Written evidence from Saga (IGF0069)
Executive Summary
Austerity Britain 1952 and 2016
1.1. When our Queen, Queen Elizabeth II, came to the throne in 1952 post-War Austerity Britain was dramatically different from Austerity Britain 2016. During World War II Britain had bankrupted itself for the second time in a Century. After the War rationing had become more intense than during the War itself – we had Germany to feed, too. Indeed, rationing was not finally abolished until 1954. ”Britons were…much less well off than today and many lived in mean and straitened circumstances”1. Income tax stood at 9s in the £ - roughly three times its current level. The average working week for manual workers was 48 hours – 50% higher than the current 32.
1.2. Domestic life was dour compared to today. Mobile phones and computers were effectively science fiction. Only one household in 20 had a fridge; one in 10 had a telephone; only one in 5 had a washing machine.2 Almost no-one had a TV or central heating – houses were heated by coal fires that blackened buildings and lungs – 4,000 people died in the London smog of 1952. Most people did not own their own homes – owner occupation was 29%. There were no motorways and only one in 5 households had access to a car. There were no supermarkets and hardly any ethnic restaurants. Society was far more militarised than today and teenage men faced conscription into the army. Despite all this drabness, drudgery and relative poverty, the rising Elizabethan generations were optimistic, and they delivered a better life for us all. Real GDP per capita grew by a factor of 3.7 between 1952 and 2014.3 They did not complain about the wracked world that had been bequeathed to them by their parents. They worked hard and despite the unpromising conditions, were content to support an ever increasing number of pensioners with an ever improving NHS and a gradually increasing range of benefits and pensions. They did this on the basis that they too in their turn would be supported in their old age under an implicit social contract between the generations.
1.3. Young adults now beginning their working lives face no conscription and no rationing. They live in a society where mobile phones and personal computers are the norm; where most enjoy a range of household appliances and central heating unimaginable in 1952; where the air and environment is cleaner; where the NHS is far more advanced; and, where there is a kaleidoscope of entertainment available inside and outside the home. They are more likely to have been brought up in an owner occupied home than in a rented home. They live in a far richer society and in general enjoy far higher levels of disposable income. The society that surrounds them has been endowed to them by those working generations before them.
● Just under £800 billion (76.2%) of the UK’s household financial wealth in Q2 2015
● £2,528 billion (74.1%) of the UK’s household pension wealth
● £2,291 billion (69.3%) of the UK’s household property wealth
(i) The Rise in State Pension Age (SPA)
3.1. The incoming Coalition Government of 2010 began a difficult process of battening down on an unsustainable Government deficit. In the context of this need for “fiscal consolidation” and aware of demographic pressures on expenditure the Government raised the SPA and moved to equalise the SPA between men and women. The DWP Impact Assessment of the Pensions Act 2011 changes was a decrease of £31bn in benefit related expenditure between 2016 and 2026. The Pensions Act 2014 brought the increase to SPA to 67 forward to between 2026 and 2028 - eight years earlier - and this was estimated to deliver net savings of £73.5bn in real terms in benefit-related expenditure5. Thus, future pensioners took a hit of £100bn from the last Government alone.
(ii) Effect of Low Interest Rate Policies
3.2. Since 2010, the Bank of England has deliberately left interest rates very low in order to stimulate the economy. However, the impact of this policy has differential impacts for different age groups. As people age they become relatively more dependent on their income from savings and less dependent on their income from employment. The average return on investments for the over 50s was only 2.4% in 20134. Each percentage rise in interest rate achieved would add £700 a year to the average over 50s household.
3.3. Quantitative easing and low gilt yields cut annuity rates that locked a generation of retirees into a lower income for the rest of their life. Annuity rates in 1990 were typically about 15%. In 2015, Moneyfacts reported annuity rates had hit an all-time low. According to a chart on the website http://www.sharingpensions.co.uk the value of an annuity for a fund of £100,000 for a 65 year old fell by 29% between June 2008 and February 2016 (£7908 vs £5614).
