Youth o’ today – not as lucky as they used to be

I was going to cover last week’s last week’s report by the Institute for Fiscal Studies, on the economic circumstances of different generations, as an update to the Boomers and Busters post but then I decided it needed a piece of its own.

Youth o’ today don’t know they’re born has long been the cry of older generations as they look upon the improved livings standards and greater opportunities available to the young. That was the natural order of things. As economies improved and per capita GDP increased, people got richer and had higher livings standards compared to those in previous generations.

This chart from the IFS report shows how this process continued throughout the last century, with each generation earning more, in real terms, than the one before it.


Then in the early years of this century, the process started to falter. As the IFS comments:

Up to and including those born in the 1950s, each cohort has had higher incomes on average than the cohort before them did at the same age. Around the age of 50, for example, average income for the 1950s cohort was more than 20% higher than average income for the 1940s cohort – an increase equivalent to around £5,000 a year for a couple without children. Similarly, average income for the 1940s cohort was itself more than 20% higher than average income for the 1930s cohort at the same age. This is what one would expect to see: as the economy has grown over time, incomes have risen and so younger cohorts have higher incomes than their predecessors did at the same age. However, the figure shows that this is no longer true for those born after 1960. The 1960s, 1970s and early 1980s cohorts (currently in the middle of their working-age lives) do not have higher incomes than their predecessors did at the same age. This partly reflects the impact of the Great Recession on the incomes of working-age households, but it is also the result of the period of sluggish income growth that preceded the recession (from the early 2000s onwards) and the weakness of the recovery in incomes over the past few years.

So not only did the decade-by-decade pay hike for twentysomethings stop, those in their middle years didn’t see the pay increases that their predecessors had enjoyed. (Another reason why lumping the 60s-born in with the Baby Boomers doesn’t make sense.)

Those of us born in the 1960s are slightly luckier than those who came later because more of us managed to buy houses and so the fall in our housing costs, thanks to time and low interest rates, has partly offset the income stagnation. Housing costs are hitting those born after 1980 particularly hard. As this next chart shows, those born in the 1960s paid particularly heavily to get themselves onto the ‘housing ladder’ (a term which I’m sure was minted in the 1980s). Since then, the cost of servicing a mortgage has fallen while the cost of buying a house in the first place has risen. Consequently rates of home ownership have dropped.


Youth o’ today who can get hold of enough capital to buy a house really don’t know they are born. The rest of their age cohort, though, are paying more as a proportion of their incomes in housing costs than previous generations did at a similar age. The decline in home ownership is clear from this chart but the drop is sharpest between the 1970s and 1980s age cohorts.


It is therefore less likely that each 10-year cohort born after the 1950s will accumulate as much wealth as the one born before it. That would be enough of a problem on its own but if these figures look worrying, the ones for pensions are frightening.

Membership of defined benefit (DB) pension schemes, those that employers contribute to and which pay out based on a proportion of people’s salaries, has fallen. This has affected all age cohorts but a much smaller proportion of those born after 1970 had DB pensions and for those born after 1980 they are available only to the lucky few.


The pensions that replaced the defined benefit schemes are not nearly as generous and don’t carry the same level of employer contribution. As the IFS says:

[T]he switch from DB to DC schemes has been associated with a large reduction in the generosity of employer pension contributions. Of those in DB schemes in 2015, 90% received an employer contribution equivalent to 10% of their earnings or more, compared with only 13% of those in DC schemes.13 The switch also represents a transfer of risk from employers to employees – as, in DB schemes, firms rather than employees bear the investment return and longevity risk. There is therefore good reason to think that younger cohorts will struggle to accumulate the pension wealth of their predecessors (certainly as a share of earnings), and they will certainly face greater uncertainty with regard to their future living standards than those cohorts with greater access to DB schemes.

As this chart from the Resolution Foundation’s Intergenerational Commission report shows, defined contribution schemes are not nearly as generous.


The closure of defined benefit schemes was, in effect, a hidden pay cut, the implications of which will only become clear over the next couple of decades.

