www.cps.org.uk

Who will care for Gen Y?The baby boomers’ legacy

20 November 2015

Michael Johnson

Research Fellow, Centre for Policy Studies

2

Introduction

Quality of later life

BBs 1946 -1964 (aged 69-51) Doing great

Gen X 1965 – early 1980s (50-35) Reliant on inherited wealth

Gen Y Early 1980s – early 2000s (34-15) < parents?

• Gen Y vs. BBs• Early adulthood: higher take-home income

•But…• Unaffordable housing, college debt, fragmented careers,

stagnant earnings, thinner pensions (occupational & private), smaller State Pensions vs. prior earnings (and SPA in retreat)

Central projection for Public Sector Net Debt, PSND*

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060

Ratio excluding impact of ageing population

(approx)

54% low, mid-2030’s

87% in 2064-65

* Fiscal Sustainability Report, June 2015

PSND 80.4% of GDP£1,484 billion£55,600 / household

% of GDP ?

Public Sector Net Debt, % of GDP

0%

50%

100%

150%

200%

250%

1900 1920 1940 1960 1980 2000

QE…..?

5

With baby boom

Without baby boom

The Old-Age Dependency Ratio*

* Ratio of 20–64 year olds to those aged 65 and over. Ref. Pensions: Challenges and Choices - The First Report of the Pensions Commission, 2004.

Workers / pensioner1941: 7.1 2051: 1.8

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Costs of an ageing population

+ Stagnant productivity growth

+ Negative real earnings growth

+ Rising interest rates (eventually)

= Fiscal squeeze

+ Approaching saving tipping point

= Diminishing supply of domestic capital

Cost of capital to rise

We need a savings culture

The squeeze is on

Impact on personal debt?

Savings, debt and demographics

Population aged 65+

UK Japan1950 10.7% 4.9%2010 16.5% 22.6% 2050 22.9% 37.8%

Gross household saving rate 2013

Gov't debt / GDP 2014

Greece -16.0% 177%United Kingdom 6.4% 89%

Denmark 6.7% 45%Spain 10.4% 98%

Italy 11.3% 132%Ireland 12.7% 110%Austria 12.8% 85%

Euro area (18 countries) 12.9% 92%Belgium 13.5% 107%

Netherlands 14.7% 69%France 14.7% 95%

Germany 16.3% 75%Sweden 18.1% 44%

8

PM: "We are paying down Britain’s debts” *

Cloudy communication

* Conservative Party political broadcast, 24 Jan 2013

“The deficit”

Outturn Forecast2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

PSNB ex £97.3 £90.2 £75.3 £39.4 £12.8 -£5.2% of GDP 5.6% 5.0% 4.0% 2.0% 0.6% 0.2%

National Accounts, Budget Red Book, March 2015

9

Which deficit, which accounts ?

Non-cash

Whole of Gov’t Accounts

2013-14 2014-15PSNB ex £97.3 £90.2

Net capital investment and QE effects -£24.3 -£33.2Current deficit £73.0 £57.0 Down £16

Central gov't net cash requirement CGNCR £78.4 £93.6 Up £15.2

National Accounts

Current deficit £73.0Plus: Public sector pension net financing costs £49.0

Plus: Asset accounting (depreciation etc.) £17.0Plus: Provisions £10.0

Accounting deficit for the year £149.0 WGA's "net expenditure"

10

Public service pensions: WGA, 2013-14

£ billionCurrent and past service costs £39.0 Non-cash

Net financing costs £49.1 Non-cashTotal WGA net expenditure £88.1

Actuarial movements used to value liabilities £83.5 Non-cashCash benefits paid as per National Accounts -£36.0 Cash

Net contribution from employees -£8.0 CashTransfers in / out (net) £2.4 Cash

Total net increase in liabilities £130.0

11

Whole of Government Accounts (WGA)

Assets 2013-14 2012-13 2011-12 2010-11Property, plant and equipment £763

Gold, cash, other financial assets £324Trade receivables £149

Equity in public sector banks £43Intangible assets £32

Other physical assets £27Total assets £1,338 £1,298 £1,270 £1,234

LiabilitiesPublic service pensions £1,302 £1,172 £1,006 £961Government borrowing £1,096

Financial liabilities £491Trade payables £159

Provisions £142Total liabilities £3,190 £2,926 £2,618 £2,419

Net liability £1,852 £1,628 £1,348 £1,185% GDP 111% 100% 83% 75%

Pensions

• The State Pension……..c £4,000 billion liability

HMT: A benefit (i.e. “welfare”), not an obligation

Steve Webb: It is yours by right, you have paid your NICs

• Triple lock?*

• Ancillary pensioner benefits?

* Guarantees that the State Pension is increased each year by the higher of CPI inflation, average earnings or a minimum of 2.5%.

Tax receipts, reliefs & expenditures 2014-15

Structural reliefs 563Special cases 380

Targeted reliefs 131Thresholds 62International 20

Total 1,156

£ bnStructural reliefs £177

Tax expenditures £110Mixed £84Total £371

£ bnIncome Tax £163

VAT £111NICs £109

Corporation Tax £42Council tax £28Fuel duties £27

Business rates £27The rest £95

Total £602OBR forecast, Table C3 Budget 2015

14

1. Office for Inter-generational Responsibility (OIR)

• Produce Inter-generational Impact Assessments

• Scrutinise all tax reliefs and exemptions

• Five year sunset clause?

• Triennial Intergenerational Report?

2. Lobbyists OIR

3. Departmental budgets: set net of tax reliefs

4. PM’s responsibilities doctrine: add inter-generational

Proposals to arrest inter-gen. injustice

15

• Debt and promise mountain, low growth risk

Debt + unfunded promises < GDP growth rate

• Risk: quality of later life < (baby boomer) parents’

“The central projection in each of our reports over the past five years has pointed to an unsustainable fiscal position over the long term.”

OBR Fiscal Sustainability Report, June 2015

Conclusion: Gen Y under threat

www.cps.org.uk

Who will care for Gen Y?The baby boomers’ legacy

20 November 2015

Michael Johnson

Research Fellow, Centre for Policy Studies

17

• We need higher economic growth….led by investment

• Low interest rates means low returns…..so people don’t invest

• Interest rates: the price for capital….low rates indicate excessive savings

– Ageing populations postpone spending to enjoy retirement

– They save more…..so interest rates fall

• How to break out? > Raise retirement age

– More years earning…..then require less savings for retirement

– Higher consumption….higher demand….higher investment

• But distribution of savings….is with the old……Gen Y has smaller savings

Notes: hedging against the next recession