In defence of higher pensions

Is there a case for ever-rising state pensions which redistribute from young to old? Madsen Pirie thinks not. The image of pensioner poverty, he says, "does not accord with present day reality for most pensioners":

Some 86% of pensioners live in households with assets in excess of £50,000. The average income of over 65s is £15,400. A young person working on current minimum wage for a normal working week earns just under £13,000. Yet the young person is taxed while the older person is guaranteed a triple locked pension.

However, you can easily argue that this is fair, and not just because, as Simon says, pensioners have assets because they have had years in which to save.

In fact, in one important respect pensioners are poorer than youngsters. Our wealth does not consist merely of financial assets. It also comprises human capital - our ability to earn wages. Youngsters have a lot of this: someone who can look forward to 30 years of a real income of £25,000 has an asset of almost £400,000, assuming a 5% discount rate. Pensioners have little or none.

This means they are exposed to greater risks than youngsters. For one thing, they face distribution risk: a shift in incomes from capital to labour would hurt them. Youngsters who hold a mix of human and financial wealth can diversify this risk, however*.

Also, oldsters have less chance to time-diversify. Youngsters can withstand short-term losses in the hope that better times will follow. Oldsters might be dead before they arrive.

And thirdly, younger retirees face a genuine uncertainty about whether equity returns will continue to mean-revert or not. Younger workers also face this risk, but their human capital means it is less important.

In these senses, older folk face more risk than younger ones. Higher state pensions can be justified on the grounds that they reduce the income risks that pensioners face.

And, remember, the triple lock does NOT merely redistribute to older people. Quite the opposite. Insofar as it stays in place, younger people will benefit more simply because they'll get many years of rises whereas an oldster will dies before getting them.And the power of compound growth is a great thing.

In saying this, I don't mean to deny that younger people have no grievances. They assuredly do. They face obscenely high house prices, the threat of being made redundant (pdf) by robots and the more immediate dangers of job degradation and polarization. There might be solutions to these harms - but they do not involve cutting pensions.

* Of course, many younger people can't afford to save and hold equities. This is either because they haven't yet seen the pay rises that come with experience, or because they'll suffer lifelong poverty. The first problem will solve itself with time, the second requires inter-personal rather than inter-generational redistribution.

Comments

[Adamcorlett]

"Insofar as pyramid schemes stay in place", joining is a great idea!

[james c]

I am afraid that this piece is complete nonsense throughout.

It claims that:

1 Young workers have a large asset in human capital.

2 That they have lower investment risk than their elders.

3 That they will be benefit from the same system when they are older.

Point 1 is nonsense-the treats 30 years' income as an asset but has no corresponding liability for 30 years' of expenses.

Point 2 is just wrong-investment risk increases with time.

Point 3 assumes that today's young workers will benefit from the same system in their retirement, which is not very likely.

Also ignored is that the current older generation has enjoyed abnormal windfall gains through housing.

[Ben]

No way - let's hang them out to dry like they did us. Boomer haircut time: *now*.

If you wasted it then live poor or get back out to work.

[Bob]

It should be remembered that inequality amongst the elderly is high due to housing. I have nothing against elderly people generally but it is clear quite a few are benefiting from higher house prices. South-east vs Rest of UK is at least a big factor than old vs young though.
http://ageukblog.org.uk/2013/09/24/housing-inequality-and-older-people/
"Dr Searle described dramatic geographical variations in the location of housing wealth – linked to house prices – which determine the equity available to older people and the choices they can make. Dr Searle found that 42% of housing wealth is concentrated in London and the South East, while 20% is located in the North East, Yorkshire and Humberside and the North West combined. Only 3% of housing wealth is found in North East. These inequalities mean that some housing and care options will only be available in affluent places, while choices for older people in poorer areas decline.

