Pensioners are still winning out in Britain’s battle of the generations

Peter Dixon
WHEN in 1965 The Who sang “Hope I die before I get old,” it articulated the sentiment of a generation. However, the boomers – those born in the immediate aftermath of World War II – did not die: They lived long and lived well, enjoying historically unprecedented increases in living standards. David Willetts, the current minister for Universities and Education and himself a boomer, published a book in 2010 that argued that his generation had “stolen their children’s future.” The boomers’ cultural, political and economic dominance has resulted in a significant concentration of wealth, while their general lack of foresight means that future generations will have to pick up the economic tab.

It is easy to overstate the case, but there is no doubt that members of today’s Generation Y face a different, and perhaps more difficult, set of conditions to those which their parents and grandparents enjoyed. Take education. Well into the 1980s, local authorities paid the tuition fees for UK students and provided a maintenance grant which was adequate to live on. By the mid-1990s, the real value of the maintenance grant had been sharply reduced, thus requiring students to take out loans, and from 1998 they were required to bear at least part of the cost of tuition fees. Recent legislation, which has removed the cap on tuition fees, means that from 2012 students in England will face fees of up to £9,000 per year – and that is before they cover their living expenses.

Assuming that students borrow the money to fund their education, they will need to find a job after graduation to help them do so. That will not be easy. In the three months to January 2012, employment among those aged 18-24 was 3.4 per cent below year-ago levels and the jobless rate for this age cohort exceeded 20 per cent. Faced with such high debt burdens throughout their 20s, young people can legitimately question whether the returns to education are all they are cracked up to be. Moreover, high debt levels place limits on new graduates’ ability to accumulate capital. With the average UK house price currently around 4.3 times annual income (5.1 times for south east England), and banks constrained in their ability to lend, it is increasingly difficult for Generation Y to get a foot on the property ladder.

Given the likelihood that the current generation of twenty-somethings will find it hard to match the living standards of their parents, the recent budget decision to limit age-related tax allowances (the so-called Granny Tax) has to be seen as a way to redress intergenerational imbalances. Consider what is being proposed. George Osborne has merely suggested that instead of giving pensioners a tax allowance in excess of that enjoyed by the working population, it will be frozen at current levels until the two are aligned. Despite the howls of outrage from lobby groups, bear in mind that pensioners receive a winter fuel allowance, free bus travel and those aged above 75 are not required to pay for a TV licence. Restricting these freebies would claw back £4bn for the Exchequer by 2015/16 – around four times the yield from restricting the tax allowance.

Analysis of Department for Work and Pensions data for fiscal year 2009-10 (the latest available) broadly implies that freezing the age-related tax allowance will result in state benefits remaining tax free, but that a slightly higher proportion of income derived from personal and occupational pensions will be subject to tax at a 20 per cent rate. However, retirees enjoyed the privilege of significant tax breaks during their working lifetime in order to build up their pension pot. Indeed, higher-rate taxpayers, who received tax relief at 40 per cent, are still benefiting from a 20 per cent tax subsidy (the difference between the 40 per cent tax break on pension saving and the 20 per cent tax on their income).

I am sympathetic to the argument that pensioners have contributed to the system throughout their working life, and are entitled to some degree of respite in their old age. But pensioners have done well from the coalition so far, with guaranteed increases in the state pension, while Generation Y faces the bleakest prospects for years. While today’s generation of pensioners still has a lot to offer, it is reasonable to acknowledge that its members should not continue to enjoy privileges at the expense of their children.

Peter Dixon is senior economist for Commerzbank Corporates and Markets.