The rise and fall of the rich pensioner

When I was a kid old people weren’t very well off. The words poor and pensioner often went together. I remember a poster (presumably by one of the age charities) which I used to pass on the way to my swimming lesson. It said something like, “Poverty and loneliness, the punishment for old age.”

That would have been sometime around 1972 when, as the FT explained earlier this week, the average pensioner’s income was in the bottom 20 percent.

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It’s not like that now though. Forty years on, older people aren’t doing too badly. These days, you’re more likely to hear people talking about rich pensioners than poor ones.

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I wonder how long this will last.

Earlier this week, the Ernst & Young ITEM Club reported that much of the increase in the workforce over the past five years has been due to older people either staying in work or going back to work. Rising participation by older age cohorts, it says, has added even more people to the labour force than immigration. People who ten years ago might have retired are now staying in work.

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Some of this has happened because state pension age for women has risen and the statutory retirement age has been abolished. But, says EY, some of it is caused by deficient pension provision and this is likely to get worse.

[G]rowth in elderly employment also
looks to be a symptom of the need of many to keep
working in order to supplement squeezed
retirement incomes, in part a consequence of rock-
bottom annuity rates. The historical association between movements in annuity rates and participation by older people in the labour market certainly points to this being an important driver.

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As pension incomes fell, first the over 50s and then the over 65s began to think again about retiring. The 1980s and 1990s were the heyday of early retirement. The proportion of older people working has been creeping up ever since.

EY think this will continue:

[I]t is likely that the steady upward trend in participation amongst the older age groups will continue, with greater longevity and deficient levels of pension saving remaining important drivers.

They’re probably right. The number of people in defined benefit pension schemes has been falling steadily too.

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Source: DWP

The DWP forecasts that the average defined benefit payment is about to go into a steep decline.

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Source: DWP

With even companies like John Lewis abandoning their final salary schemes and many company pension schemes underfunded, the days of generous retirement plans seem to be well and truly over.

As for the future of defined contribution schemes, that just looks plain scary.

Today’s pensioners are only well off because they lived and worked through a lucky half-century. The generous pensions they enjoyed look as though they will be a historical blip. Fifteen years from now, when the next demographic bulge retires, their incomes will nowhere near what retired people are on now. The stereotype of the rich pensioner is on the way to being obsolete.

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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.


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.


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.


Source: Chartbook of Economic Inequality

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Source: ONS

Screen Shot 2015-02-25 at 16.10.08Source: ONS

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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The lucky half-century

Andrew Haldane, the Bank of England’s Chief Economist, gave a fascinating speech to the University of East Anglia last week on the subject of economic growth and whether or not the recent slowdown is a blip or a longer term trend.

The economic jury is still out on whether recent rates of growth are a temporary post-crisis dip or a longer-lasting valley in our economic fortunes. Pessimists point to high levels of debt and inequality, worsening demographics and stagnating levels of educational attainment. Optimists appeal to a new industrial revolution in digital technology. Given its importance to living standards, this debate is one of the key issues of our time.

As he says, economic growth is a relatively recent thing.

[T]he long history of growth looks rather different than the short. Secularly rising living standards have become the social and economic norm. No-one can recall a time when the growth escalator has moved anything other than upwards.

Yet viewed through a long lens telescope, ‘twas not ever thus. Chart 2 plots estimates of global GDP per capita back to 1000 BC. This suggests a very different growth story. For three millennia prior to the Industrial Revolution, growth per head averaged only 0.01% per year. Global living standards were essentially flat. Since 1750, it has taken around 50 years for living standards to double. Prior to 1750, it would have taken 6000 years.

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For much of human history, life changed very little for most people. One year was pretty much like the next and one century wasn’t a lot different from the one that went before. For centuries, life and death rates barely changed and life expectancy was somewhere around 40. A peasant beamed forward from 1100 to 1300 would find very little had changed. His family might even be farming the same plot and he would have no trouble helping his descendants in the fields as the tools and techniques would be very similar to his own. What little change there was came about very slowly.

As Haldane says:

[G]lobal living standards plateaued for the majority of the past 3000 years, before rocketing over the past 300.

Discernible rises in living standards are a very recent phenomenon. If the history of growth were a 24-hour clock, 99% would have come in the last 20 seconds.

He goes on to discuss why the growth takeoff happened and the social, political and technological factors that led to it. And, of course, whether the next technology fuelled leap is around the corner or whether we are now settling back into a period of much lower growth.

I’ve talked about this quite a lot recently with various groups of people. I have noticed how difficult people find the ideas of secular stagnation and a slowdown in technological development. Even though the prospect may be frightening, most people seem to think a scenario where technology advances rapidly and robots take our jobs more plausible than one where growth and innovation cease.

This isn’t surprising when you consider our recent history. Take the period on from 1700 when growth began to take off and look at what happened since. In the western economies, much of that growth happened between the period immediately before the Second World War and the turn of the millennium.


Source: Chart by M Tracy Hunter based on data compiled by Angus Maddison.

