The Economic Generation Game in the UK looks increasingly unfair to me

Today is one where one of the themes of this blog has hit the wider media. It is the argument that modern economic policy favours different age gaps and accordingly benefits some age groups much more than others. Specifically it tends to favour the older over the younger if we make a sweeping assumption. Whilst there may be elements of an explicit plan here actually I think that most of it is due to the fact that the establishment which as Malcolm Rikfind so (un)ably demonstrated on the BBC yesterday thinks it has a right to both money and power, looks to enrich itself and its acolytes. Financiers and the wealthy of course tend to surround those in power and inflate their egos in return for morsels of information about what will happen next. In a world where front-running central banks is the main game in town it obviously helps to know the next chess move! Accordingly both power and wealth tends to congregate and policies favour those with existing assets of which there are simply more of them as we get older.

An explicit move

The election period tends to see moves to favour older people simply because they are more likely to vote. An example of this was seen only yesterday. From the BBC.

Universal benefits for pensioners will once again be protected if the Conservatives win May’s general election, David Cameron has said.

Actually there is a bigger promise made by all the leading parties which tends to be ignored.

These benefits cost £3bn a year. That is small when you consider that all the main parties are willing to spend hundreds of millions of pounds during the next Parliament by sticking with the “triple lock” protection of the state pension.

Sorry about the BBC’s mathematics,apparently hundreds of millions is more than 3 billion in their world! But the fundamental point is that the cost of the “triple lock” is unknown but expensive should inflation be high or low (the 2.5% guarantee).

Also there are the Pensioner Bonds for those over 65 which offer savings rates of 2.8% for one year and 4% for three years when the respective Gilt yields are more like 0.3% and 0.6%.

Quantitative Easing

This has been a policy which has benefitted those with existing financial assets including some which have been saved from going bust as we examine an ever-growing list of moral hazards. You do not have to take my word for it as here is the Bank of England from July 2012.

Many more companies would have gone out of business.

But later comes the crux of the matter as the Bank of England puts a positive spin on what it has done.

As a result, the Bank’s asset purchases have increased the prices of a wide range of assets, not just gilts. In fact, the Bank’s assessment is that asset purchases have pushed up the price of equities by at least as much as they have pushed up the price of gilts.

You may note that it does not mention the price of houses which across the wider population is the main player here. Perhaps that truth is simply too painful. However there was a confession that it had contributed to inequality.

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Or putting it another way.

Looser monetary policy also typically pushes up asset prices (sometimes referred to as the ‘wealth effect’), so those households with significant asset holdings will benefit by more than those without

Now there will be plenty of older people with few or no assets and some with negative ones and some younger ones with a portfolio but in general the older you are the more likely it is that QE boosted your asset position.

Funding for (Mortgage) Lending Scheme

This in many ways is the main player in an intergenerational transfer as in spite of being badged as a boost to business lending we saw mortgage rates fall and lending rise in response to it. Very quickly house prices rose benefiting existing owners who are in general of a certain age overall and making life more difficult for first time buyers who in general are younger and often much younger. It was a particularly perverted piece of language which saw such policies – there is also Help To Buy – as benefiting first time buyers.

In a type of timing that may not have been an accident this policy began in July 2012 or the same time as the Bank of England report when the average UK house price was £234,000 and as of December 2014 it was £272,000. Of course there may be other influences but ta the time house prices were simply drifting and it has hardly been either wage growth in either its nominal or real forms which has drive prices higher!

So existing house owners have a more valuable asset whilst new buyers have to pay more and out of an income which in general has risen by much less.

Wages and student debt

If we look from the perspective of the younger than their world is one where thankfully we are seeing more employment but the question at hand is the price of it. Wage growth as I have written on previous occasions has fallen considerably and whilst there is a new hope for real wages they have fallen by around 10% in the credit crunch era depending on the inflation measure used. Indeed a reply to the Financial Times article makes this claim.

Real wages for the under 25s have fallen so far that they are now back to 1988 levels,

If we move to the balance sheet ledger we see that more and more of our younger people are being weighted down by larger and larger amounts of student debt. From HM Parliament.

Currently more than £10 billion is loaned to students each year. This is expected to grow rapidly over the new few years and the Government expects the value of outstanding loans to reach over £100 billion (2014-15 prices) in 2018 and continue to increase in real terms to around £330 billion (2014-15 prices) by the middle of this century.

This is of course before they are expected to join the queue to take out a mortgage to purchase a house (which is now much more expensive). I regularly mention that we are increasingly living in a world described by the novel Dune and this part seems much more Harkonnen than Atriedes to me.

The Financial Times

The FT has entered the debate by quoting from the UK Data Service which has 50 years of data. First we have the declining position of the young.

Despite the trials of inflation and unemployment in the 1960s and 1970s, people aged between 20 and 25 with average incomes after housing costs were better off than at least 60 per cent of population…..they can now expect only 37 per cent of the population to have lower incomes after taking into account housing costs in 2012-13.

Now the improving position of the older part of the population.

