Social care· Wealth & assets· Welfare· Intergenerational Centre Baby boomers are going to have to pay more tax on their wealth to fund health and social care 5 March 2018 by David Willetts David Willetts In the past decade a new issue has entered British politics – fairness between the generations. It straddles the conventional political divide. The Prime Minister has spoken of “a growing divide between a more prosperous older generation and a struggling younger generation”. And the leader of the Labour Party has argued that future generations should be able to take for granted the “affordable home, secure job, better living standards, reliable healthcare and decent pension,” that his generation did. Over the last 18 months, the Resolution Foundation’s Intergenerational Commission has published rigorous analysis of the issue. From wages to the welfare state, housing and pensions, the evidence is overwhelming. Today’s young people are earning less than people of the same age ten or fifteen years ago. Recent shifts in the welfare state have been increasingly tilted against their generation and towards older people. The younger generation are spending a record share of their income on housing – and getting smaller, insecure rented accommodation in return, rather than the homes they want to own and settle down in. Final salary pension schemes are closed to them and, while auto-enrolment is getting saving going, new DC schemes will probably be worth less and place much of the risks of having a decent retirement income on the individuals. The norm of major living standards gains made by each successive post-war generation is under threat. The Commission will now be publishing papers looking at policy options to confront head on these worrying trends. This will not just be an offer of a better deal to the younger generation, but to build the kind of country we all, young and old, want to see. We are keen to learn from responses to these policy options before we finalise our main report which we will publish after the local elections in May. We are clear that bold measures are needed because of the risk to the contract between the generations if we do not act. We are also clear that there is a role for government and public policy in promoting fairness between the generations. The sceptics may argue that whether or not a generation is doing well or badly is just a matter of brute luck and that it is not the job of the state to set things right. But our analysis shows that public policy has a big impact on the balance between the generations, whether we like it or not. We have an obligation to act if we can. Some argue that the state just needs to protect the poorest of society, rather than generations as a group. But this can leave generation-wide challenges to ferment into crises – even young adults from prosperous families are now finding it hard to get started on the housing ladder. Another objection is that we are inventing a new and over-ambitious role for government when it has quite enough on its hands already. But this is not about increasing the role of government – it is asking it to discharge better its historic responsibility of maintaining the contract between the generations. Let me briefly explain why this is one of the classic functions of government. We come into the world as dependents and may well leave it as dependents too. In between we work, produce and create. Of course, young and old contribute too. Many parents need their kids to get the IT to work and turn to grandparents to help with the child care. There is a cat’s cradle of mutual dependence between generations. But when it comes to the basics of earning the money, we produce most in middle age. We spread this income more evenly over our lives by transferring resources to old and young in the expectation that we will then benefit when we are old. In the wise words of Paul Samuelson: “giving goods to an older person is figuratively giving goods to yourself when old”. That type of exchange happens within the family and within the modern welfare state. The government is not so much Robin Hood but more like a piggy bank – enabling us to put in at times of prosperity and take out when we have less. There is an element of mutual insurance too – we cover risks like ill health. The political support for all this arises however because most of us are likely both to pay in and take out at different stages of our lives. This is why the contributory principle is back on the agenda. It is an account of government which Conservatives and Labour can embrace. Such a contract between the generations can go wrong if one generation looks likely to get a better deal than the ones coming before or after. That may be just brute luck – living in a time of peace not war. But it can also arise from a big generation using its voting and economic power to back policies which, intentionally or not, help it at the expense of others. That may not be out of deliberate hostility to other generations – it may just be because it is not aware of the implications of what it is doing. Then such a fortunate generation faces a particular obligation to help out the others. That is what we are facing now. For the past thirty years Britain has enjoyed a time when the baby boomers were at their peak earning power. In recent decades our big generation has enjoyed the fruits of a demographic sweet-spot with lots of working age contributors, and relatively few pensioners and children. We benefitted from lower pressures on public spending. Politicians talked as if tax cuts were the normal state of British politics. This has been the backdrop to Britain’s generally strong growth performance from the early 1980s right up to the financial crisis. But we are now at a tipping point because the boomers are growing old with fewer people of working age coming on behind. Today, for every ten working age adults there are seven young and old people needing their support. This dependency ratio has hit a historic low and now it is rising inexorably upwards. By 2030, that ratio will rise to nearly nine. The generation that have boosted the labour market over the last 30 years are now retiring. Whilst pensioners are doing more paid work it does not offset the underlying demographic trends, especially as they get older. So we are entering a period when just to maintain the existing welfare state promise is going to cost more and more. By the end of the next decade this cost will rise by £20bn a year. But 2040 it will rise to £60bn. Politics is going