired people tend to get ignored. First, they face difficulties in the present economic climate: there are pitifully low returns on savings (an estimated £160bn is currently sitting in bank accounts and earning no interest at all); most final salary occupational pension schemes have collapsed; annuity values have fallen drastically, such that a £100,000 annuity purchased at age 65 will now yield only £6,000 per annum where twenty years ago it would have yielded £15,000; one glance at pensioner household incomes reveals six out of ten of such households reliant on cash benefits for an average of 75 per cent of their total income; four out of five quintile groups of pensioner households have gross incomes below £25,000 per annum, whereas only one out of five non-retired households have such low incomes. 

7. Again, the priority given to increasing pensioner living standards is only a long-overdue addressing of the decline in the state pension since 1980, which fell from 26 per cent of average earnings in 1979 to 18 per cent in 2013. Had nothing been done, the state pension would have fallen to around 5 per cent by the mid-21st century. Today’s pensioners have each lost c. £2,300 per annum because of this long-run decline. Intergenerational equity should require a restoration of this loss, because the new single-tier state pension will not do so. Second, the UK economy is the sixth-richest country in the world, yet we have one of the worst state pensions, in terms of replacement rates: as a percentage of average male gross earnings, the UK pension is about 38 per cent, where the OECD average is around 58 per cent. ‘Fairness’ should mean making it a priority to improve the UK’s state pension. Those troubled by intergenerational inequity need to state unequivocally whether or not they wish to see UK pensioners become even poorer. Realistically, the only scope for a reduction of pensioner incomes is via a redistribution from the top 20 per cent, or perhaps only the top 10 per cent, and this would be politically very controversial.

8. Other reasons lie behind the revival of interest in intergenerational equity. The UK, along with many other industrialised nations, faces something of a problem of population ageing: the proportion of people aged 65+ has been projected to rise from c.17 per cent now to c.24 per cent by 2060. However, ONS projections for total population size are regularly being revised upwards – the latest predict 74,000,000 by 2039 and 85,000,000 by 2080. This overall growth will shrink the projected proportion aged 65+ down to c.21 per cent - about what it is now in Germany (held up as an economic example to us all). This ageing of the UK population has been caused much more by the size of age cohorts than by life expectancy gains. Contrary to the Intergenerational Foundation’s claim that ‘increasing longevity’ is creating an urgent need to reduce pensioner living standards, life expectancy at birth is rising by only 0.3 per cent per annum for males and 0.2 per annum for females; at age 65 the respective gains are 0.9 per cent for men and 0.6 per cent per annum for women. One would have thought that, in the sixth richest nation in the world, life expectancy gains of less than 1 per cent per annum should be affordable. The problem – a much exaggerated one – is caused by cohort size (both birth cohorts and adult cohorts swelled by immigration) much more than by longevity gains. Even then, in the UK the baby boomer birth cohorts represent two peaks, clustering round 1947 (‘first wave’) and 1964 (‘second wave’), rather than a consistently high birth rate from c.1941 to 1970. These people will all have paid for their state pension, and intergenerational ‘fairness’ should mean that they receive it in full at the age originally promised.

9. However, alongside these obvious and immediate reasons is the fact that it has been a long-running macroeconomic strategy to stimulate economic growth by expanding labour supply. Whereas the public message has been that urgent demographic and fiscal imperatives have created the need to expand labour supply by raising state pension ages, it is more likely that the macroeconomic strategy of expanding labour supply has caused the demographic and fiscal evidence to be interpreted in a highly partial way. For example, a key justifying principle behind present policies is that pushing more older people into work will improve the UK’s economic performance. Yet workforce numbers are not the key to economic growth, compared with factors like technology, the price of raw materials, skill levels, the demand for products on world markets, and so on. Hence the UK had a higher overall employment rate (with more older men still working) in 1931 (a time of economic recession and mass unemployment) than in 1951 (a time of full-employment prosperity). The employment rate of all women hardly changed between 1931 and 1951, at 34.2 per cent and 34.9 per cent respectively. The employment rate of all men fell over the same period from 90.5 per cent to 87.5 per cent, with the sharpest fall among men aged 65 and over. In other words, the improved economic performance in 1951 was achieved by a proportionately smaller workforce, with fewer older people working. We also need to remember that many economists today (e.g. the New Economics Foundation) are predicting a future in which technological developments cause the UK to achieve much higher economic growth with a smaller workforce. Recently, the World Economic Forum discussed the massive job losses that may well accompany a ‘fourth industrial revolution’ based upon new developments in artificial intelligence, robotics, nanotechnology and the like. Indeed, the whole history of economic growth has been the story of increasing productivity being achieved with progressively smaller workforces, thanks to technology. Hence the American workforce is twice as large as it was in 1945, yet total productivity has grown eight times: on average, productivity per worker has quadrupled.

10. The fact is that raising state pension ages has been a longstanding political cause in certain quarters, and not something forced upon governments only very recently. For example, Mrs Thatcher’s cabinet considered raising state pension ages to 70 in 1989, and in the 1990s broadly free-market bodies like the World Bank advocated this policy. It is therefore unconvincing to argue that this has been caused by austerity or by a sudden, dramatic and unexpected demographic crisis. Intergenerational equity arguments are being used today to justify a restructuring of the welfare state and public expenditure cuts. As Chancellor George Osborne said in his 2013 autumn statement, raising state pension ages represents ‘this generation fulfilling its obligations for fiscal responsibility to the next generation – not saddling them with the debts and the decisions we weren’t prepared to deal with ourselves’.