Replacing the young in the premier league of living standards have been people in their 60s and 70s. The average 65-70-year-old used to have lower living standards than 75 per cent of UK families. Now people in the same age group can expect to be almost in the top 40 per cent of family incomes.

There are a couple of caveats which come to mind here. Firstly these are relative rather than absolute numbers and secondly the FT quotes house prices as an influence on income rather than wealth. Perhaps it is implicitly admitting that buy to let is more of a player than many might consider but I will mull that one a bit. Or it might be the income from the funds released by those who have taken their profits.

Comment

In any analysisof this type there is always a broad brush and something of this from The Specials.

He’s just a stereotype
He drinks his age in pints
He has girls every night
But he doesn’t really exist

For example I am sure that there are predominantly older savers reading this wondering about the consequences of a Bank Rate which has stayed at an emergency rate of 0.5% for nearly six years now. The impact was reinforced by the implications of the FLS as savings rates were pushed even lower.

But the fundamental trend of a “can-kicking” strategy is that there is a transfer of wealth from the future to the present and that plainly benefits those alive now at the expense of those who will be alive then. There are many advantages to being young and they are alive at a time of great advancement in many ways but economics and fairness are not one of them.

Oh and I did like this reply to the FT which poaches some of my musical references theme but raises a smile.

Prince should have actually sung the song ‘Party like I am 99’

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24 thoughts on “The Economic Generation Game in the UK looks increasingly unfair to me

  1. Very, very good – nailed as usual.

    With the pension age being pushed further out we delay creating a ‘hole’ for a young person to step into. Not sure that a company can force retirement on one any more?

    I reach that age very soon where I don’t pay NIC so I become 10% cheaper to employ than a young person. Once again the system acts in favour of the old. (Why do we have employer’s NIC? Is it trying to make industry efficient by deterring companies from hiring people?)

    The Who had it completely wrong: I hope I don’t die before I get old.

    • Very interesting read again Shaun.
      One point: if you are an owner-occupier, is your house an asset or a commodity.
      It’s obviously a far simpler matter with b-t-l; the properties are assets, but there is not the simple generational divide.

      • Hi therrawbuzzin

        Actually I have always considered my flat to be my home and all other issues are secondary. Whoever inherits it from me will I guess have a choice as will be an asset or becomes their home or some combination thereof.

        • Actually, if this is a serious question then it is not a commodity as it isn’t fungible whilst at certain times it may be considered an asset (boom time like now or when someone is prepared to lend you money against it) whilst at other times it’s a liability (collapse time when it’s valued at less than you paid for it, you can’t borrow against it but you still have the monthly payments to make on it) that is of course predicated upon the assumption you regard it as an “asset” as the majority of the population do. I am with Shaun, my house is my home to live in, not to make money on.

    • “With the pension age being pushed further out we delay creating a ‘hole’ for a young person to step into.”
      _______________________________________________________
      With so few leaving school at the min. age, is that really the case?
      Most young people I know haven’t entered the workplace until their early/mid twenties.

    • Hi chrisrick

      I like the new lyrics for the Who! However as Pete Townsend can write and strum a tune I guess that he hasn’t done so bad…

      As to the retirement age I believe that it is now true that you cannot be forced to retire. Some will consider that a gain and some a pain!

  2. Whilst my house has undoubtedly increased in value I have no benefit from that at all. If I move I will have to pay roughly the same + stamp duty (unless I downsize, which is not an option) so difficult to access the increased wealth I have on paper. In due course my children will inherit the property and will enjoy whatever value it has gained so the next generation will benefit – eventually! If I owned BTL properties then of course it would be quite a different proposition however the gain is taxed should one realise it. There is quite a difference between the theoretical and actual gain in asset inflation. Certainly there are a few, usually very wealthy people, who can make major gains in a loose monetary environment

    • Hi Pavlaki

      You make a good point about housing wealth often being inherited although of course that leads to another form of inequality. But it is a transfer from this generation to a later one.

      As to the gains well there is an additional issue which is that the current quoted price is much nearer to a marginal price than an average one. What I mean by that is that you could sell 10,100,1000 maybe 10,000 at current prices but a long way from all of them.

      In a way this must apply even more to my subject of yesterday which is Denmark…

  3. Well Shaun , I think we all know the “looney” scheme of reducing unemployment by Uni education sold on the dubious premise that those with a Degree are higher paind so if everyone has a Degree they’ll all be higher paid , has turned into yet another debt burden for the younger memebers of our society .

    So add in extortionate house prices ( those assets the BoE wanted to keep inflated ) , which as we said yesterday , seems so prevalent over the western world and what do we get ?

    Mind you I think this merry go round can carry on a lot further , I’ve not seen any wheels falling off yet . And if it takes 25 years , well the young will be then the ” new ” old !

    I wonder what the politicians of that day will do then ? ( apart from blame each other , which they often do! )

    Forbin

    • I think it worse than that. If only 10 people apply for a job then still just 3 might be interviewed. How do you get to 3? Start by rejecting those without a degree. You have to pay £27,000 in fees just to ‘be in the club’…and still not get a job.