3.4. For mortgage payers, the vast bulk of whom are not retired, the effect of these policies has been highly beneficial. In May 2015 the average mortgage taken out was £167,842. The typical variable mortgage rate has been around 2.5% since March 2009 – compared with 7.5% in June 2008. A £167,842 interest only mortgage at 2.5% costs £4,196 pa and at 7.5% £12,588 p.a. – a difference of £699 per month. A Boomer born in 1952 would have faced a mortgage rate as a first time buyer of about 10% thirty years later in 1982. First time buyers may indeed face the problem of inflated house prices due to too few houses being built, but at least mortgages are cheap, often derived from poorly rewarded building society accounts owned by pensioners.
4. Response of the over 50s to the Financial Crisis
(i) Spending
4.1. In the context of the over 50s holding over two thirds of the national wealth, can they be accused of sitting smugly on their pile? Pensioners are not universally well-off – Age UK says that 1 in 6 pensioners (1.8 million or 16% of pensioners in the UK) live in poverty. Those in more comfortable circumstances will in time pass their wealth to succeeding generations. Meanwhile, evidence points to the Boomers making a significant contribution to economic recovery.
4.2. A report by CEBR for Saga in February 20146, analysed the contribution of the over 50s to the economy. Note that the over 50s comprise 35% of the population of the UK7 when evaluating the Key Findings as follows:
“• The over 50s accounted for £320 billion (47.6%) of UK household expenditure in 2012.
• The ‘silver pound’ has become relatively more important since the financial crisis, with expenditure among households of the over 50s making up a growing share of overall UK household expenditure.
• The over 50s account for over half of UK household expenditure on health, recreation and culture, alcoholic beverages, restaurants and hotels.
• Their share of total UK expenditure in the alcohol and tobacco, clothing and footwear, and restaurant and hotel sectors has risen by over eight percentage points in the past decade.
• Sectors such as recreation culture, household goods & services, health, transport and communications have also seen the share of the over 50s of total expenditure rise by over 6 percentage points.
“For the period until 2018, the key forecast-based findings of the analysis are as follows:
• Over 2003-12, over-50s expenditure on health rose at an average rate 5.4% per year, increasing from £3.5 billion to £5.7 billion. Over 2013-18, this is forecast to accelerate to 6.4% per year, with expenditure reaching £7.8 billion in 2018.
• By contrast, over 2003-12, over-50s expenditure on housing rose at an average rate 7.7% per year, increasing from £20.0 billion to £39.0 billion. Over 2013-18, this is forecast to decelerate to 5.9% per year, with expenditure reaching £53.4 billion in 2018.
• Consumer spending by the over 50s is so economically significant that the UK’s GDP would be noticeably lower in each year of the forecast period if, since 2003, over 50s spending had only grown at the same rate as under 50s spending – i.e. at 1.2% per year as opposed to 4.4% per year.
• If, as of 2003, over 50s consumer spending had only grown at the same rate as under-50s spending, by 2013 UK GDP would have been depressed by 4.2% or £6.8 billion, and by 2018, UK GDP as forecast would be depressed by 6.8%.”
4.3. This is evidence not of some begrudged trickle-down of wealth into the economy by the over 50s but of their disproportionate and increasing contribution to GDP and employment. Without them, GDP would be lower, and austerity far tighter.
(ii) Employment
4.4. During the period of fiscal consolidation, large numbers of the over 50s and over 65s have chosen to return to work or stay in work longer – contributing to the economy. Over the past five years, the total number of people in employment in the UK has grown by 7.1%, with employment for the over 50s rising faster than for younger workers. The number of workers aged:
4.5. As the UK population ages the economic contribution of the over 50s is growing. The growing economic importance of the over 50s is not to the detriment of younger age groups, just as women entering the labour force en masse did not act to the detriment of job opportunities for men. The reality is that the over 50s, through their spending power and tax contributions, support millions of jobs in the private and public sector. Indeed, spending by the over 50s is more effective at creating jobs in the UK than spending by the under 50s.
