Why are the older generations richer?

The FT’s article on the changing balance of incomes between the young and old was one of its most-read this week. Trawling through half a century’s income statistics, they found a reversal in the fortunes of the young and old. The median income for a young people in 1961 would  have made them relatively affluent while the median income for someone between 65 and 70 would have been in the bottom third. Today, that position has almost reversed.

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In 1961, those earning the median income after housing costs for a 20-25 year old would have been at the 66th percentile in the income distribution. Their 2012 counterparts would only be at the 37th percentile.

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The story fits in well with the zeitgeisty intergenerational conflict narrative.

The pattern of gains for the old at the expense of the young is repeated for rich and poor alike, but it is strongest for average and poorer families.

And the gap between generations is wider for those on middle and lower incomes.

I wonder if our ancestors would find today’s income distribution so strange though. They would expect the young to earn less. For most of our history, age and income hierarchy were closely aligned. As recently as the early 20th century, young people were not expected to earn more than older people. They progressed up through the ranks of whatever occupation they were in, improving their skills and probably reaching peak earnings somewhere around 40. The outlandish bit of all this is the income distribution in the 1960s. The idea that the average 20-25 year old would earn more than two-thirds of the rest of the population would have been thought absurd.

Indeed, a lot of people thought it was absurd in the 1960s. I once saw a documentary on the youth of the 1960s and the Mods and Rockers. It went into some of the socio-economic factors behind the growth of these youth movements. There was an interview from the early 1960s with a man and his daughter. The daughter was earning a lot more money as a secretary than her father was as a manual worker. He was clearly proud of his daughter yet, at the same time, slightly bemused that this should be the case. The increase in young people’s earnings and the behaviour and attitudes that came with it were behind much of the moral panic about the Mods and Rockers. Not only were they tearing around the country on motorbikes but the cheeky little blighters were earning more money than their parents to boot. And after we’d fought a bleedin’ war, n’ all….

As Chris Giles and Sarah O’Connor say in their piece:

Those born in the 1940s belonged to a particularly lucky generation. On average they were relatively rich as young adults and remain relatively rich today.

The sharp-eyed among you will already have worked out that the 20-25s of the early 1960s are today’s recently retired. They lived through an extraordinary time when the economy grew at a rate never seen before and when twenty year olds could out-earn their parents.

But something else happened during that period too. Not only did the economy grow but those on middle incomes got a bigger share of the spoils.

Wages as a percentage of GDP reached a peak in the 1970s. For a brief period, most of the benefits of Britain’s economic growth went to employees.

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Chart by Chris Dillow

At the same time, middle earners were getting a larger share of those wages. The 60s, 70s and early 80s were a good time to be earning the median wage. Not only did you benefit from a growing economy, you got a higher share of the proceeds too. Those on middle incomes got a bigger slice of a bigger pie than at any time before or since.

It was during this period that today’s recently retired were in the prime of their working lives. Many were able to buy property, which was still cheap by today’s standards, and have increased their wealth by doing so. A lot of people had generous final salary pension schemes and enough disposable income to invest to top them up.

Since the 1980s, though, wages have fallen as a percentage of GDP and the proportion of income going to those in the middle has fallen too.

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Source: Chartbook of Economic Inequality

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Source: ONS

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A median income is a lot further from the average than it was in the 1970s. Being a middle-earner isn’t such a good deal these days.

And that’s the problem for the next generations. The Baby Boomers are relatively affluent because they lived and worked through a period when the spoils of postwar growth were distributed more widely and equally. Subsequent generations will not be as rich because they didn’t. A greater share of income is being taken by fewer people, housing is being priced out of many people’s reach and the occupational pensions are disappearing.

But by framing these differing fortunes as a generational conflict, we are missing something. The young aren’t poor and the old rich because the old are snaffling the income and benefits from the young. The old are richer because they lived through a time when the country’s wealth was distributed more evenly, so more people had more. The inequality between generations is a symptom of the wider rise in inequality since the 1980s, the shifting balance of power in the workplace and the fall in wages over the last decade. The average youngster will have a smaller share of wealth than the average oldster did because they are living through times that are less generous for the average worker. Intergenerational inequality is really just another story about falling incomes, less secure employment and job polarisation.

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5 Responses to Why are the older generations richer?

  1. Bernie Samson says:

    “But by framing these differing fortunes as a generational conflict, we are missing something. The young aren’t poor and the old rich because the old are snaffling the income and benefits from the young. The old are richer because they lived through a time when the country’s wealth was distributed more evenly, so more people had more.”

    It is difficult and ultimately futile to disagree with this. There really is no point in tit-for-tat arguments about whether life was better then or now. In my view, however, it is not unreasonable to question the way cohorts are being treated now. The lucky generation will benefit from their protected use of health, housing and pension resources as they are steadily removed (or made much more expensive) for their descendants.

    As the success of that generation is based on a significant amount of luck, as you say, it doesn’t seem unreasonable to me to shift the tax burden back towards them a little over the next few years – not to cripple those in genuine poverty but to take something extra from those middle and higher income pensioners who can afford it. Just as the government is doing with younger people and just as all parties are promising to do in the next parliament.

  2. Your first chart shows that the crucial divergence occurs circa 2000-2005. House values leapt from £72k in 1990 to £84k in 1999 to £100k in 2001, to £165k in 2005. Simultaneously from 2000, jobs contracted, wages were frozen and swingeing University fees were about to be introduced. The relative wealth of the elderly is because they spent a lifetime buying their houses. The massive increase in house prices effectively reduced the value of money by 50percent over a couple of decades. My personal example is the average house price in 1990 was £60k (outside London). My husband and I living in London with no hope of buying there saved to buy a house outside London when we retired. By 2005 house prices were about £150k. After 20 years our savings went from being enough to buy a house to the equivalent of half the price of a house. in other words we still could not afford to buy . If in the same time span our wages (standard couple income of about £35 k, no debts, no dependents, but atrociously high London rents and cost of living) had doubled to remain on a par with house prices, we could have stayed up with the spiralling cost of living. Inflation, or devaluation of the currency is a key factor in present day poverty. Bear in mind those savings of the elderly accrued over a lifetime have also been trashed in value. Compare their wages in work about £20k pa with nursing home fees.

  3. Reblogged this on Patrick Nelson Reblogs Stuff and commented:
    Question: Young getting poorer – Propertied, invested old getting richer, but why? Answer: Big Fat Greedy Old Capitalism – a system designed to facilitate the people who possess wealth in robbing the people who provide labour (i.e. do the actual work). The “trickle down effect” is a lie and Neo Liberalism is taking the workers towards slavery.

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