      • It’s called “red queen syndrome”. As you note even though you consider it irrational the state is forcing your hand because they are underwriting misallocation of resources.

  4. Shaun Common sense and reality is what we expect from you but our leaders have none of the former and are selective with the latter.

    If as seems likely we are stuck in a timewarp of zirp we can only presume we’ll have ever
    higher stock markets,mega debt and pumped up property prices,but what if war continues
    to escalate and will some seemingly trivial event enforce reality.

    As Alabama 3 said

    Right is wrong
    And wrong is right

    JRH

  5. The triple lock commitment is madness in this low inflation environment and given that the only people paying in don’t get a triple lock guarantee on there salary/wages its unsustainable. Of course it was another easy give away by our politicians and pulling back from it will never happen until its too late. Awful though it is this country needs a Greek moment to tackle this and all the other issues Shaun bring to the screen on a daily basis.

    • Hi Nickrl

      I think that as you suggest the 2.5% guarantee was something which the coalition government felt it would never have to pay! Back then overshooting inflation was the issue and we were way above 2.5% even on the lower CPI measure.Now of course it is likely to be around 2% above the inflation rate..

      For those unaware of the triple-lock for UK State Pensions here is the explanation from HM Parliament. BSP is the Basic State Pension.

      “The legislation requires the BSP to be increased each year at least in line with earnings. The legislation to restore the earnings link was taken through Parliament by the Labour Government. The current Government commenced the legislation and committed itself to increasing the BSP by a “triple guarantee” of earnings, prices or 2.5 per cent, whichever is highest, from April 2011. The legislation requires the ASP to be uprated at least in line with prices. It does not specify what measure of prices should be used – just that it should be the “general level of prices obtaining in Great Britain, estimated in such manner as the Secretary of State thinks fit.” Since April 2011, the Consumer Prices Index (CPI) has been used as the measure of prices.
      The BSP is to increase by 2.5% in April 2015 (as the increase in both earnings and prices was lower than this”

  6. Shaun, an excellent summary and often shared by the ceo of Legal & General but no one seems to take any notice. Least of all the oldies who do not recognise that they are part of the problem. As long as they nimby-about and vote for free coal they are perpetuating the injustice. Take my mum who bought at £114k and sold at £594k some 13 years later, she is convinced that she earned it!

    • Hi Paul C and thank you

      What is true value in the housing market? That would take a succession of posts I think! But for now the plan is clearly of the to infinity and beyond variety.

      Good luck to your mum, I hope that she enjoyed the fruits of her gains.

    • “…she is convinced that she earned it!”

      We have a generation, (or even generations) now that have become used to the idea that you can get money for nothing (via rigged property markets) and somehow have been an entrepreneur, or been terribly shrewd. How does that bode for a capitalist future based on endeavour and invention.

      That’s before you get into the fact that their increased ‘wealth’ has come at the expense of wider society.

      I’m afraid I cannot agree with Shaun in wishing her good luck. All I can hope is that she perhaps finds a way to put that money into something that in some way gives something back to her community.

      What a shambles.

  7. hi Shaun,

    Great post as usual. Apologies if this has been asked before though have you thought about quantifying the effect BTL has had on house prices ?

    From an economic point of view its madness to have a deficit and give interest deductions on BTL and capital gains treatment to houses. Either you allow housebuilding to proceed or you have to tax multiple house ownership disproportionately. Yesterday the Green party put the removal of BTL interest into the spotlight…

    Thanks Johnnie B

    • Hi JohnnieB

      There has been little work on this. A while back the NHPAU published these estimates.

      “This paper investigates the impact of Buy-to-let (BTL) on UK house prices. The establishment of
      BTL mortgages at a specified time point in 1996 Q3 made it possible to estimate their average
      inflationary impact on house prices. In order to control for other possible factors that influence
      house prices a simple regression model was built that included other variables identified by the
      literature as important determinants of house price movements. In controlling for these factors it
      was therefore possible to observe the independent effect of BTL mortgages on the time series.
      The results suggest that the gross amount of BTL lending may have increased the average UK
      house price by up to 7 per cent by 2007 Q2. This estimate represents the upper bound”

      As to interest-rate relief for businesses it may have to go overall as we review the impact on private-equity and so on.

  8. Very good. Clearly you’ve been watching social media as you have your ducks in a row. In particular this heads off the inevitable swamping of comments stating not to generalise or “I’m a poor pensioner”:

    > Now there will be plenty of older people with few or no assets and some with negative ones and some younger ones with a portfolio but in general the older you are the more likely it is that QE boosted your asset position

    Boomers are taking a bribe from the banks / politicians to get their share of the pie on farming the young. It’s truly reprehensible. The establishment lack morals but you’ll never see them openly taking from their own kids. This is what the middle class and below are doing in the UK.

    Glad to see you are getting more and more forthright on this disgusting injustice. We need people like you writing this. Hopefully more and more young will wake up and realise they need to take direct action to change this as they lack numbers at the ballot box and I guarantee you won’t shame the boomers into it. It’s the only way to see change.

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