Dignity and security for all ages

Tom Anderson, who is working at IF under the Oxford Internship scheme, examines a new report on pensioner living standards that shows pensioner poverty is reaching record lows, but possibly at the expense of future generationsSenior citizen can-can

On 1 September, the Joseph Rowntree Foundation (JRF) published a report on pensioner living standards. Together with the Institute for Fiscal Studies (IFS), they found that living standards for pensioners have soared over the second half of the 20th and the early part of the 21st century. Given that they think this trend will continue in the short to medium term, they are concerned that this rise in living standards may not be sustainable for future generations of pensioners.

What were the findings?

The report’s main finding was “a dramatic increase in pensioner incomes and decline in pensioner poverty rates” over the last 50 years. In 1961 38% of pensioners lived in relative poverty compared to 13% of the population as a whole. By 2012/13, however, only 13% of pensioners lived in relative poverty compared to 21% of the population. Meanwhile income growth for working-age households has been weak over the past decade, so we are now in the position where those born in the 1960s/70s are no wealthier (and probably less wealthy) than those born in the 1940s/50s.

Alongside weak wage growth, the report identifies two additional reasons for this. Firstly, the generous defined benefit pension schemes that many older people took advantage of are no longer available to younger generations. Secondly, older people are more likely to have owned a house at any given age. It is estimated that by 2022/23 the gross household incomes of those aged 65–74 will on average be 56% higher after inflation than they were in 2010/11. Younger people, on the other hand, are less likely to have benefited from the multi-decade house price boom, and are more likely to have to pay rents that have increased well above inflation.

What can we learn from this?

Current pensioners who have been relatively well treated during the recession are not the ones needing help. They are benefiting from a pension system that will be unsustainable by the time those younger people, who are not so wealthy, come to need it. The report concludes: “those born in the 1940s and 1950s (who are, or will soon be eligible for pensioner benefits) appear to have fared better financially than those who came before them and those who are coming after. As such, they do not seem to be – on average at least – a group in need of greater support from public spending. At this time of continued public spending cuts, politicians should be wary of channelling more public money towards this group through well-meaning, but likely poorly targeted, ‘protection’ of pensioner benefits.”

This is not to say that no older people need help. According to the Department for Work and Pensions, 16% of pensioners are living in absolute poverty, although according to the JRF/IFS study this is expected to fall as low as 12.1% by 2022/23. What we need to see is a change of perspective and a change of rhetoric. David Cameron has declared that he wants “people when they reach retirement to know they can have dignity and security in their old age.” IF suggests that such laudable intentions should also be extended to younger generations as well.

Young people today live in an unprecedentedly toxic environment. If they want to move out of their family home, they face a housing market which makes it nearly impossible to buy a house (in real terms houses are four times more expensive than they were in 1970), or a private rental sector where fewer than 2% of properties are available and affordable to single young people on benefits. This is before the Conservative government carry out their plans to axe any housing benefit to those aged 18–21. If young people want to go to university they will be saddled with around £50,000 of debt, which they will have to pay back with interest well above inflation.

In the years from 1997 to 2013 18–21 year olds saw their real incomes fall by almost 29%. This is while pensions are protected by the triple lock – rising by the higher of 2.5%, inflation or earnings. Alongside this, older people receive free bus travel, winter fuel payments and free prescriptions. Whilst we should applaud efforts to reduce pensioner poverty, we should also recognise that a higher percentage of both children and working-age adults are living in absolute and relative poverty (after housing costs) than pensioners, and that the younger a working adult, the lower their standard of living is likely to be.

So what should we do?

The JRF/IFS report suggests that we go ahead with the increases in retirement age to reduce the number of years that the working-age population has to subsidise pensioners (and because one of the reasons for the dramatic rise in living standards for pensioners is because they are working for longer).

Secondly, it suggests that we need to reform the triple lock system. It is reasonable for pensions to be protected against inflation, but at the moment pensioners benefit from earnings and inflation volatility. That is to say if inflation and earnings fall, then pensioners still gain by 2.5%, but if they rise, pensioners also gain. This leaves pension payments rushing ahead of both inflation and earnings in the long term. The report suggests a claw-back system for when earnings or inflation are unexpectedly high, but a simpler system might be to just reduce the triple lock to a double lock, taking out the 2.5% element.

The report also advises the government to target clear and simple pension advice to working people at important stages of their life (e.g. when they have paid off their student loans). This will help to relieve some of the pressure on the state pension system, which already has multi-trillion pound liabilities. We would also like to see a recognition by policy-makers that young people are not being treated fairly and their living standards are suffering as a result. Only once this has been accepted can it be addressed. We believe in reducing poverty for everyone, regardless of age.