The Battle of the generations

An excellent email from Mr Young about the current macroeconomic situation that merits quoting:

the view from ten thousand feet looking down is simple - Laws are made by old people, not the young. And they are inevitably made with the interests of older people in mind. In some countries it leads to interference in the labour market (much of Europe). In some it's interference in the land market (UK and Japan). In all it's interference in the social security system. In every case, the laws favour older workers, older property owners and older welfare users.

The young people of today are actually astonishingly forgiving and unselfish about all of this. Or astonishingly misguided and misinformed. Why there isn't rioting about the cost of housing here I cannot understand.

Most of those who have retired, even most of those of my generation, will doubtless deny this analysis. So, let's look at the UK numbers.

The numbers are not particularly easy to come by, but I found this analysis, which shows distribution of wealth by age:

http://www.ifs.org.uk/comms/r71.pdf Pages 17 to 19 show wealth distribution by age.

Table 3.5. Home ownership, by age
Age, Have mortgage, Own home outright
<25, 4, 0
25–29, 37, 1
30–34, 57, 2
35–39, 67, 4
40–44, 76, 6
45–49, 78, 14
50–54, 78, 26
55–59, 84, 39
60–64, 77, 58
65–69, 74, 64
70–74, 75, 69
75+, 63, 60,
Total, 53, 24


Looking at the other graphs in the analysis, one conclusion is inescapable, the older generation (particularly in the 60 to 74 age group) are in many cases, immeasurably wealthier than the young. I use the word "immeasurably" without exaggeration, because those aged from 20 to 34 often have a negative net wealth.

A second conclusion is also inescapable. Any claim by the elderly that they "deserve" their retirement income is nonsense. The wealth that they have accumulated, and the retirement benefits that they enjoy, far outweigh the money that they have put aside during their working life. If one takes the south-east, the situation is even more marked, but wven in the country as a whole, with an average house price of £200,000, and about 60% of people in the relevant age group owning their home outright, that would require a saving of £3k a year in current money terms just to pay for the home that they are living in. Let's assume a retirement income of about £16,000 all told (including state pensions, annuity income or final salary scheme). That would require an investment of about £250,000 in current money terms. Over a working life that's a saving of £6k a year in current money terms. We can knock off about a quarter of National Insurance (the other three quarters goes to benefits and other outgoings) or about £500 a year.

So, ignoring all other benefits that the retired receive (free TV licences, bus passes, discounts for rail travel, leisure club membership, adult education, and so on) they would have needed to have saved about £8k a year of their earnings at current money values, every year, throughout their life, to be "entitled" to the living that they now receive. Throw in all other benefits and I reckon the current retired would have needed to save about £12k a year throughout their working life.

So, how much DID people save?

You can look here for some numbers: http://www.economicshelp.org/blog/848/economics/savings-ratio-uk/,

or here: http://statistics4u-uk.com/html/household_saving_ratio.html

These don't go back far enough, but I reckon that an estimate of 6% wouldn't be far off the mark. At current average salary levels that would be £1,800 a year.

Whoa! How much? You can add to that the money that went "into" government and which is now coming back out (even though technically you can't, because the pension system runs on an unfunded basis). Let's be generous and call that £3k a year at current values.

That means that, by my rough calculations, today's retirees are taking out what they would have needed to have put in £12k a year to deserve, but which in fact they only put in £4.8k a year (all at current money values). Put crudely, for every £12,000 a year in total benefits they are receiving, they only deserve £4,800.

So, that's £7,200 that has to come from somewhere (and this is assuming a FUNDED pension system, which it isn't). This is basically the annual transfer from the working population to the retired population above and beyond what is merited. There's about 20% of the population that are retired. About 50% are working, and about 30% are either too young to work or are unemployed.

That means that, at the moment, each working person is contributing about £2,800 to each retired person above and beyond what that retired person merits if one looks at the amount "saved" in his or her working life.

(The working person is also contributing about £3,600 to the other part of the non-producing part of the country, the unemployed and the young, but that's a whole different argument).


As far as David is concerned, and I agree with him, this constitutes a completely unjustified transfer of wealth from the young to the old. And it takes no account of other iniquities, such as the old maintaining the value of their capital (in houses) by stopping the young from building houses in which to live.

One way to get this country moving again would be to slash retirement benefits, either gradually or suddenly. In many cases this would create legal disputes, but usually these can be subverted. And, I suggest, they have to be subverted. Because we cannot carry on in this way, and the alternative will not be the old living a comfortable old age on income that they do not deserve. It will be a youth that will eventually see what is happening and who will make it much, much worse for the misnamed "old and vulnerable".

Old and vulnerable my arse. "Old and comfortable" vs "Young and vulnerable" would be a better combineation.