Time for the "Baby Boomers" to give something back

While there is little doubt that it will be Brexit - and the success thereof - that will define Mrs May's administration, a secondary theme will be that of how far she succeeds in implementing greater fairness in the country - in her own words  "a country that works for everyone". While every PM in the last 25 years has made similar noises she has seemed to have a greater commitment. And there is evidence that the policies of the last Cameron government are all being reevaluated not least in terms of their fairness. But, no doubt though that any politician should be judged by actions not words!

An important aspect of the fairness agenda, but one not as often mentioned as others, is what economists call intergenerational equity - a concept of fairness between children, youth, adults and seniors. It is a term often used in investment management but has become more prominent in the world of economics in recent years because governments have run up large deficits and debts which have benefited a current generation through welfare benefits, tax cuts and government jobs, potentially at the expense of future generations.

Baby boomers refer to a cohort of the population born between 1946 and 1965 when the birth rate materially accelerated. It was thought that because this cohort was very big, a person born then would suffer in terms of greater competition for jobs and housing. But the reality has been that they have been the beneficiaries of a number of developments and events at the cost of other mainly future generations.

The welfare system may be seen as having a natural life cycle. Thus we tend to mainly benefit from it in our youth and in our old age. Conversely our contribution to government revenues tend to occur during our working life in between. Keeping this in mind, baby boomers, as the biggest group, when they started working, they tended to push the dependency ratio sharply down, ie the number of people earning rose relative to the number of dependents, whether the young or retired. During this period, roughly from Thatcher to the coalition administration, the government was able to spend more freely because of this, and also over and above this they spent during the Labour government years stacking up debt for future generations to pay for. But now that the baby boomers are increasingly retiring, the dependency ratio has in the last couple of years increased significantly. Immigration actually delayed this phenomenon, but it will continue rising for a long time yet. This means that those working now have to pay for more dependents than in the past and for excess spending in the Labour years.

This demographic trend is storing up massive problems for governments not just in this country but most of the developed world, most notably in Japan and Germany. Moreover, baby boomers have benefited from a number of other events.

In the housing market, baby boomers were relatively easily able to afford to get a deposit and buy a house. Today so many people cannot do so. In fact on average it takes them 22 years to save for a deposit! In pensions they have done well too. Pensions have been heavily protected from welfare cuts, by the infamous triple-lock, while other pensioner benefits have been protected too. Furthermore, the massive rise in the pensions deficit (notably due to low long term interest rates) has been primarily responsible for driving a wedge between productivity growth and pay growth. Companies have had to pay into their pension funds, so that people working today are not benefitting from rising productivity.

Only in one respect are pensioners losing out, that is in terms of very low savings rates, while mortgage holders, who tend to be workers from generations after the baby boomers, have done very well. Nevertheless, overall the baby boomers have done exceedingly well.

It is time that government policy looks at rectifyting this siuation. This includes reducing pensioners benefits,  increasing inheritance tax, and raising housing supply at a more rapid rate.