Too Expensive to Keep? Is it time to break our promises to the baby boomers?

In a stunning lecture delivered without notes to a “senior” audience at the Oxford and Cambridge Club last night, Paul Johnson helped us ask these questions of ourselves.

For his audience was by and large – precisely the entitled class who had already won in the current generation game. In this blog I lay out Paul’s argument , hoping that it will fall on younger ears who may be in time to do something about the injustices we are heaping upon our children!

Baby Seals

Paul set out his argument by establishing

  1. the current uneven distribution of wealth inter and intra generations
  2. why the wealth inequalities matter
  3. a policy framework for doing something about unfair inequalities

1. Wealth today

98-9% of the population find themselves in the same position with regards the wealth of others as they were 25 years ago.

For the very top earners , income rose sharply in the first decade of the century but has levelled off in the past five years.

Divides in wealth inequality are most obvious within a generation, the differences between one generation and another are less easy to see.

The most dramatic social change we have seen in the past 35 years has been in the reduction in pension poverty. In 1980, one third of pensioners were in poverty, today the number is less than half that. Real incomes of pensioners have increased every year in the last 25 and in 2011, for the first time- the average income of people over 65 exceed the average for working age people.

This is new and – according to Johnson – quite unexpected.

Johnson ascribes this phenomenon to three causes

  1. Increased pay out in State Pensions (Johnson called them benefits but I think most of us consider them entitlements). Added to these pensions, many people get means tested benefits – largely introduced by the last Labour Government.
  2. The maturation of high quality occupational pensions
  3. Reduced housing costs for owner occupiers who have paid off their mortgages.

The likely boom in retirement incomes is likely to persist for at least ten years as us baby boomers pick up all the wealth.

2.Why this matters (and is a cause for concern)

Younger people have seen no real wage increases since 2008 and household incomes have hardly changed in the last 12 years.

But while current earnings have stagnated, the prospect of future wealth has diminished. Less than 2% of 20-30 year olds are currently accruing defined benefits in a pension scheme.

What makes this worse is that people in their 20s and 30s are half as likely to be home owners than the 20-30 year olds of 30 years ago.

Those in the middle quintile of earnings are now more likely to look downwards towards those in low earnings than aspire to those in higher earnings.

For the first time since the war we have DOWNWARD SOCIAL MOBILITY

State Pensions and the failure of SERPS

State pensions for those retiring after 2030 are likely to be less generous (than planned). The State Earnings Related Pension introduced in 1978 was 35 years in its disintroduction and has proved a public policy disaster.

Those not in a good occupational scheme are now relying on personal savings to boulster retirement. But savings are not productive. Those saving on deposit have now seen 6-7 years of no growth. With real interest rates less than 0%, people need to save in excess of 50% of their earnings to match the benefits of a good quality occupational scheme.

Relative to the destruction of defined benefits and their replacement by defined contribution pensions, changes to state pensions don’t make much difference.

The housing haves and have nots

The inequalities between the haves (homeowners) and have nots (renters) are greater still. Johnson pointed to an unfair tax stystem as making housing inequality worse. Council tax and Stamp Duty are preventing people from moving house.Monetary policy has widened the gap between the haves and have nots.

The collapse of DB workplace pensions

Nobody expected the promises made in the last century to prove so expensive. In the 1970s policy makers talked about a decrease in life expectancy.Instead we have seen life expectancy increase by 9 years in the last 40.

The expected returns in world stock markets have not – since 2000- materialised.

Together with low interest rates, these unexpected economic factors have increased the value of our defined benefit pension pounds by 40%.

Taken together , defined benefit pensions now seem a massive policy mistake. the cost of maintaining the defined benefit promises (using current accounting methods) has to come from somewhere. It is being met by those (not) enjoying low DC contributions and from the decreased dividends from private companies struggling to pay deficit bills.

3. A new policy framework?

In future the rich will be those who inherit the wealth of the current baby boomers. We are looking at a return to ancestral wealth and a social oligarchy of the wealthy.

Johnson calls into question the sanctity of the promises made to the boomers. There are precedents for Government to move the cheese (within the “reasonable ambit of policy”).

  • For 30 years state pensions were not indexed against wages causing our basic state pension to become “nugatory” (Michael Portillo)
  • The recent change switching occupational pensions in payment from RPI to CIP will be the most significant reduction in the value of Public Service Pensions ever
  • The changes in state pension age – where introduced gradually – have been socially acceptable.

For Johnson, these changes are “annoying but not unreasonable”. For him we can have too much certainty; the rights of past savers should not be protected at the expense of future savers.

Maxwell’s fraud paradoxically made for guaranteed pension payments which companies can no longer afford. The passing of large occupational schemes into the PPF is becoming a weekly occurrence.

Our expectation to the sanctity of a guaranteed occupational pension, like our “right” to future winter fuel allowance, free education , low taxes- is fallacious.

More risk sharing needed

Johnson talked feelingly about the need for trust (both in terms of trustees and in the trust people put in them to do the right thing).

He called for an end to the bifurcation between DB and DC , where those in DB have a right to everything and those in DC have a right to what’s left over.

Similarly with housing, where Johnson called for a reform in the current taxation policy – especially the ham-fisted attempts of this Government to limit tax-relief on buy-to-let.

