Living standards· Intergenerational Centre The social contract between generations in Britain is being broken 25 October 2015 by David Willetts David Willetts It marks a dramatic turnaround in the fortunes of different generations that this week the IFS estimate that the incomes of pensioners – £394 per week – are higher than the incomes of the rest of the population – £385 per week. In many ways, this is a triumph. Nobody wants to see pensioners struggling in poverty. And we might hope that the forces driving up the incomes of today’s pensioners will similarly boost incomes of the generations coming after. But if we investigate what lies behind the headline figures we see that this is not a simply benign economic and social trend from which we might all expect to benefit. Instead there are some specific reasons why especially younger pensioners, the boomers who are now retiring, have ended up enjoying spectacular advantages which may not boost incomes of the generations coming after them. We can get a good idea of how this has come about if we look behind the headline figures. First they measure incomes left over after deducting housing costs. More and more old people own their own houses with the mortgage paid off. They have very low housing costs. Meanwhile younger generations struggle to get on the housing ladder, with high rents for poor quality property. We simply are not building anything like the number of houses we need. Through the 1950s and 1960s we were building 300,000 houses a year but now, despite all the government’s efforts we are only at about half that. Getting more houses built and bringing down the cost of housing is crucial to reducing this gap between the generations. Pensioners are also doing well because of the triple lock protecting their incomes. This means the state pension is boosted by either inflation or earnings or 2.5% – whichever is highest. This is a ratchet which means whatever the state of the economic cycle the state pension keeps on going up. So even when earnings were not increasing pensioners kept enjoying increases in their pension because it was linked to prices. Inflation has now dipped below zero but, because earnings are going up by 2.9 %, pensioners are going to do as well as workers next April. Increases in the female state pension age do provide some offset to these costs for the Exchequer. Nevertheless, the annual ratchet of the triple lock raises public spending at a time when the government is, for example, planning cash cuts in the incomes of working people on tax credits. One estimate suggests that the triple lock is already costing around £6bn a year – significantly more than the £4.5bn cut to tax credits from next April which is causing so much controversy. What does this mean for households? Well, a pensioner couple with an income of around £15,000 can expect it to rise by roughly £300 as a result of the triple lock. This contrasts with Resolution Foundation estimates of a loss from tax credit cuts of around £1,500 for a family with one child in which a single-earner brings in that same £15,000 (and that’s even after accounting for the welcome rise in the minimum wage promised by the Chancellor). The figures for the incomes of older people are rising not just because of their pensions – it is their total income. More and more pensioners work. Again this is a good thing. But they have a clear bonus over younger counterparts because they pay no national insurance contributions. So, for the same pay rate and the same work they will take home more pay than a younger colleague working beside them. There is another factor too. The company pension used to be a pretty basic promise to pay a cash income if you stayed with the firm for a long time. But successive governments have legislated to increase the protection for these pensions – such as adding ever more requirements for price indexation. Sounds good. But such measures have the crucial drawback of making the cost of providing such pensions so high that companies have opted out from providing them for future generations of workers. The company pension has turned into an unrepeatable special offer for one generation. The promise to them is so expensive that it has created big pension deficits which have to be plugged out of the revenues generated by the company workforce. These pension contributions are recorded as a return to labour but they don’t benefit younger employees who are working to generate revenues to plug deficits in pension schemes which they cannot themselves join. These pension contributions are one reason why take home pay is lagging behind overall performance of the economy. Young people are paying to boost pensions that they are not themselves ever going to benefit from. The decline of pensioner poverty is good news. But not enough of it is a story of wider prosperity enjoyed by everyone. Too much is a specific generation benefiting in an unrepeatable way. Some is a deliberate decision to help people above a certain age and so younger people might hope to one day to gain, but even here we can ask if it really is the best use of limited resources. We are reshaping the state and storing problems for the future by creating a country for older generations. The social contract is a contract between the generations and in Britain it is being broken. So we need to help. A key driver is housing costs. That is why we need to get more housing built. It is outrageous when older owner-occupiers, having benefited from earlier waves of home-building, object to new housing. We also need to support affordable pension schemes that they can join, help them into work through more places at university and better investment in skills. I do not believe that today’s pensioners are greedy geezers. They worry about their own children and grandchildren. In fact some of these extraordinary benefits are going to be saved up to pass on to their family. But they are in a state of denial about what is happening across the generations as a whole. Sometimes this is justified by arguing that somehow the younger generation are feckless or incompetent. But they are not. They are decent and hard-working. We have a duty to them just as much as we have to the older generation. And if we do not discharge it to them now then why in the future as they come to hold power and influence should they feel any obligation to older people. As the bumper sticker says – “be good to your kids – they choose your nursing home.” That is not just true for individual families: it is true for our country as well. This article originally appeared in The Observer.