War of the generations

Newspaper headlines for the BudgetThe furore over George Osborne's £1bn per year 'granny tax' may die down, but it represents the first salvo in a war between the generations over how the country's diminished wealth is shared. Though attempting to disguise it as a tax "simplification", the government admitted the measure aimed to "spread the tax relief fairly across working age people and pensioners".

And it coincides with what the Sunday Times calls "an attempt to push intergenerational unfairness up the political agenda". With the new crop of senior politicians and media commentators having been born after the hitherto dominant baby boomers, it's open season on that generation.

But political measures to shift wealth across generations could backfire, and if it leads to more taxes on wealth rather than income, it could hurt prudent savers of all ages. So just what are the arguments?

The case for youth
Pundits highlight that the baby boomers, born between 1945 and 1954, are now entering retirement richer than any generation preceding them, a trend of rising prosperity seen throughout the 20th century.

In contrast, the living standards of those born between 1985 and 1995 (and now entering employment) are no better than those born 10 years earlier. Furthermore, real household disposable incomes of people in their 20s has been overtaken for the first time by those in their 60s.

The unfairness of this is promulgated by David Willets in his book The Pinch, how the baby boomers took their children's future and why they should give it back, by the lobby group the Intergenerational Foundation, and by the Financial Times, which has described the "jinxed younger generation".

They point out that baby boomers benefitted from final salary pension schemes, free university education and rising property values funded by mortgages that fell in real terms during the high inflation of the 1970s. (Some might say, be careful what you wish for).

Contrast the fortunes of today's youth. A fifth of 16-24 year olds are neither in employment nor full-time education. The proportion of graduates in lower-skilled jobs has increased from 27% in 2001 to 36% in 2011.

And home ownership is out of their reach. The average age of a first-time buyer has rise to 37. While the proportion of pensioners owning their own homes has risen from 62% in 1991 to 79% now, home ownership among 16-24 year olds has fallen from 36% to 14%.

This perception of unfairness across the generations impacts the debate on tax policy. The FT complained: "The elderly have been protected from the coalition's rises in NI contributions, student tuition fees, child benefit and tax credit cuts. They have also benefitted from a more generous uprating of pensions and no cuts to winter fuel allowances, free TV licenses or bus passes".

The case for age
The older generation has its own lobbyists, in the form of Saga and the right-leaning press, and its case has been put forcefully in response to the granny tax.

Axing the age-related benefit put in place by William Churchill in 1925 is seen as particularly harsh, when -- as they see it -- pensioners have suffered some of the biggest cuts in income as a direct result of austerity measures. Annuity rates, already declining due to increased longevity, have been hit by quantitative easing, while negative real interest rates have trashed savings income.

With the threat of having to contribute more to care bills, pensioners don't feel universally wealthy. And many see their pensions as reward for a lifetime's work and full NI contribution record.

The grey lobby argue that the much higher proportion of young people going to university naturally increases the age at which they start to earn, and so own property.

And high youth unemployment can at least in part be blamed on poor education. In a recent survey of 500 employers, Unlocking Britain's Potential, over half said the education system was not equipping young people with the right skills. Nissan reported how apprentices struggled with basic maths despite having GCSE grades A or B in the subject.

The issue is more than one of literacy and numeracy. The study identified deficiencies in basic tools of employability such as behaviour, attitude and communication. That's a serious issue for society, but hardly one that will be solved by transferring wealth across the generations.

Attempts to do that by taxation, or more subtle pressure, might possibly backfire.

Older people are more likely to vote in elections. The FT suggests reducing the voting age to 16 as a countermeasure. Certainly, a Tory party that relies on the grey vote may be more deft in passing any future age-related tax measures.

But if the objective is to tax the wealth of older generations while disguising the target, the easy way may be to tax wealth more, and income (relatively) less. That would ultimately discourage saving and investment across the generations.

The baby boomers might also vote with their wallets. Older people's wealth gets redistributed -- through inheritance, through generosity to children and grandchildren, and by investment into the real economy.

If tax and society's attitudes discourage this nurturing of wealth by older people, then the baby boomers might just spend their money instead, on anything from care to cruises.

Already the equity market faces a demographic time bomb, if retirees' funds are withdrawn and "life-styled" into gilts. More familiarity -- and the need for yield -- may keep them invested in equity income funds. But if instead they spend their wealth, bang goes the country's already poor savings ratio.

Money tied up in property could be consumed as well. Equity release is presently complicated, costly and suitable only for the desperate. But given sufficient demand, it would not defeat the finance industry to design products that enable older home owners to spend their assets while remaining in their own home for their lifetime.

If politicians choose to play the Generation Game, they may not be met with "Nice to see you!"

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