Those born in 1983 will pay on average £187,000 to the government over their lives, net of the benefits and services they receive. Conversely, those born in 1933 will receive an average £150,000 in payments and services over their lifetime, net of benefits and services. This was highlighted in the fiscal sustainability report recently published by the Office of Budget Responsibility (OBR).
The figure below charts how much people will give or receive from government, adjusted for inflation, over their lifetimes. People born before 1953 are net beneficiaries. In contrast, people born after 1953 will pay more in taxes than they receive in services and benefits.
These net shifts occur because state pensions, benefits and services such as health care are unfunded. This means that the younger working population pays for the retirement benefits of the current pensioners. In turn, when the current generation comes to retire they will receive their pensions from the payments of future workers. However, the number of people over 65 has increased and they are living longer. This has increased the cost of their pensions and providing their health and social care.
The OBR also predict that under current policies the government spending as proportion of GDP that will be spent on state pensions will rise by 40% in the next 50 years. Similarly, the amount spent on long term care will rise by over 50% and the amount spent on health care will rise by 20%.
These increased costs must be paid for either by increasing the retirement age, by raising general taxation and reducing government spending or reducing benefits for current pensioners.
The government plans to gradually increase the retirement age, to 66 in 2018, 67 in 2034, and 68 in 2044. This sounds a long way off, but if you were born after 1952, 1967 or 1976 you will retire one, two and three years later. This makes younger people worse off, but does not affect people born before 1952.
Over the next four years, taking into account inflation, much public spending is being cut, public sector wages are falling, and public sector workers are being laid off. These cuts will have limited effects on retirees, but will cause significant harm to younger people. According to the ONS youth unemployment has risen by a third since 2008. Investment in education of young people, such as the educational maintenance allowance (EMA) has been cut and the price of university education is being increased.
So it is pretty clear that the younger generations are doing their bit to help pay for the increases in life expectancy. Are retirees also paying their share?
Let’s see what our leaders say:
“We will use growth in average earnings, prices or 2.5%, whichever is higher, to determine the increase in the state pension.
It is unfair that as each year goes by, pensioners slip further behind. It is only fair that, at times when the country is getting richer, retired people share the benefit.” – Nick Clegg MP
While David Cameron promised:
"Not to cut spending on the NHS, but to increase it." So that’s a no then.
Over the next 15 years the triple guarantee to pensions is forecast to double state pensions. This is forecast to cost an extra £45bn compared to increasing the state pension by the retail price index. A reprieve for the EMA would have cost around £6bn[1] over the same period.
Why has public spending for pensioners been protected by politicians? Pensioners vote. Only 53% of those under 25 voted in the 2001 election compared to 87% of pensioners. Those under 18 aren’t allowed to vote.
What should be done?
- The pension triple guarantee should be abandoned; the basic state pension should be increased in line with the consumer price index as with all other pensions and benefits.
- Changes to pensions should be fully discounted using the real interest rate on long term government debt and changes reflected in reported public sector net debt.
Older people in Britain have not saved enough for their pensions and care in retirement. Our political system is forcing younger people to pay for their mistake. Where is the fairness in that?
So what do you think? Convinced?
[1] Assuming a cost of £500m per year discounted at 3.5% as per the treasury green book.
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