Intergenerational fairness Contents

Conclusions and recommendations

The intergenerational contract under strain

1.Demographic trends have placed considerable stress on the intergenerational contract. The post-war baby boomer cohort entering retirement is particularly large and people within it will tend to enjoy longer retirements than was anticipated. This puts a strain on the working age population. Increases in the state pension age reduce the ratio of pensioners to working age people and therefore have counteracted demographic trends. For many people, however, working into their late sixties or seventies is not an option. (Paragraph 14)

2.Housing is central to intergenerational fairness. Rapid and sustained rises in house prices, most marked in London and its surrounding areas, have concentrated wealth in the hands of those who have owned property for decades. At the same time far too many young people have been priced out of homeownership. High private rents make it difficult to save for a deposit. The opportunities that were open to baby boomers to buy a home with a relatively small deposit are closed to today’s young. Though wealth will be passed to younger people through inheritance, this risks exacerbating inequality within generations. Successive governments have palpably failed to act effectively on the housing market. Alongside housebuilding, there is a strong case to consider innovative policies to encourage downsizing and to more efficiently distribute the existing stock. Such measures lie outside our remit. The manifest problems in the housing market, however, form the backdrop to much of this Report. (Paragraph 22)

3.More work is required to assess the intergenerational distribution of tax contributions and public spending on services and benefits. What research exists suggests that today’s young will be net contributors to the welfare state, while the baby boomer generation will be net beneficiaries. The effect is likely to have been exacerbated by policy decisions to protect pensioner benefits while targeting welfare cuts on working age payments. The limits of that approach have been reached. If further measures are needed to ensure the fiscal sustainability of welfare spending in the medium to long term then pensioner expenditure should not remain out of bounds. (Paragraph 36)

4.Great strides against the scourge of pensioner poverty have been made over the past 25 years. After housing costs, pensioner households are far less likely to be in poverty than households of working age, particularly those with children. Pensioner incomes have also rapidly caught up those of other households. This is a triumph. This success, however, has implications for policy. This is particularly true at a time when people in their 20s and 30s may struggle to attain—never mind exceed—the incomes of their forebears. (Paragraph 41)

5.The economy has become skewed in favour of baby boomers and against millennials. Unless governments adapt to these changed circumstances the intergenerational contract that underpins the welfare state is under threat. (Paragraph 42)

The pension state triple lock

6.The triple lock, allied to the introduction of the flat rate new state pension, has succeeded in increasing the value of the headline state pension relative to average earnings to a level not seen since the original earnings link was removed in 1980. Low rates of earnings growth following the 2008–09 recession mean this process has occurred faster than was expected. Provided the new state pension is maintained at this proportion of earnings the work of the triple lock, to secure a decent minimum income for people in retirement to underpin private saving, will have been achieved. (Paragraph 48)

7.The triple lock is inherently unsustainable. In the absence of reform the state pension would inevitably grow at a faster rate than the rewards of work and would account for an ever-greater share of national income. In particular, we find no objective justification for the 2.5 per cent minimum increase. (Paragraph 54)

8.There is, to some extent, a trade-off between the uprating of the state pension and the state pension age. The cost of a more generous state pension can be offset by restricting its availability to fewer people. Increases in the state pension age, however, disproportionately affect younger people. They also risk further skewing receipt of the state pension towards people in areas of the country, and socio-economic groups, in which life expectancy is high. People with low life expectancies, who may have been disadvantaged in their early years and working lives, would be further disadvantaged in their later years. We do not doubt that further increases in the state pension age will be required as welcome increases in life expectancy continue. They should not, however, be the sole means of ensuring the long-term affordability of the state pension. We welcome the wide-ranging approach the ongoing review of the state pension age has taken to its work. (Paragraph 60)

9.The triple lock should not continue beyond 2020. By then, the value of the new state pension relative to average earnings will be close to the historic high for the headline state pension rate. If maintained, the arbitrary boost the triple lock gives to the state pension relative to both earnings and prices will become ever harder to justify both in fiscal terms and from the perspective of intergenerational fairness. We urge political consensus before the next general election on a new earnings link for the state pension. (Paragraph 67)

10.We recommend the Government benchmark the new state pension and basic state pension at the levels relative to average full-time earnings they reach in 2020. The triple lock should then be replaced by an earnings link. In periods when earnings lag 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 should continue when real earnings growth resumes until the state pension reverts to its benchmark proportion of average earnings. Such a mechanism would enable pensioners to continue to share in the proceeds of economic growth, protect the state pension against inflation and ensure a firm foundation for private retirement saving. The new state pension and basic state pension it replaced would track average earnings growth in the long term. That is more fiscally sustainable and more intergenerationally fair. (Paragraph 68)

Universal pensioner benefits

11.The Winter Fuel Payment is a universal benefit that is not focused on those who need it most. It is a blunt instrument for alleviating fuel poverty among the least well-off pensioner households and gives a cash payment to many households who do not need it. As its value is fixed in cash terms its real value is set to dwindle gradually over time. (Paragraph 80)

12.Successive Governments from both main parties have introduced universal benefits for pensioners, who have a high propensity to vote, for reasons of short-term expediency. As these benefits are not subject to indexation promises their value withers away in real terms, but their symbolic and political importance is more durable. Such measures lead to ill-targeted support, further complicate the benefits system and are far harder to put right than to introduce in the first place. Given the welcome improvements in pensioner incomes and reductions in pensioner poverty seen in recent years, there is no case for future governments to contemplate any increase in the value or range of universal pensioner benefits. (Paragraph 86)

13.The longer universal pension benefits remain protected, the more they may come to be viewed as integral entitlements. Their relatively recent introduction, however, means they should not be seen as sacrosanct elements of the welfare settlement that beneficiaries have paid for during their working lives. Universal pensioner benefits should not be off limits when spending priorities are set in future Parliaments. (Paragraph 87)

Strengthening the intergenerational contract

14.There is a dearth of reliable and comprehensive information about the intergenerational distribution of public and private resources. Greater awareness of the intergenerational implications of decisions would make for better policy. We recommend the Government make available the necessary information and resources to enable updated research estimating the balance of fiscal contributions and withdrawals by different generations over their entire lifetimes to be carried out. We further recommend the Government undertake a forward-looking assessment of the intergenerational distribution of private income and wealth. There is a dearth of reliable and comprehensive information about the intergenerational distribution of public and private resources. Greater awareness of the intergenerational implications of decisions would make for better policy. We recommend the Government make available the necessary information and resources to enable updated research estimating the balance of fiscal contributions and withdrawals by different generations over their entire lifetimes to be carried out. We further recommend the Government undertake a forward-looking assessment of the intergenerational distribution of private income and wealth. (Paragraph 93)

15.Our current focus on imbalances between generations should not detract from the important issue of disparities of wealth and opportunity within each generation. The generational perspective is one of many that need to be considered in the formulation of policy to ensure a cohesive society that works for everyone. (Paragraph 98)

16.The intergenerational fairness debate should not be conducted in divisive or adversarial terms. We reject any notion of intergenerational conflict and do not accuse any particular generation of stealing from their successors. Baby boomers acknowledge the pressures faced by later generations. They are concerned for their children’s and grandchildren’s prospects and already provide support where they can. In turn, younger people are concerned for the welfare of their parents and grandparents and want to ensure they enjoy a decent retirement. It is not the fault of baby boomers that the economy has become skewed in their favour. But the absence of fault does not obviate the need for policy action. The recommendations in this report are intended to strengthen the contract between generations that is at the heart of our society. (Paragraph 99)





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4 November 2016