Do you want the good news or the bad news first?
The good news is that on average, the UK population is living longer. The bad news is if we want to make the most of our extra years, someone has to pay the price.
This is something the government is rightly grappling with, and it’s likely to remain high up the political agenda after the surge in votes from younger age groups in the last General Election.
The Conservative pre-election manifesto talked of the need for fairness between the generations and this was part of the justification for the government’s recent decision to increase the state pension age to 68, seven years earlier than planned.
There’s no fund from which to pay today’s state pensions. Instead, they’re paid for by today’s workers through National Insurance contributions.
So if the state pension age doesn’t rise to reflect improvements in lifespans, state pensions will be paid for longer, increasing the burden on those of working age.
Intergenerational fairness creates challenges in the wider pension field, particularly for defined benefit or final salary schemes.
The university superannuation scheme’s deficit of £17.5bn, the largest of any UK pension scheme, recently prompted suggestions that students might be asked to pay even higher tuition fees to deliver promised pension benefits to current university employees.
This move would take intergenerational unfairness to a new level, saddling our future workforce with even greater student debt – a case of robbing grandson Peter to pay grandpa Paul’s pension.
What makes matters worse is that those joining the workforce – who are repaying significant student debt and struggling to get on the housing ladder – might be tempted to opt out of their employer’s pension scheme.
This is doubly damaging for their future pension prospects, because not only do they lose out on valuable employer contributions, but the contributions they miss when younger are the ones that have the longest amount of time to grow.
Another consequence of living longer is that more of us may need some form of social care in later life.
The Conservatives’ pre-election manifesto proposed that individuals would fund their own care out of assets including their home, until these fell to £100,000. These proposals proved so controversial that they were amended to include an absolute maximum personal contribution.
But lower individual contributions mean higher state funding and if this pushes up income tax rates, the burden on today’s workers also increases. The government is to consult further on this later in the year and intergenerational fairness must be an overriding principle.
Of course, intergenerational fairness stretches well beyond pensions and social care. The Intergenerational Foundation publishes an index each year which considers a wider range of topics including housing, unemployment, education and the environment.
Every generation faces its own challenges, financial and otherwise, and these have changed dramatically. Figures show that those who have retired in recent years have almost caught up with the incomes after housing costs of those of working age.
This is largely a result of this group still enjoying generous defined benefit schemes, as well as having been able to buy their own property at a much more affordable price. But today’s golden age of retirement will lose its shine for future generations of retirees who are more likely to be members of less generous defined contribution pensions.
Fortunately, most younger people want to see older generations have a dignified retirement and parents and grandparents want to see future generations have the best start in life they can, without being crippled by financial burdens.
Agreeing on the best approach to fairness won’t be simple, but it needn’t lead to conflict between the generations.