Economic growth is a recent phenomenon but rapid growth is even more recent. The sort of growth we experienced over the past half century or so was unusual even by the standards of the last 300 years. In short, we have lived through an extraordinary period within an extraordinary period.

But we don’t think of it as extraordinary. The post-war generations came to think of these growth rates as normal. We grew up thinking that the economy would always grow at just short of 3 percent and that the next generation would always be better off than the one before it. We were convinced that the world would continue to change rapidly. So convinced were we of the increasing speed and importance of change that we even invented a thing called Change Management. These days, you can’t move for people quoting Heraclitus, saying that the only thing constant is change, whether or not he actually said it. It used to be said that people fear change as they get older. Not us, though. We’ve grown up with change and we expect more of it. These days, the middle-aged men who don’t get out much complain that youngsters just aren’t revolting any more. We have come to think of rapid growth and change as normal.

Which is why we find it so difficult to get our heads round the idea that the future might be  Tech Meh! rather than Tech Yeah!

But what if we’re wrong? What if the real change we have to get used to is that the future won’t be anywhere near as different as we thought it was going to be? What if our increasingly middle-aged world slows down and technological and economic change goes back to the pace it moved at before the twentieth century? Could it be that the rapidly changing world in which we grew up was a lucky blip?

We grew up with imaginative science fiction and futuristic science on TV. Exciting predictions about what new technology might do might be a little scary but we are used to them. An economic and technological slowdown would be much more of a shock for us which is why we find it so difficult to believe. After all, the past 70 years of rapid growth may be abnormal when viewed against the rest of history but it’s all we have ever known.

Update: I think I might have accidentally deleted some of the comments on here while trying to approve them. If your comment has disappeared, I apologise. It’s a phone and fat fingers, not deliberate censorship.

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Strikes: monsters that are almost extinct

After he wisely cautioned the government against further trade union legislation a few years ago, Norman Tebbit changed his tune in the Telegraph earlier this week. In a piece which summoned up the ghost of militancy past, he backed proposed new laws on strike ballots and warned of “irresponsible minorities of trades unionists in the public services engaged in blackmailing their employers into pay rises or other concessions”.

I’ve discussed the legal aspects of strike ballots at length on here. Whether or not they are irresponsible, a minority of union militants can’t force a majority to take industrial action. Lord Tebbit knows this because he was a member of the governments that put a stop to the closed shop, mass picketing and the disciplining of union members for refusing to strike.

A lot has changed since the 1980s. As luck would have it, the ONS released the latest data on labour disputes yesterday. Its records go back to 1931. (See Table LABD01 here.)

Labour Disputes 1931 -2014

To say that the number of days lost to industrial disputes is at an all time low is something of an understatement. Compared to most of the last century, strikes have almost become extinct. They are no longer a feature of our industrial relations landscape.

The decline in industrial militancy is not recent. Strikes have been historically low for the past 25 years. There were fewer days lost to strikes last year than there were during the backs-to-the-wall days of 1940. Whatever else is going on in the UK economy, there is no labour disputes crisis. To suggest that urgent action needs to be taken against trade unions is either delusional or mischievous.

Perhaps the clue is in this sentence:

If my friends really want to win the election in May they need to move the debate back onto Conservative strong ground.

It’s a battle the Conservatives won once before so they are hoping they can stage a re-enactment. I’m not convinced this is strong ground any more though. While we still hear about industrial disputes, few of us are directly affected by them and even fewer participate. If you’d asked a random sample of people in 1980 if they knew anyone who’d been on strike, you’d have found plenty who did. Ask the same now and you might struggle to find anyone at all. Strikes just aren’t part of our world any more.

There is no practical reason to change the law on strike ballots. You only have to look at the figures to see how much has changed. This is solution without a problem. The Conservatives are picking a fight with an extinct monster.

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Global ageing: From pyramid to beehive in 100 years

Age International published a wide-ranging report on global ageing earlier this month. It emphasises something I’ve been banging on about for a while. Population ageing isn’t just a western phenomenon. It’s happening throughout the world.

Contrary to popular belief, the rise in the population aged 80 and over is taking place at a faster rate in less developed countries than in more developed countries.

The population of some developing countries is ageing at a fascinating rate. By the middle of the century, many places we still think of as young countries will have a greater proportion of their population aged over 60 than Britain has now.


This turbo greying will see some countries overtake the developed regions, ending up with a greater proportion of their population over 60 than in North America and Europe. As these graphics from Pew Research and the ILO show, many developing countries are ageing at much faster rate than the richer economies.


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As Age International says, this is happening because a lot of the things the human race has been doing over the last 5o years have worked. Aid agencies have been persuading poor people to have fewer children while helping more of them to live longer. And that’s what’s happened. Falling birth rates have contributed to global ageing but much of it has come about simply because fewer people are dying. As this chart shows, first we helped more children to survive into their teens, then we helped more adults to live longer. Result; adults and then older people make up an increasing proportion of the population.

