In a scene that is likely to play out across the developed world over coming decades, one of the Church of England’s most senior clerics, the Bishop of London, Rt Rev Richard Chartres, has requested that his own generation – the baby boomers – give up some of their entitlements in the name of restoring public finances and improving inter-generational equity. From the Telegraph:
Baby boomers are a “fortunate generation” who have enjoyed dramatic improvements in living standards but are now “absorbing” more than their fair share of taxpayers’ money…
[He] said there were “severe questions” about the share of government spending that goes on his own generation…
Figures published by the Organisation for Economic Cooperation and Development last year showed that while elderly people make up about 15 per cent of the population in the leading economies, they account for 40 per cent of all public social spending.
Welfare for British pensioners accounts for about £110 billion of the total £165 billion spent on benefits…
He said we are living through a period in which the Government’s financial clout remains “massive”, with public spending rising from around £26 billion in 1997 to nearly £695 billion last year.
“Much of that is absorbed by the fortunate generation to which I belong in ways which raise questions – severe questions – of intergenerational equity,” he said.
It’s an interesting perspective. Like most Anglo nations, UK baby boomers have benefited enormously from the huge escalation in housing values from the mid-1990s (see next chart).
Given most boomers would have already been in the market when the mid-1990s price boom began, they benefited disproportionately from the large rise in wealth. The generations that followed, however, have not been so lucky, forced to pay higher prices for housing and dedicating a larger proportion of their lifetime’s earnings to enjoy the same standard of shelter enjoyed by their parents.
Now the UK is in a situation where the wealthier older cohort is entering retirement and requiring the substantially less well-off younger generations to subsidise their living through the aged care and pension systems. The burden on the younger generations is made worse by the fact that the boomers are significantly larger than previous retiree generations.
To add insult to injury, the working aged population in the UK is being squeezed hard by the recession, which has lingered longer than any other downturn over the past century (see next chart).
Real inflation-adjusted incomes in the UK have also taken a hammering, down around 8% since the recession began in 2008 (see next chart).
In short, something has to give. The landed baby boomer generation in the UK cannot expect to continue to live large at the expense of the younger cohorts, which are struggling under the weight of high housing costs, declining incomes, and a moribund economy.
Apart from winding back retiree entitlements, another solution to the UK’s conundrum is to liberalise land-supply by freeing up the greenbelt, as well as reforming the UK planning system, in order to bring down urban land prices and stimulate housing construction across the UK. Not only would such reforms lead to more affordable housing for the younger generations, but it would help to restore growth and employment to the UK economy. Broad-based land taxes could also assist in this regard, whilst also raising much needed tax revenue from wealthier land holders.
Don’t expect older property owners to support such moves, however. As with removing entitlements, they are likely to fight tooth and nail to ensure that their housing wealth is maintained, even if it has been gained at the expense of later generations.
