The balance of old and young

There is much current comment about an alleged imbalance between addressing the problems faced by young people today and attending to those bearing more upon older people. Some analysts claim that too much emphasis has been placed on meeting the problems of the elderly, and not enough on those of the young. 

Older people have a triple-lock pension, rising with inflation or wages, or at 2.5%, whichever is the largest. They have free travel passes, a Christmas bonus, and a winter fuel allowance. Those over 75 have free TV licences, plus free or reduced admission to many attractions and services. Many are home-owners, free of mortgages, with private pensions to supplement the state’s provision.

Young people, by contrast, find it difficult to become home-owners with an inadequate housing stock, rising prices, fairly static incomes, and difficulty in saving enough for a deposit. Many graduates face tuition fee debts of nearly fifty thousand pounds. They face increased taxes and National Insurance, and many lack the comfort of an adequate private pension to support them in retirement.

This has created a political tension between young and old, a tension that comes out at the ballot box. Some of this showed in the 2017 UK general election, when the Labour Party offered to cancel tuition debt and help young people with social housing and a minimum wage increase. The Conservatives, by contrast, offered little to young people, and threatened the elderly with the confiscation of their homes to defray social care costs.  In that election Labour did better than expected or predicted.

The elderly are more numerous than the young, and historically more likely to vote, although this may have been less true than usual in the 2017 election. Some political observers see the prospect of a bidding war at general elections, with parties bidding for the votes of these two divergent constituencies. Should the young be taxed to fund benefits for the elderly, or should cuts in benefits for the old finance tax cuts for the young? Someone has to pay for the benefits.

There is a way to avoid having today’s young funding today’s old. It can be done by having yesterday’s young funding today’s old. This involves young people building up savings funds while they are earning, and using those funds to support themselves when old. It still involves the young funding the old, but removes the bidding war by having the elderly pay for their own benefits from savings when younger, accumulated over their working lives.

This personal fund, dubbed a “Fortune Account” by the ASI, would be the property of the individual, with any money remaining at death forming part of a person’s estate, to be inherited by heirs.

The Treasury fears that some people would not save enough, but dump themselves onto a state unable to let them starve, people the Treasury calls “freeloaders.” This is a valid concern, and one reason why people would be required to pay into such funds. There would be no net gain in compulsion, since National Insurance is not voluntary either.

The transition itself presents a major problem. One generation has to save for their own retirement, while simultaneously funding the commitments made to today's elderly. It might involve some one-off source of finance to fund the changeover, perhaps by a sale of remaining state assets such as land and buildings.

People would choose between competing providers to handle their Fortune Accounts, as happened when Sweden privatized its state pension scheme. The state would provide funds on behalf of those unable to earn enough to finance their own savings.

The change would be disruptive, without doubt, but it would prove a massive source of future investment as the providers put the funds to good use, investment that would augment economic growth.

Above all, it would end the divisiveness caused by the political struggle between young and old as each group sought to benefit itself at the other’s expense. And it would end the imbalance between them.