The upshot of this, then, is that the tradition of each new generation of young people ‘not knowing they’re born’ is no more. Pay stagnation has put a stop to the above-inflation pay increases, property prices have risen to the point where fewer people are able to buy houses and the generous (or should that be ‘adequate’?) pension funds have been shut down. And, of course,for anyone born after 1960 the state pension age has been pushed out to age 67. At least, for now. Where it will be when they actually come to retire is anyone’s guess. It’s hard to look at any of these figures without concluding that those who have recently retired have had the best of it and that each subsequent generation will find things more difficult than the one that went before.

That said, I’m still uncomfortable with the intergenerational conflict narrative. One generation has not robbed another. A lot of the things that happened since the Second World War were way beyond the control of most people. The economy grew, trade union power increased, middle earners gained a bigger slide of the economic pie, then GDP growth slowed, industries declined, trade unions lost power and wages began to get squeezed. These things affected everybody but how much and for how long depended on which stage of life you were at. Those born in the late 1940s and early 1950s happened to be get into the market at the right time and out of it before things started to go seriously wrong. Their relative wealth is a legacy of a time when those on middle incomes did quite well.

The trouble is, we assumed for many years that the postwar improvements in wages, living standards and pensions would simply continue and that each generation would be better off than the last one. A lot of older people still don’t seem to have cottoned on. I still hear ‘youth o’ today don’t know they are born’, or more modern variants of it, from people of my age and older who think youngsters have it easy. Of course, the young grew up materially better off in many ways than their predecessors but many of them will struggle to live as comfortably as their parents did later in life.

Of course, there could be a leap in economic growth sometime over the next couple of decades that showers today’s youngsters with super abundance in their later years. At the moment, though, that isn’t looking very likely. To achieve the sort of per capita GDP growth we saw in the last half of the twentieth century, and to compensate for the slump, the UK economy would need to be growing at well over 3 percent per year by now. There are no signs that it will get anywhere near that in the coming years.

Meanwhile, the fortunes of the early baby boomers continue to grow. As Andy Haldane said, two-thirds of the household wealth increase since the recession has gone to those born before 1952. Of course they worked hard and saved hard but they should acknowledge that they have been lucky too. It is not their fault that subsequent generations will not enjoy such a comfortable retirement but their accumulated wealth isn’t entirely of their own doing either. Some of it is due simply to being born at the right time. A lot has changed over the last few decades. We used to assume that most pensioners were poor but there has never been a better time to be in your late 60s. Youth o’ today are not the lucky ones any more.



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9 Responses to Youth o’ today – not as lucky as they used to be

  1. duncan brown says:

    Agree Rick at discomfort with age war rhetoric. And analysis misses the fact that poorer 20 year old kids move back in with supposedly richer dad and spend all his cash and wreck his flat!

    • Blissex says:

      «discomfort with age war rhetoric»

      But it is not totally inappropriate, and it is not really about wage, it is about cohort, strictly speaking. Consider the huge windfdall 1982-2007 of scottish oil: other countries have also invested similar windfalls into local productive assets or foreign dividend-giving assets, but the UK has largely spent scottish windfall on lower taxes and credit (and thus property prices) booms to the benefit of specific cohorts, the “aspirational” ones who supported the Thatcher and Blair governments, and who have been on the whole enthusiastic asset strippers. Blair himself wrote in 1987, before he went on to do the same:

      «Mrs Thatcher has enjoyed two advantages over any other post-war premier. First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable.»
      «Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods.
      Previously such a boom and growth in imports would have produced a balance-of-payments deficit, a plunging currency and an immediate reining-back on spending, with lower rates of growth. Instead, oil has earned foreign exchange and also produces remittance payments from overseas investments bought with oil money.»
      «The situation is neither stable nor healthy in the long term: but in the short term it allows the living standards of the majority to rise rapidly, even though the industrial base, the ultimate foundation of a successful economy, is still only achieving the levels of output of 1979.»
      «The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.»

      Not just future historians: people in the north and non-property-owning people in the south can deplore it today.

      Note: some of the non-property-owning people in the south are the future heirs of the cohorts that have enjoyed massive tax-free effort-free capital gains on their properties and I know several who think that when finally inherit them they are going to live “upstairs” as gentlefolk (I know one who is going to inherit from his parents and grandparents 3 four bedroom properties in London). Many of them don’t realize though that a lot of the properties they are going to inherit are encumbered by reverse mortgages, and that property cannot double in price every twelve years forever.

