Younger generations stand no chance of enjoying the kind of comfort current pensioners in their old age. We need a policy reset to help the young build wealth now, says John Oxley
There was good news once again this week for pensioners, as the Triple lock delivers them a 4.7 per cent increase next year. It is further succour to the one group who have done well out of the last decade or so of British politics. While the rest of the economy has struggled with economic stagnation and rising prices, the old have benefited from a system that ensured they got an uplift according to the most favourable economic indicator.
The Triple Lock is now increasingly controversial. It has boosted pensioner incomes, but at the cost of generational inequality. Younger workers have faced higher taxes to fund economic security for the old. On the horizon, however, lurk two further threats to providing for our old.
The first should be familiar – our ageing population. With decades of rising life expectancy and lower birth rates already behind us, our population pyramid is set to become skewed towards the old. Combined with higher health and social care costs, this makes for frightening viewing when public spending, and as a result, the tax burden, is projected several decades into the future. It is, however, still only half of the problem.
The pension system has historically been based on two assumptions. The first is that a person’s housing costs will be limited in old age, either because they own a home outright or because they benefit from social housing. The second is that most will be able to supplement their state income with a private pension. Neither of these is likely to hold true in future.
Growing waves of retirees will lack the security that the current generation enjoys. Current workers never had the defined benefit pensions of their forebears, and often failed to save sufficient amounts privately. A lack of housing wealth will also drive up their expenses. Retirees reliant on private rented housing will be particularly vulnerable to inflating rents and insecure tenure, as they have been through working life.
The next pensioner poverty crisis
Together, these factors could rebuild the pensioner poverty crisis. Repeating the solution of the Triple Lock, however, looks unsustainable. It would increase the existing pressures of the demographic challenge by adding to the continued real-terms increases in pension spending. This would mean either beggaring other public services, massive borrowing, or even higher taxes on working people. None of these outcomes is particularly inviting.
The alternative is to focus policy on building up wealth earlier in life. Facilitating this engages with the causes of these twin threats to the pension, rather than the outcomes. It also puts the power of compounding returns on people’s side. Governments have made a start on this with auto-enrolment, but this is neither broad nor deep enough. The government should use its powers to lower both the starting age and earnings limit. There should also be further incentivisation for employers and workers to invest in pensions and avoid forcing the state to pick up the burden.
The government also needs to tackle the major cost for future pensioners – housing. A large tranche of retirees relying on scarce private rentals could ruin the pension system. The government needs to make more older people homeowners, and stop the dramatic rises in private rental costs. This means unleashing more supply by making it easier and cheaper to build.
The Triple Lock may now seem like an affront to the young, but it has done the job of supporting pensioner incomes and lifting them out of poverty. Raising it further is not a sustainable solution for the future. Instead, the government must look at other aspects of wealth and income to have a credible policy to meet the challenges of an ageing population in this economic environment.
John Oxley is a political commentator