He called for politicians to resist the pressure “to make bad policy decisions” (though I had to admit I did not hear Johnson talk about what the good policy decisions would be). In the context of risk sharing, I assume this would involve a change to benefit those outside of house ownership.

Johnson called for a change in the taxation of DC pensions , especially what he called the free inheritability of monies from those who die before 75. He berated the National Insurance reliefs given to company contributions to workplace pensions

In conclusion

Johnson’s (generally) brilliant analysis of the inequalities building up between generations ended with three conclusions.

  1. Those (nearly all) of us in the room who were baby boomers are the fortunate generation
  2. Government policy has had unintended consequences which have favoured the old at the expense of the young
  3. The impact on future taxes has yet to be seen but is unlikely to be a happy one

You can read all about Paul Johnson here.



Paul Johnson

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Too Expensive to Keep? Is it time to break our promises to the baby boomers?

  1. DaveC says:

    Henry, isn’t this just good old demographics?

    My grandparents were all children of families with 5 or so children.

    My parents both had 4 or 5 brothers and sisters.

    I and most of my friends were families of just 2 or 3.

    And my generation are having families of 1 or 2.

    The baby boomers fuelled their own wealth, simply by being numerous and economically active.

    A boom in population would generate a boom in demand, which needs supply, which needs roads, factories, production, jobs, and huge economic growth and potential for investment.

    Their offspring reached working age in around 2000, and their offspring will in around 2020.

    Globalisation may help a bit, but from what I can see China’s single child policy has backfired and they have a shrinking working age population with a huge old age population burden.
    Those working age people don’t want big families because of the economic burden already placed upon them.

    Japan is in the same position. Most working adults don’t even want families. And Japan doesn’t want immigration which can work to offset that trend of a soon to be rapidly shrinking population.

    At least in Western Europe and North America we seem happy to have immigration which is bolstering our GDP temporarily by adding the population needed to sustain growth.
    I say temporarily because I think much of the wealth many accumulate here heads home to their wider families, likely where they may head back to in the near future as living standards in the West drop further into parity with where they originally came from.

    —What I see.

    -A government that has ballooned in cost and the spread of it’s interference.

    -A population whose demographics mean there are more people needing support, and fewer to provide the wealth to do so.

    -A global backdrop of the same processes we’re seeing locally.

    —The outcome I imagine.

    -Money being devalued rampantly. QE, low interest rates or negative interest rates, moderately high inflation on essential items like housing, rentals and food.

    -Baby boomers will find their wealth degraded heavily. Numerically it’ll be high, but in buying power terms it’ll shrink rapidly.

    -The younger generations won’t likely see their salaries rise to offset the devaluation either, since their share of their wealth will be used by the bloated government to sustain it’s increasingly socialist nature, providing increasing amounts of state funded jobs and welfare in an economically shrinking world.

    -A worrying trend towards socialism, where society deems businesses TBTF and supports them for it’s own apparent benefit, but really wealth is just redistributed from the many to the few.

    There are nicer ways to shrink economies, but since those who take the big slices of cake when economies grow don’t want to give them up when they’re shrinking, it’ll be the low and middle classes that pay.

    Who those cake eaters are, well I’ll let you use your imagination.

  2. DaveC says:

    As a side note. If promises to baby boomers are broken, but I’m still paying the same high NI and taxes, am I to expect that when it’s my turn, my children will be asked to pay more taxes while I have my benefits reduced too?

    And entire generations of grand parents, adults, and children are all happy to accept that?

    Does no one else feel like they’re being scammed by their own government?

  3. Peter D Beattie says:

    Henry. You seem only wanting to focus on those ‘baby boomers’ and those ‘post boomers’. There is a considerable number of us survivors of WW2 that are now in retirement and who had to put up with the reconstruction of our economy of being ‘bankrupt post WW2’ followed by Berlin air lift, Suez the Korea War and National Service and ‘the 3 day week’ and promises of ‘no involvement East of Suez’ that never happened and after us defending it all the politicians gave away our Empire! That’s why we are now so poor after involving ourselves with the EU making us reliant on continental imports and loss of national confidence in manufacturing! By the millennium we were mostly retiredt after the malfeasant government taxing our pension funds so that we ended up in the FAS and later PPF. We may or may not have been lucky with our savings or pension choices but many of us did not make a decision to buy their accommodation during their working lives as the government said ‘our pensions were safe’ but did not protect ‘pension promise’. So we had to ‘weather the economic storm’ pre boomers but I am sure that there are very few of us that fall into that 98% you mention and in fact most pensioners are now at the ‘bottom of the income scale’ and many have no indexing on their DB schemes especially those of us in the FAS!

  4. Gerry Flynn says:

    “The State Earnings Related Pension introduced in 1978 was 35 years in its disintroduction and has proved a public policy disaster.” What is the rational for such a sweeping statement?

  5. henry tapper says:

    Gerry – I challenged this statement myself- personally I thought it did the job rather better than the current alternative. That said- Paul was clear it never had the public or political support it needed and ended up dead by 1000 cuts- in my view it was unfairly dismissed at a time when Thatcherism economics were in full swing (personal empowerment through personal pensions)

    • billopp says:

      SERPS was too generous when it started. l believe you only needed 20 years NI to receive the full SERPS.if you were 20 years from state pension age.

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