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  3. Blissex says:

    I am astonished at how far pensions contributions have fallen: total 21% for “final salary”/DB and 5% for “money purchase”/DC is amazingly low. It used to be around 25-30% for “final salary” schemes and 10% for “money purchase” ones.

    I suspect that 21% for “final salary” reflects a degree of underfunding, and perhaps cuts in promised benefits; the traditional “final salary” pension gave 1/60th of “final salary” per year of service (usually capped at 80% of final salary) plus inflation indexing plus 50% for the survivor, and typically resulted in pensions of 50-65% of final salary.

    Most “money purchase” schemes I have seen (not many) tend to have 10% contributions and I suspect that the 5% average reported above is the result of the average with many stakeholder pensions with minimal contributions.

    Anyhow the figures reported here mean smaller “final salary” pensions, of perhaps 35-50% of final salary and minuscule average “money purchase” pensions, of perhaps 10-15% of average career salary. I have seen articles saying that many if not most “money purchase” pensions in the UK will be a few thousands a year.

    Just done a simple search and this document by UNISON gives some additional estimates:

    Click to access Briefings-and-CircularsUNISON-Guide-to-Defined-Contribution-Pension-Schemes3.pdf

    «In practice, at current average contribution rates of 8.9% in total, the defined contribution scheme member might end up with a total pension pot of just 2.7 times earnings after 30 years – approximately £70,000 for someone retiring in 2011 on national average earnings. This would buy an annual pension of just 8% of final pay at March 2012 rates or £2,100 per annum for someone on national average earnings in 2011. The average pension pot used to buy an annuity in 2010 was actually only £25,874.»

    Another one:

    Click to access 20151008%20The%20Future%20Book%20-%20Edition%202015%20final.pdf

    «PPI modelling indicates that a median earner might need to contribute between 11% and 14% of band earnings to have a 2/3 chance of replicating working life living standards if contributing between age 22 and State Pension Age. For people who begin contributing later or who take career breaks, contribution levels needed to have a 2/3 chance of replicating working life living standards could be as high as 27%.»
    «People are likely to need between 50% and 80% of working life income in retirement in
    order to achieve a living standard that is similar to the one experienced in working life.»
    «Median DC pension pots could grow around £14,100 to around £56,000 over
    20 years» «A level annuity bought with this fund by a single man at age 65 with no
    dependents or health problems could yield around £3,200 per year.»

    And that £3,200 is “level” that is not inflation adjusted.

  4. Blissex says:

    «there could be a leap in economic growth sometime over the next couple of decades»

    That so far has depended on oil, and the scottish oil is about to run out, and the global prices and supply don’t look entirely favourable, and the productivity enhancing uses of oil have probably been fully deployed already.

    «two-thirds of the household wealth increase since the recession has gone to those born before 1952. Of course they worked hard and saved hard»

    That’s not quite right: currently middle aged and older people in the north who were made redundant or whose properties did not quadruple in real price have seen pretty modest wealth increases. The people in the south who did not own properties also were hit quite hard by ever increasing rents in the south. It is the middle aged and older people in the south who have captured a large part of wealth increases and not just since the recession, but since 1980.

    And they became much wealthier not because they «worked hard and saved hard» more so than most people in the north or renters in the south, but because Conservative and New Labour governments pushed up property prices in the south with many cleverly targeted policies to achieve massive upward and southward redistribution.

  5. Blissex says:

    correction: “It is the middle aged and older [property-owning] people in the south”.

  6. Good summary.

    This is why we set up Young People’s Party. There’s not much the government can do about wages levels in the private sector, but it can level the playing field by reducing taxes on earnings and having Land Value Tax instead.

  7. Nick says:

    You are completely ignoring that the difference between wealth and no wealth is due to being a home owner or a tenant.
    Therefore the best solution would be to stop subsidising high house prices and introduce LVT/Removal of CGT allowances while reducing income taxes. That would bring money in the economy and would help the ones who do not have any asset wealth.
    That is a solution to the problems described above.

    There is a solution. But will economist allow house prices to fall? Suspect no.

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