11. In analysing intergenerational equity, three contrasting lifecourse perspectives are helpful:

(a) The so-called ‘cohort effect’, whereby each successive generation tends on average to be better educated, healthier, have higher incomes and so on. This means that, at any one time, old people appear to be disadvantaged relative to those younger than them and the working-aged appear to be subsidising children and the retired. Much of the intergenerational comparisons made today are cross-sectional and based upon relative living standards (retired people today versus working-aged people today). If, however, absolute living standards are employed, today’s young appear to enjoy a far higher standard of living than young people in the past. This is progress, and has hitherto been built into the collective expectations of western societies.

(b) On a cross-sectional view, public policy appears to be biased at any one time in favour of older generations. This is largely the result of the historic conquest of disease and death in youth and middle age, and is a mark of success: for example, 80 per cent of an individual’s lifetime health care costs are consumed in the first six years of life and the last three. We implicitly accept this age bias because we know that we too will become old (if lucky enough) and in need of social policies to protect us: we are, in effect, redistributing to ‘our future selves’. Interestingly, a lifecourse perspective evens things out: the IFS has shown that 93 per cent of the population are net contributors to the economy, over the course of a lifetime. Attempting to calculate whether particular cohorts have ‘taken out more than they have paid in’, or vice-versa, is so difficult that it is best not attempted. In essence, it signifies a conceptual shift away from the collective ‘risk-pooling’ principles that have hitherto underpinned welfare state funding - indeed, most commercial insurance - and towards a more individualised notion of eligibility: taken to its logical conclusion, it would mean that any citizen who could prove that they had received less from the welfare state than they had contributed in taxes and contributions over the course of a lifetime would be entitled to a refund.

(c) The view that one particularly selfish ‘welfare generation’ has monopolised public resources in its own interests – apparently without anyone noticing. This was the narrative that sustained much of the critique in the 1980s, and it has reappeared, this time with the baby boomers as the guilty generation. Bizarre, conspiratorial and unhistorical though this narrative may be, it nevertheless has its supporters. For example, in a recent Conservative Centre for Policy Studies pamphlet, Who Will Care for Generation Y?, Michael Johnson claims that the baby boomers ‘have become masters at perpetrating inter-generational injustice, by making vast unfunded promises to themselves, notably in respect of pensions…..there is little evidence to suggest that the baby boomers are unwilling to halt the torrent of unfunded promises that they are making to themselves’.

12. There are many interpretative and practical problems thrown up by the idea of intergenerational equity, such as to render it almost unworkable as a basis for policy, e.g.

(a) The question of agency: have the baby boomers really conspired so successfully to distort public policy in their own interests – or has this happened for other reasons (in which case, retaliatory action is unjustified and pointless)? There is no evidence of a ‘baby boomers’ party’ taking control of the policy process and manipulating it selfishly and secretly. If we are standing on the edge of a new era in which every successive generation will experience progressively lower living standards, then the baby boomers cannot be to blame. Likewise, youth unemployment is a Europe-wide phenomenon and therefore cannot have been ‘caused’ by the actions of a UK-specific baby boom generation.

(b) How valid is the concept of a generation, given all the intragenerational divisions (of class, gender, ethnicity, etc.) that exist? Does a twenty-five year grouping of birth cohorts really possess experiential unity?

(c) Protagonists have been unclear about whether they mean ‘equity’ or ‘equality’: achieving the latter may appear impossible, but it is what is implied by ‘generational accounting’ exercises (such as proposed by Professor Laurence Kotlikoff and others). In practice, it would be wellnigh impossible to identify exactly who were the ‘over-resourced’ and who the ‘under-resourced’ within and between generations, given the vast intragenerational inequalities and differences.

(d) Women outnumber men two-to-one in the pensioner population, so redistributing from pensioners to the working-aged would on the face of it involve a redistribution from women to men.

(e) Whether private transfers between the generations within the extended family (e.g. via inheritance, or gifts) are as unfair as public transfers.

(f) Whether any accurate generational accounting exercise should include many quality-of-life indicators experienced by a particular generation (e.g. wars, recessions, natural disasters, and not just social security transfers.

(g) An accurate assessment of how much an individual old person had received over a lifetime, in relation to what they contributed, could only be done on their deathbed – by which time, corrective justice would come too late: any confiscation of their resources would only hurt the generation below them who would lose their inheritance. It would therefore be spectacularly counter-productive.

13. All in all, intergenerational equity raises some very interesting issues at a theoretical level, but today’s call for justice between the generations is really part of a wider political project to privatise social security and cut welfare states. It was back in the 1980s, when an entirely different generation was blamed, and it is now. For protagonists like David Willetts and the Intergenerational Foundation, the fact that young people are currently suffering economically justifies lowering the living standards of the retired, seemingly on the basis that two wrongs make a right. For them, the pursuit of fairness appears to involve little more than a race to the bottom.

February 2016

John Macnicol is Visiting Professor of Social Policy at the London School of Economics. This piece of evidence is submitted in his personal capacity. He has researched and published on many aspects of social policy and old age, including retirement and age discrimination. Principal publications specifically relating to intergenerational equity are:

'Ageing and Justice' (review article), Labour History Review, 55, 1, Spring 1990, pp. 75-80.

Age Discrimination, an Historical and Contemporary Analysis (Cambridge University Press, 2006)

(Winner of the Social Policy Association’s award for ‘Best New Publication, 2006-7’), ch. 2.

A Think Piece on Intergenerational Equity, Commissioned Report for the Equality and Human Rights Commission, 2009 (with David Piachaud and Jane Lewis) (33,000 words).

‘The Reappearance of an Intergenerational Equity Debate in the UK’ (July 2012), www.social-policy.org.uk

‘Intergenerational Equity: Historical Reconstructions’, in Cornelius Torp (ed.), Challenges of Aging: Retirement, Pensions, and Intergenerational Justice (Palgrave Macmillan, 2015).

Neoliberalising Old Age (Cambridge University Press, 2015), ch. 6.