Every pension journalist is aware of the intergenerational unfairness baked into our retirement system. Baby boomers working in the private sector will retire with an income for life. But if their children follow in their footsteps, they are unlikely to have guaranteed earnings when they become pensioners.
Contribution levels for current generations are currently half the levels needed to provide an adequate replacement income at retirement. In contrast, earlier generations could count on much higher rates and inflation-linkage income protection.
Current pensioners are protected by a triple lock protecting their income levels while the replacement ratio dwindles as our population ages and the burden of this pay-as-you-go benefit falls on the backs of a smaller number of working age individuals.
Pensions are not the only area where this wealth inequality is obvious. The inability of younger generations to step onto the housing ladder is well documented. Earlier generations were able to buy properties in London and the South-East, but the capital’s success as a global city has helped to make unaffordable – as this article explains so well.
While the government talks about changing plans laws to make it easier to build more homes in the bid to increase access to the housing market, the reality is political parties have a strong incentive to keep house prices high.
The high price of these assets have become such a fundamental part of voters’ feeling of wealth that upsetting this apple cart would be political suicide, as this article by the UK in a Changing Europe explains.
Not only has it become harder for younger generations to get a foot on the housing ladder unless they have wealthier parents to help take the first step, but it is also adding to the gap between rich and poor within generations when it comes to retirement.
The retirement prospects for Generation X are much bleaker than for Baby Boomers as they suffered from the closing of DB schemes and are too old to benefit from auto-enrolment. This makes this cohort more dependent on inheriting from the earlier generation to avoid penury in older life.
This intra-generational retirement lottery – you get to have a decent old age if you can inherit from your parents – will become more extreme for Millennials. That’s because it so much harder for this generation to accumulate either housing or pension wealth during their working life.
Solving all these issues are far from straightforward. Resolving the housing crisis is a particularly thorny problem. But there are steps which could be taken that are currently being ignored.
There is broad agreement among the pensions industry about how to turn the success of auto-enrolment into long-term benefits. Contribution levels need to be auto-escalated and master trusts should be allowed to offer at-retirement schemes to overcome the confusion of freedom of choice. Yet policy makers shrug their shoulders and focus on the short-term.
The rising inter-generational wealth gap shows this is a dangerous game for politicians. The Conservatives’ relentless focus on the older, wealthier generation and their willful neglect of the growing inter-generational wealth gap will not age well. How can younger generations look to their future with anything other than mounting anger?