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Old Age Wealth
Jun. 24th, 2013 07:44 pmThere was an interesting histogram in The Economist on Friday. It wa sused to illustrate an article on France's huge and unsustainable public social spending (32% of GDP, compared with 24% in the UK and an OECD average of 22%). Apparently it has come as something of a shock to Hollande and the French people that one of the best ways around this would be for everyone to work harder; the days when a French waiter could earn more than €50k a year might actually be coming to an end.
However, that was not what attracted my attention. What was interesting was how the public social spending by policy area is divided up -- Pensions; income support to working-age people; health, and other social services.
France spends 14% of its GDP on pensions, less than Italy (15%) and more than Germany (12%). But the differences aren't that huge when you consider the disparity in retirement ages (France, 62, Germany, 67, Italy, 66).
The OECD average expenditure on pensions is 7.5% of GDP, and the US, which doesn't even have a pension-for-all, is just under this at 7%. But what of the UK? At its current average retirement age of about 63, one would expect it to be closer to France than any other country. But, no. In fact the UK's proportion of GDP spent on pensions is just 6.5% -- less even than the US.
What, one might reasonably ask, is going on?
Since the UK pension is theoretically for all and non-means-tested, we have to look beyond the basic numbers. A few possibilities spring to mind.
Perhaps there are fewer old age pensioners in the UK? No, that doesn't work. Average lifespan is not that different. Indeed, in the US the average lifespan has been falling.
Perhaps the UK has hidden hurdles? This could well be true. The UK demands 30 years of National Insurance contributions (soon to rise to 35 years) to qualify for a full pension. The "basic" pension is considerably lower. Also, if you move abroad, you do not have the same benefits as if you stay in the UK. If you move outside of the EU, my understanding is that your pension is effectively frozen.
Or perhaps the means-tested parts in Europe are more needed? This seems to be getting closer to the truth. In France, most people do not have a privately funded pension. What they do have is two separate pay-as-you-go schemes -- one run by the government and one run by a couple of industry-wide organizations.
Another mandatory ting about pensions is that calculations are not simple, but it looks to me as if French entitlement qualifications are easier to build up. In other words, when you retire, you are likely to get an income closer to your working income than is the case in the UK.
But odd tings are still going on. One would expect, if France's pension provisions cost more, that french pensioners would be better off. Indeed, the UK is moving away from a pension close to your working salary and towards a minimum basic for everyone, and the excuse is one of cost.
However, UK pensioners are not worse off than their French (or German) counterparts. Now, while it's quite easy to get the stats on pensioners' average incomes throughout Europe, it's much harder to get hold of average wealth.
But, for the nation as a whole, the median wealth in the UK is about $125,000, whereas in France it is about $80,000 and in Germany it is just $60,000.
I expect you can see where this paradox is going.
In the UK in the 65+ age bracket, 67% of households are worth more than £250,000 (http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-309726)
In Germany, not only is median wealth lower, but that wealth is actually more skewed than it is in the UK. (the situation is slightly different between Germany and France -- if one takes all of Germany, then France has slightly higher median wealth, but if one excludes the former GDR, then Germany has slightly higher median wealth).
The answer is found here: http://www.bruegel.org/nc/blog/detail/article/1053-wealth-distribution-in-the-eurozone/
It seems clear to me therefore that a major factor in the wealth of Britain's pensioners is because they own property, because they had the luck to sign up to privately funded final salary schemes that, at the moment, are not going bust and which are not (as in France) pay as you go, but, most importantly, because they bought assets on borrowed money at what turned out to be negative real interest rates.
And this is the key -- far from being "savers" as they claim to be, most people over 60 were more profligate than the wtruggling youth of today. But the oldies of today transferred wealth from the oldies of yesterday, via inflation writing off the (then younger generation's) debts.
This time round, the older generation are not going to fall into the same trap, so they are holding onto that wealth accumulated through inflation, to the detriment of the younger generation, and to the detriment of the economy.
No-one is to blame for this. The current older generation has (unconsciously) learnt from the previous older generation's mistakes. And it's not as if the 65-plusses are rolling in cash -- they are still poorer than the traditionally "richest" generation of 45 to 64. But relatively speaking they are far less poor than the richest generation than were old age pensioners of 40 years ago when inflation was in double figures and would reach a peak of more than 30%.
