A new generational compact

Published on Incomes and Inequality, Intergenerational Centre

One of the best books written by a politician in recent years is David Willetts’ The Pinch. In it Willetts documents, with great clarity and rich empirical evidence, how the baby boomer generation has been pinching too big a share of the nation’s wealth, enjoying rising house prices and generous pensions while failing to invest in the future for their children and grandchildren.

The Pinch clearly wasn’t on George Osborne’s summer reading list, however. The biggest losers in the spending review were families with children, who bore the brunt of welfare spending cuts as childcare support, tax credits, education maintenance allowances and child benefit all fell under the axe. Young adults leaving home also now face steep rises in tuition fees for higher education and an even longer wait to get on the housing ladder, as deep capital cuts mean fewer affordable homes will be built. Young people in Britain will definitely be feeling the pinch.

In stark contrast, pensioners across all income groups will retain their winter fuel allowances, free TV licences and bus passes. Their wealth emerges unscathed too: the Liberal Democrats’ commitment to a mansion tax didn’t survive the coalition negotiations and council tax will remain unreformed. Only the savings credit gets less generous, as it is frozen until 2014.

The paradox of our age is that we have both to give to, and take more from, our elderly population if we are to prepare our welfare state for an ageing society. Every advanced country faces huge cost pressures arising from this demographic change. Increases in the birth rate, immigration or productivity improvements can offset these but only to a degree. Experts estimate that demographic changes will add something like six per cent to the share of the UK’s GDP taken in public spending by 2050.

These long-term spending pressures make difficult choices about the role and scope of the state even more pressing; at the very least, they invite a strategic response about which public services to prioritise in the coming decades. But they also give succour to social democratic politics because the most efficient, fair and sustainable means for society to meet these challenges requires collective solutions alongside far-reaching state reform: the classic terrain of revisionist social democracy.

The question facing our societies is not whether additional costs will arise as we age, but how best to pay for them. In each of the big areas of spending for the elderly – pensions, social care and health services – collective solutions, in which everyone has a stake, are superior to private or family-based alternatives. In the UK pension policy has already been reformed in a majoritarian direction, by restoring the centrality of a rising universal basic state pension, limiting the growth of means-testing and automatically enrolling lower-paid workers in personal pension accounts. There is a price to pay for this, to be sure: people will have to retire later and save more. But the reforms ensure the integrity of a population-wide and largely progressive pension policy. Similarly, a reformed NHS, funded out of general taxation, has repeatedly demonstrated its superiority, on both efficiency and equity grounds, to private health insurance, and there is no reason to believe that this will change as our society ages.

In principle, the case for a comprehensive social care system is equally strong, since it would allow the pooling of risk for care needs, reducing the costs to individuals and overcoming the myopia which has inhibited the development of private insurance products for care of the elderly. In contrast, countries that rely on private provision, or predominantly on extended family support, to pay the bills of an ageing society will face some combination of increased inequalities in access to services, rising charges or falling family incomes. Private insurance is particularly ill-suited to meeting the care needs of the elderly as it tends to replicate wider inequalities, leaving the poor or high-risk individuals without coverage and increasing the costs to others. Equally, countries that rely predominantly on kinship care and income transfers from family members will reproduce existing inequalities, reinforce gender inequality, and depress household incomes, by pulling women out of the labour market to care for their relatives (that is why family-based welfare societies, such as those in southern and central Europe, have seen a rise in the public provision of family services in recent years).

The case for a ‘grey’ social democracy is therefore a powerful one, but it needs to be very carefully made. There are two high-stakes challenges that need to be overcome: firstly, dealing with the issues of funding and generational justice. This means ensuring that some of the accumulated wealth of the baby boomers can be drawn down to help pay for social care services (rather than taxing the working age population), but doing this in a fair way that reassures people that – in contrast to the situation under the current funding lottery – their family homes can be passed on to the next generation. This is why new and progressive forms of wealth or property taxation need to be considered alongside the question of the funding of care.
The second strategic challenge is how to reassure the public that the necessary comprehensive solution will not be a statist, one-size-fits-all service; in fact, it will be quite the reverse. After all, the very essence of what this seeks to achieve is to enable people to spend longer in their own homes, give families rather than councils real choice over patterns of care, and reduce, not increase, the amount of resource that society would otherwise have to spend on the elderly.

The other pillar of a new generational compact to unlock the affordability of the welfare state in the 21st century is to prioritise investment in childcare. Full employment, including a high female employment rate, is the best guarantee of a buoyant tax base to fund public services. But high female employment rates can only be sustained if quality childcare is widely available and affordable, particularly for low-income families. As with care of the elderly, the most cost-effective and efficient means of providing childcare is collective: private childcare provision tends to suffer from high churn and low quality. Millions of families can and do, of course, provide valued childcare, but only if they possess the internal resources to do so, and at a cost to household incomes if women are impeded from working for lengthy periods.

Comprehensive childcare is a double win for societies, since not only is it the key to helping women work, but, if it is of sufficiently high-quality, it also reduces inequalities in early childhood development, enhancing strategies for improving social mobility. High standards of early-years education and daycare feed directly into narrower class gaps in schooling – the professed goal of all political parties. But it does not come cheap: it absorbs a considerable proportion of social expenditure in Nordic countries. This is why it must represent a first-rank strategic priority for public service investment in the future.

Ensuring a new generation of highly responsive services for young children and the elderly will be at the heart of progressive policy renewal. Services for the very young and the elderly never benefited from the full focus of reform in the way that the NHS or schools did. Nor were they embraced by Labour’s leaders as key emblems of the political bargain they wanted to strike with a new generation of aspirant middle-class voters who had started to take improvements in the NHS or schools for granted. Putting this right must be at the heart of renewing support for public services among key groups
– young and old.

This article first appeared as an article in Prospect magazine.