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In some countries, though, economic migration is speeding up the ageing process by removing the working age adults and leaving hollowed out societies:

A major pull factor of international migration is the ageing of workforces in the rich world; at the same time migration from poor communities leaves behind disproportionate numbers of the old, and the young. From Latin America to Asia, migration is changing the age profile of many relatively ‘young’ countries, leaving ‘skipped-generation’ households of older people caring for grandchildren left by middle-generation migrants. With remittances infrequent, inadequate or non-existent, old and young in these households are sharing the burden of poverty and vulnerability.

This is the flip side of western countries’ child-catching policies. As we make up for the ageing of our populations by importing young people from elsewhere, we effectively export some of our rising dependency ratio to countries less able to cope with the results.

For most of human history, the age profile looked like a pyramid, with a lot of young people and fewer and fewer making it to each age cohort. At the top were a tiny number of old people. But by 2047, for the first time, there will be more people aged over 60 than children under 16. The age profile will look more like a beehive.

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From pyramid to beehive in just 100 years. That’s a global social transformation taking place with astonishing speed. We have, as yet, no idea what the consequences of this will be.

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The fall of the skilled worker

There’s an interesting discussion about pay in the IFS Green Budget and the increase in highly skilled employment at the same time as a decrease in real wages. (See previous posts here, here and here.) The IFS believes that the fall in wages has been mitigated by these compositional effects. Because the recent rise in employment has been among the higher-skill level groups, the fall in wages is not as severe as it might have been. Or, to put it another way, had the composition of the workforce stayed the same, the wage collapse would have been even worse.

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The IFS comments:

The overall conclusion that compositional effects are, on average, increasing real wages is also true in both the public and private sectors, and for both men and women.

In summary, we can rule out a story that says that the continued weakness of earnings is due to compositional effects, such as lower-paid types of people returning to work after losing jobs during the recession. Cyclical compositional effects might be playing some role, but they are being dominated by the continuation of longer-run compositional changes, such as increasing education levels, that should act to raise pay.

In other words, rising skill levels would normally be expected to raise pay. The fact that they haven’t is indicative of the severity of the pay squeeze.

But, as the Resolution Foundation’s interactive chart shows, real-terms median pay levels for all occupational groups are now lower than they were in 2004. For all except the managerial group, they are lower than in 2002.

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For all groups, real-terms median pay levels started falling before the financial crisis. The recession has just made the fall that bit worse. The drop in pay is sharpest among the Professional and Skilled Trades groups, both falling by more than 6 percent in the decade since 2004. As Larry Elliott says, we have sacrificed pay for jobs. That seems to be true even for the highly skilled.

Of course, all these figures would look even worse if we included the self-employed, whose earnings, on a number of measures, were on the slide before the recession and have collapsed since 2008.

The IFS blames falling productivity for the pay squeeze, though it acknowledges that pay has fallen even faster than productivity.

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And, in any case, this just changes the question. Why has productivity collapsed? The pay puzzle becomes a productivity puzzle.

There’s a lengthy discussion of the productivity paper in this Bank of England paper by MPC member Martin Weale. He points out that the UK’s post-recession drop in productivity hasn’t been much worse than for of many other OECD members. That said, he’s not very optimistic about the near future.

After the disappointments of the last few years one would be bold indeed to be confident that this is the start of a sustained revival. I have not been able to identify factors responsible for the weak productivity growth, except in the broad sense that it is related to the financial crisis and the experience of countries during the period 2008-2010, so I cannot be confident that shadow of this is now easing.

And looking at the underlying rate of growth:

Chart 8 suggests that the third quarter of this year is no more than a brief ray of sunshine in the gloom.

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The key to improving productivity is to improve skills say the CIPD, UKCES, the CBI and just about everyone else. But that’s where we came in. We have more people in skilled occupations yet still our pay levels and productivity have fallen.

It could be that this is all simply the result of a catastrophic economic crash. Maybe it’s unreasonable to expect employment and pay to recover as quickly as they did after previous recessions. But the fact that these trends seem to have started before the downturn is worrying. Could it be a sign of a longer-term shift in the balance of power in the workplace? Are many employers substituting labour for capital and paying lower rates simply because they can?

We have tended to assume that education, skills and qualifications gave workers bargaining power and therefore some protection from the pressure on wages and conditions experienced by the unskilled. It seems that is no longer the case. Middle-class professionals can have their pay rates hammered down too. If, as some commentators predict, technology enables even complex jobs to be chopped up into discrete tasks, things may be about to get that bit worse.

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Blog celebration

As promised before Christmas, I will be having a celebration to mark this blog’s 8th anniversary. Yes folks, I’ve been punting this stuff out for almost 8 years now.

It will be an informal do, just a few drinks and a chance to have a chat.


Date: 5 March 2015

Time: 17.00

Venue: The Parcel Yard, King’s Cross

The invitation is open to all this blog’s readers, even though I’ve no idea who most of you are. If you would like to come, please let me know in the comments, on Twitter @FlipChartRick or by emailing Rick at FCFT dot gmail dot com.

Hope to see lots of you there.

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