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However, that was not what attracted my attention. What was interesting was how the public social spending by policy area is divided up -- Pensions; income support to working-age people; health, and other social services.
France spends 14% of its GDP on pensions, less than Italy (15%) and more than Germany (12%). But the differences aren't that huge when you consider the disparity in retirement ages (France, 62, Germany, 67, Italy, 66).
The OECD average expenditure on pensions is 7.5% of GDP, and the US, which doesn't even have a pension-for-all, is just under this at 7%. But what of the UK? At its current average retirement age of about 63, one would expect it to be closer to France than any other country. But, no. In fact the UK's proportion of GDP spent on pensions is just 6.5% -- less even than the US.
What, one might reasonably ask, is going on?
Since the UK pension is theoretically for all and non-means-tested, we have to look beyond the basic numbers. A few possibilities spring to mind.
Perhaps there are fewer old age pensioners in the UK? No, that doesn't work. Average lifespan is not that different. Indeed, in the US the average lifespan has been falling.
Perhaps the UK has hidden hurdles? This could well be true. The UK demands 30 years of National Insurance contributions (soon to rise to 35 years) to qualify for a full pension. The "basic" pension is considerably lower. Also, if you move abroad, you do not have the same benefits as if you stay in the UK. If you move outside of the EU, my understanding is that your pension is effectively frozen.
Or perhaps the means-tested parts in Europe are more needed? This seems to be getting closer to the truth. In France, most people do not have a privately funded pension. What they do have is two separate pay-as-you-go schemes -- one run by the government and one run by a couple of industry-wide organizations.
Another mandatory ting about pensions is that calculations are not simple, but it looks to me as if French entitlement qualifications are easier to build up. In other words, when you retire, you are likely to get an income closer to your working income than is the case in the UK.
But odd tings are still going on. One would expect, if France's pension provisions cost more, that french pensioners would be better off. Indeed, the UK is moving away from a pension close to your working salary and towards a minimum basic for everyone, and the excuse is one of cost.
However, UK pensioners are not worse off than their French (or German) counterparts. Now, while it's quite easy to get the stats on pensioners' average incomes throughout Europe, it's much harder to get hold of average wealth.
But, for the nation as a whole, the median wealth in the UK is about $125,000, whereas in France it is about $80,000 and in Germany it is just $60,000.
I expect you can see where this paradox is going.
In the UK in the 65+ age bracket, 67% of households are worth more than £250,000 (http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-309726)
In Germany, not only is median wealth lower, but that wealth is actually more skewed than it is in the UK. (the situation is slightly different between Germany and France -- if one takes all of Germany, then France has slightly higher median wealth, but if one excludes the former GDR, then Germany has slightly higher median wealth).
The answer is found here: http://www.bruegel.org/nc/blog/detail/article/1053-wealth-distribution-in-the-eurozone/
"The median household, i.e. the household with an equal number of richer and lower households around, owns only a net property of 51k euros. This means only a quarter of the average net property. This contrasts with much richer median households in France and more than 3 times richer households in Spain and Italy.
Third, the low net property in Germany is correlated with the low home ownership in Germany. Only 44% of German households own apartments. Yet, it is shown that buying an apartment is a central factor for saving."
It seems clear to me therefore that a major factor in the wealth of Britain's pensioners is because they own property, because they had the luck to sign up to privately funded final salary schemes that, at the moment, are not going bust and which are not (as in France) pay as you go, but, most importantly, because they bought assets on borrowed money at what turned out to be negative real interest rates.
And this is the key -- far from being "savers" as they claim to be, most people over 60 were more profligate than the wtruggling youth of today. But the oldies of today transferred wealth from the oldies of yesterday, via inflation writing off the (then younger generation's) debts.
This time round, the older generation are not going to fall into the same trap, so they are holding onto that wealth accumulated through inflation, to the detriment of the younger generation, and to the detriment of the economy.
No-one is to blame for this. The current older generation has (unconsciously) learnt from the previous older generation's mistakes. And it's not as if the 65-plusses are rolling in cash -- they are still poorer than the traditionally "richest" generation of 45 to 64. But relatively speaking they are far less poor than the richest generation than were old age pensioners of 40 years ago when inflation was in double figures and would reach a peak of more than 30%.
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