•               
  • >> News

    Wealth of generations

    From:Economics   View:460   Date:2015-01-26

        BRITAIN'S pensioners are a spoiled lot. They benefit from perks such as free bus travel and free television licences, and do not have to pay national insurance, one of Britain's two income taxes, on their private earnings. Last week George Osborne, chancellor of the exchequer, introduced new savings bonds exclusively for over-65s. The bonds have an artificially high rate: the government will pay 4% to borrow from oldies for three years, versus a three-year gilt yield of around 0.6%. This does not chime well with the chancellor's professed policy priority of keeping Britain's borrowing costs down.

        Pensioners have also been largely protected from austerity. Yet many still see spending on the old as sacrosanct. Last year, we advocated means-testing the state pension. I have had it put to me that our proposal is misguided, as pensioners are poorer than the rest of society.

       In the first chart, I plot equivalised disposable income—earnings after direct taxes and benefits are taken into account, and after adjusting for household size—against gross income, for retired households and working-age households. Each point represents one decile in the respective income distribution. I have plotted lines through the points using a linear trend for the working-age, and a power law for the retired.

        
       Several things stand out. First, pensioners are indeed worse off than working-age people: in every decile other than the first, pensioners have less disposable income. Second, pensioners do much better out of the state, for a given private income. This is particularly noticeable for the richest retired households, who have a private income of just over £40,000. Their disposable income is over £50,000, whereas a working-age household with the same private income will end up with just over £30,000. The difference is huge, and unjust.
     
       A big chunk of the difference is caused by the state pension, which affords around £10,000 to most pensioners. Some argue that this represents a return on past savings via national insurance contributions (NICs). This is wrong: state pensions are funded by today's tax contributions, and the distinction between income tax and NICs is academic. But even if you count the state pension as part of gross private income, a large gap remains (see second chart)
     
     
        The only way to make the gap disappear is if you both count the state pension as private income, and use a measure of income which does not adjust for household size. But when thinking about fair redistributive policies, household size is surely crucial: the ultimate goal of policy is the welfare of individuals, not households. That is the justification for, say, child benefit, or child tax credits, which top up the income of those who have children.

       There is a defensible argument for greater handouts to the elderly for any given income level: future economic growth means the young are likely to end up richer over their lifetimes. On the other hand, the young face myriad risks from climate change, pandemics, greater inequality and long-term unemployment (resulting from high youth unemployment today). And even if we want to be especially generous to pensioners, should our generosity really be focused on those who are the richest?
     
     
    Share |

  • Prev: [ News ] Are some older patients being overtreated for di...
  • Next: [ News ] More Cases of IRS Scam Calls Targeting Elderly