In 2014 the Cebr studied how the economic activity of the over 50s affects overall employment within the economy. They found:
(i) The Triple-lock
5.1. The triple-lock guarantees state pension upratings of inflation as measured by the CPI, 2.5% or the percentage increase in earnings, whichever is the highest The replacement of RPI by CPI in calculating pensions in 2011 was an unfair move. On average, CPI runs at 1% less than RPI. If CPI is used then, “Both state and most occupational pensions will lose purchasing power over time, so that pensioners’ living standards fall as they age. For example, a pensioner with an income of £10,000 pa will lose £800 over 5 years compared with when RPI was the index”8. The Saga Manifesto 2015 called the triple-lock package as a whole “admirably fair” and there is an argument that pensioners should share in a growing economy over time. However, the most potentially problematic part of the guarantee is the link to earnings. Earnings growth has been restrained in recent years, but history shows that earnings can prove to be highly volatile - take the mid-1970s as an example.
5.2. As of January 1974, earnings growth was running at 17.5% compared with RPI at 12.0% over the same period. As of January 1975 earnings growth was 26.7% over the previous year – the comparative RPI was 19.9%. The then Government elected on a promise to link pensions to “the rise in wages” soon found such increases unsustainable. Pensions should have risen by at least 19.4% in 1976 to match earnings but the pension increase was pegged to 15%. The then Government also broke the earnings link in 1978. We fear that should earnings shoot up in future the triple-lock will prove unsustainable. It may be better to address this issue prudently in advance. It must be right that pensions should at least be protected against the inflation that they suffer. One possibility would be to link pension rises at minimum with rises in a pensioner price index, or 2.5%, whichever is the higher.
Between September 2007 - when the financial crisis started to really get underway - and January 2016, living costs have risen for different age bands as follows:
o 50-64: 24.6%
o 65-74: 27.5%
o 75 and over: 28.1%
o Whole population (RPI): 24.4%
(ii) Demographic Pressures
5.3. Rapid and sustained increases in longevity in the UK are an ongoing success story. In 2012, there were 10.3 million people over 65 in the UK – an 80% increase over six decades. These trends are expected to continue. An increased elderly population will have an impact on health, pension and social care expenditures. The very elderly (80 and over) will rise from an equivalent of 7.2% of the working age population in 2013 to 16.3% in 2060. A man in his 80s has 50 times the weighting of a man in his 20s for his use of acute care, and 7 times the weighting for a man in his 20s for his use of primary care9.
5.4. The OBR has taken a view of long-term sustainability of these demographic pressures. Despite reforms to the state pension system that will save 0.4% of national income in the long run, the OBR believes that, by 2063–64, the ageing population will have nevertheless offset most of the reductions in public spending from the austerity measures planned between 2013–14 and 2018–19. The OBR concludes that, “In the absence of offsetting tax rises or spending cuts this would widen budget deficits over time and eventually put public sector net debt on an unsustainable upward trajectory”.
5.5. Although the UK retirement pension is set at a lower rate than equivalent pensions in other EU countries19; although the ratio of older people to those of prime age will be more favourable in the UK than in many other countries11; and, although UK Health expenditure is lower than the EU average and only about average in OECD terms (we spend less on health relatively than Spain, Greece or Portugal, for instance)12 we nevertheless accept the OBR’s conclusion that demographic pressures on the basis of “unchanged policy” will lead to unsustainable burdens in the longer term. However, we note that this is based on “a higher assumed cost of uprating” as a result of the triple-lock. Our suggestion in para.5.2. above might ease the pressure to a degree.
The ONS makes the following projection of longevity:
MEN | WOMEN |
Born 2016 79.9 | 83.4 |
Born 2064 87.2 | 89.8 |
This suggests that the main scope for easing future pressures probably lies in revisiting SPAs once again as longevity continues to rise, though such decisions do not need to be rushed.
5.6 As the population ages over time the dependency ratio – which compares the working age/non-working age population - looks scary to policymakers. However, as working lives extend for many the calculation of the ratio needs better to reflect the reality of the fact that 1.2m people over 65 continue to work and should not be simply labelled as part of the “dependent” population. This will give a properly nuanced approach upon which rational decisions can be based.
February 2016