Intergenerational fairness and the end of the triple lock?

There has been increased debate recently about what is perceived to be a wealth divide between generations and two reports on the concept of ‘intergenerational fairness’ have been published to inform the debate: 

1.  A report issued by the House of Commons Work and Pensions Committee which calls for the triple lock policy for uprating the State Pension to be abolished; and

2.  A briefing published by the Institute for Fiscal Studies (IFS) which looks at the looking at the economic situation for each generation by decade. 

The reports are driven by concerns that wealth is increasingly concentrated amongst the older generation with the ‘baby boomers’ set to enjoy greater provision of welfare and public services relative to their tax contribution than younger generations. 

Calls to remove the ‘unsustainable’ State Pension triple lock

The House of Commons Works and Pensions Committee report on intergenerational fairness includes a call for the State Pension triple lock to be abolished.  Its recommendations include:  

  • The triple lock policy, which promises to increase the basic State Pension annually by the highest of by the highest of the Consumer Price Index, average earnings growth or 2.5%, is ‘inherently unsustainable’ and should not continue beyond 2020 by which time it will ‘have achieved the Government’s objective of securing a decent minimum income for people in retirement to underpin private saving’. 

 

  • The Committee recommends that the triple lock is instead replaced by earnings benchmarks for the old and new state pensions and, when earnings fall behind price inflation, an above-earnings increase should be applied to protect pensioners against a reduction in the purchasing power of their state pension.   Price indexation would then continue when earnings growth first exceeds inflation until the state pensions again align with their earnings benchmarks.

 

  • Universal pensioner benefits, such as the Winter Fuel Payment, should not be ‘off limits’ when the Government considers its future spending plans. There is no case for any increase in the value or range of such benefits.

 

  • The Government should undertake an assessment of the intergenerational distribution of private income and wealth and enable updated research estimating the balance of fiscal contributions and withdrawals by different generations over their entire lifetimes to be carried out. 

The economic circumstances of different generations 

The Institute for Fiscal Studies (IFS) has published a briefing looking at each generation by decade’s economic situation.  This informs current debates on intergenerational fairness.  Key findings include: 

  • In the past, each decade generation’s household income was more than 20% higher than its predecessor.  Accordingly the average income around the age of 50 for those born in the 1940s (the ‘1940s cohort') was more than 20% higher than the 1930s cohort and likewise the average income at that age for the 1950s cohort was more than 20% higher than the 1940s cohort.

 

  • However, those born after 1960 now have no higher income than their predecessors born 10 years earlier.  This is the result of the stagnation of working-age incomes over the past decade – real median income for those aged 25 to 55 grew by only 2% in total between 2004/05 and 2014/15, compared with 26% in the preceding decade (1994/95 to 2004/05).
     
  • Those born in the early 1980s have started adulthood with no higher incomes than those born in the previous decade (although that is much higher than the incomes with which the 1960s started their adulthood two decades earlier).

 

  • The 1980s cohort have accumulated significantly less wealth than their predecessors by the same age.  By their 30s, those born in the early 1980s had median net household wealth of £27,000 per adult (this includes housing, financial and private pension wealth) compared with nearly twice as much (£53,000) per adult for the 1970s cohort at the same age.

 

  • Less than 10% of private sector employees born in the early 1980s and now in their early 30s have recent active membership of a defined benefit (DB) pension scheme compared with 15% of those born in the 1970s and nearly 40% of those born in the 1960s.

 

  • It is noticeable that those born in the 1980s have much lower homeownership rates compared with other post-war cohorts at a similar age. By age 30, only 40% of those born in the early 1980s were owner-occupiers compared with 55% of those born in the 1970s and more than 60% of those born in the 1960s and 1950s.

 

  • There has been a dramatic divergence in the housing costs of renters and homeowners as a share of income.  Between ages 26 and 30, the 1960s cohort spent around 20% of their income on average on housing costs.  In contrast, those born in the early 1980s spend 28% of their income on housing costs if they are renting but only 15% if they are homeowners. 

Capita’s comments

The IFS and Work and Pensions Committee reports give a flavour of the debates currently surrounding intergenerational fairness.  Theresa May herself noted the divide between “a more prosperous older generation and a struggling younger generation” in her first speech as Prime Minister at the recent Conservative Party conference.     

However, the Conservative Party manifesto at the 2015 general election included a pledge to maintain the triple lock and, in the Autumn Statement 2016, the Chancellor Philip Hammond reaffirmed the Government's committment to keeping it in place for this Parliament.  It remains to be seen whether they would seek to abolish it after 2020.