to be very different as the baby boomers age. The age of tax cuts is over. Instead politics will be about who pays more and how much they pay. So far our attempts to address this challenge have been clumsy, and responses to them hysterical – we all remember the Mansion Tax in 2015 and the Dementia Tax in 2017. But neither party can avoid this issue. The Conservative Party now faces the challenge of fighting elections without offering tax cuts – the manifesto of 2017 is a taste of things to come. The Labour Party faces the challenge of whether it is credible to say only the rich will pay more – taxing bankers cannot pay for everything. The analysis we have been assembling for the Intergenerational Commission suggests that young working generations today are already having a tougher time than the generations which came before them. That is why I do not believe we can just expect them to pay higher taxes, picking up the full bill for the costs facing the older generation ahead of them. This is the moment when the chickens come home to roost for all of us, but the Baby Boomers in particular. We are the first generation to have lived our entire lives under the modern welfare state. We have benefitted from Britain’s house price boom which has made home ownership unaffordable for our children. We have done so well compared with the younger generation in so many ways that we cannot just turn to them to pay for our health and social care. And it is this cost above all – paying for a service we particularly benefit from in our old age -which is pushing public spending inexorably upwards. We are going to have to make a contribution too. And when we look at how we should do this there is one obvious source – the wealth we are sitting on. This is not done out of dislike of wealth or wealthy people. Collecting more from affluent boomers should not be done out of savage pleasure in taxing them. It is done reluctantly because the alternatives are worse – cuts in the services that older people rely on, unaffordable high public borrowing that has to be paid for eventually, or even higher taxes on our kids and grandchildren who are struggling under higher costs than we face. The time has come when we Boomers are going to have to reach into our own pockets. As we at last emerge from deficits the recession gave us in this decade we need to look forward to the pressures an ageing population is set to give us in the next. Let’s return to the growing cost of maintaining our existing welfare state. By the end of the next decade the fiscal gap is set to grow to the equivalent today of £20bn a year, and then to £60bn after another decade. That translates to an income tax hike of 15p in the basic rate by 2040, the burden of which will overwhelmingly fall on the generations following baby boomers. Is that kind of tax rise really the legacy we – a generation that owns half the nation’s wealth £13tn of wealth – want to bequeath to our children and grandchildren? If we just borrow the extra money to pay for the increasing costs of the welfare state, notably health and social care, then public debt rises to 230% of GDP over the next fifty years. And are we boomers going to support cuts in funding for health and social care just when we grow old and need it more? As we baby boomers sit on so much wealth – which has continued to grow even as incomes have stagnated – one obvious source is for us to make a contribution through capital or property taxes. OECD figures suggest that we pay about 9 per cent of our taxes in capital taxes, which is broadly in line with historic levels and with some other major countries. However, the bulk of our property tax revenues come through Council Tax – which is just about the most regressive property tax you could have. The tax rate for a family living in a £100,000 house is five times that of someone living in a £1 million pound property. That is why Council Tax is crying out for reform. We will shortly be publishing a paper looking at the options for making it fairer and raising more money from it. For example, a 1% tax on the value of properties after their first £100,000 would add up to £9 billion to revenues. That’s more than enough to reduce other taxes, such as stamp duty, and provide valuable extra investment in social care. Yes, some would pay more. But there are ways to help asset-rich, low-income older families, for example through deferred payments. And those with the lowest incomes would pay less, as will younger people who don’t own their own homes. It is hard to tax wealth as wealth. But we can tax it as it moves in and out. And that leads us to another area where tax is poorly designed, widely abused and under-utilised – inheritance. Inheritance is now a classic bad tax with a very high rate and very high exemptions. We could lower the rate but with a broader tax base, which would be fairer for all. I realise that these are difficult and unpalatable options. They are not popular. But it is the job of think tanks and those of us who do not have to run for elective office to create the space so that those who do face the electorate may be able to act in future. I have reluctantly come to see these kind of tax measures as becoming necessary because the alternatives are even worse. We have to face the facts about the cost of health and social care in particular. For many years, higher wealth taxation has been off the mainstream political agenda as our demographic tailwinds have reduced pressure on the public purse. But our belief in universal healthcare, free at the point of use, is cherished even more. And unless we act, at some point we will face a choice between changing our approach to taxation, or cutting access to the NHS and letting the social care get into even deeper crisis. We can’t delay that debate for much longer. I believe the argument for a new approach to wealth taxation can be won. But it can only be won by an argument which appeals to both the interests of the Boomers and also to their sense of obligation to others. That argument is that we need a well-funded welfare state capable of helping us in our old age and we should help pay for it rather than expecting our hard-pressed children and grandchildren to bear the whole burden. My parents’ generation bequeathed the creation of the modern welfare state six decades ago. The gift to my children’s generation – and those that follow – should be a fair funding settlement that all contribute to, for a modern welfare state that supports young, old and those in between over the next 60 years.