Despite stark housing inequalities within the older population we have seen a series of studies that try to represent the issue of housing wealth as a battle between generations. This serves to shift the focus away from inadequate housing policies and broader patterns of inequality that affect all of us. They give the impression that older owners in London and the South East are typical of all older householders, as the rest of England seems to fade into the background. These studies fail to explore the consequences of housing inequality across the older population. "
"No way - let's hang them out to dry like they did us. Boomer haircut time: *now*."
Re-distributive land reform is needed. You should be pissed at landowners not 'boomers' in general. Which is *mostly* elderly of course who lose. But there is some young (heirs.)
As I said last post it's important to note that the elderly in the UK receive a basic income. The income needs are met, but the social ones are not. Chris just completely ignores this because he wants to push his basic income line.
"If you wasted it"
It's always about the current distribution of real resources.

[Bob]

"It also comprises human capital - our ability to earn wages. Youngsters have a lot of this: someone who can look forward to 30 years of a real income of £25,000 has an asset of almost £400,000, assuming a 5% discount rate. Pensioners have little or none."
I'm sorry but this is complete horseshit. Yes *if you can get a job* Youth unemployment is high.
This is from February 2015 but still:
http://www.theguardian.com/society/2015/feb/22/youth-unemployment-jobless-figure
"Young people are nearly three times more likely to be unemployed than the rest of the population, the largest gap in more than 20 years, according to an analysis of official figures.

The number of people aged 16-24 who are not in full-time education or employment has increased by 8,000 over the last quarter. With 498,000 in that age group without a job, an analysis by the House of Commons library for Labour shows that young people now fare comparatively worse than at any point since 1992.

Their unemployment rate is 14.4%. The overall unemployment rate now stands at 5.7% of the total working population, according to the Office for National Statistics (ONS)."
What people need, both young and old, are jobs.

[aragon]

Bob,

Better not mention 1984-1986, unemployment at 12%-11.2% (vs your current figure of 5.7%). More than 20 years that would be about Jan 1993 (10.8%)?

http://blogs.new.spectator.co.uk/2013/04/margaret-thatcher-in-six-graphs/

See Graph 3.

"The income of the 10th percentile rose by 4.6 per cent in real terms before housing costs (the income of the 90th percentile rose by 47 per cent). But after housing costs, the real income of the 10th percentile fell by 2.4 per cent — so the poor were in fact worse off in 1990 than in 1979 (the 90th percentile were 48 per cent better off after housing costs)."

https://thepsychologist.bps.org.uk/volume-27/edition-4/neoliberal-austerity-and-unemployment

"Instead, it is a set of connected manifestations of material, social and subjective violence necessary to make the neoliberal labour market work in the interests of employers and shareholders."

The future has the potential to change, the past is immutable. Technological progress increases wealth, however it is distributed.

Obviously the Young have more of the future than the old.

http://www.economicshelp.org/2008/03/unemployment-price-worth-paying-for.html

"Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying."
and Lamont said it on 16 May 1991

John Major also said "If it's not hurting, it's not working" (in 1989)

[rogerh]

I reckon Madsen is creating a smokescreen. Seems to me that people dependant on the state pension are not excessively well off. But I have noticed several recent retirees with final salary schemes who got two job promotions within 3 years or so of retirement. This smells of a fiddle. Pension incomes probably could bear a little further taxation - for those getting £20k+.

[Roy Lonergan]

James C - both the young and old will have expenses, if you run a PV of total NAV for each I think you'll find that Chris is directionally right on his first point.

Roy

[NoniMausa]

James c: "Point 1 is nonsense-the treats 30 years' income as an asset but has no corresponding liability for 30 years' of expenses."

Yes?

Young person-- (30 years of earnings, good health, energy)-(30 years of rental or mortgage, expenses, childrearing, education expenses) = $Ny

Old person-- (<30 years of no earnings, poor health, no energy)-(30 years of rental or mortgage, expenses, aid to adult children and their children, medical expenses) = $No

You're trying to tell me $Ny and $No are comparable?

[LTV]

Important article, and needs highlighting.

The Tories are delivering the wet dreams of many Tory boys and they are now getting giddy. So after years of gold plated public sector pensions and benefit cheats we are now going to get years of pensioners living off the backs of youngsters.

Dangerous times, dangerous ideas. ISIS are the least of our problems with this sort of shit being peddled.

[james c]

NoniMusa

I have no idea what your point is.

No one is comparing 30 years of an old person's life with that of a young person.

James C