Transcript Michael Johnson - Who will care for Gen Y?

Who will care for Gen Y?
The baby boomers’ legacy
20 November 2015
Michael Johnson
Research Fellow, Centre for Policy Studies
www.cps.org.uk
Introduction
BBs
Gen X
Gen Y
Quality of later life
1946 -1964 (aged 69-51)
Doing great
1965 – early 1980s (50-35)
Reliant on inherited wealth
Early 1980s – early 2000s (34-15) < parents?
• Gen Y vs. BBs
• Early adulthood: higher take-home income
• But…
• Unaffordable housing, college debt, fragmented careers,
stagnant earnings, thinner pensions (occupational & private),
smaller State Pensions vs. prior earnings (and SPA in retreat)
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Central projection for Public Sector Net Debt, PSND*
87% in 2064-65
% of GDP
?
100%
90%
80%
70%
54% low,
mid-2030’s
PSND 80.4% of GDP
£1,484 billion
£55,600 / household
60%
50%
40%
Ratio excluding impact
of ageing population
(approx)
30%
20%
10%
0%
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
* Fiscal Sustainability Report, June 2015
Public Sector Net Debt, % of GDP
250%
200%
150%
100%
QE…..?
50%
0%
1900
1920
1940
1960
1980
2000
The Old-Age Dependency Ratio*
Workers / pensioner
1941: 7.1
2051: 1.8
60%
50%
Without baby boom
40%
30%
20%
With baby boom
10%
0%
1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 2051
* Ratio of 20–64 year olds to those aged 65 and over. Ref. Pensions: Challenges and Choices The First Report of the Pensions Commission, 2004.
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The squeeze is on
Costs of an ageing population
+ Stagnant productivity growth
+ Negative real earnings growth
+ Rising interest rates (eventually)
Impact on
personal debt?
= Fiscal squeeze
+
Approaching saving tipping point
=
Diminishing supply of domestic capital
Cost of capital to rise
We need a savings culture
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Savings, debt and demographics
Gross household Gov't debt /
GDP 2014
saving rate 2013
Greece
United Kingdom
Denmark
Spain
Italy
Ireland
Austria
Euro area (18 countries)
Belgium
Netherlands
France
Germany
Sweden
-16.0%
6.4%
6.7%
10.4%
11.3%
12.7%
12.8%
12.9%
13.5%
14.7%
14.7%
16.3%
18.1%
177%
89%
45%
98%
132%
110%
85%
92%
107%
69%
95%
75%
44%
Population aged 65+
UK
Japan
1950 10.7%
4.9%
2010 16.5% 22.6%
2050 22.9% 37.8%
Cloudy communication
PM: "We are paying down Britain’s debts” *
“The deficit”
Outturn
Forecast
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
PSNB ex £97.3
£90.2
£75.3
£39.4
£12.8
-£5.2
% of GDP 5.6%
5.0%
4.0%
2.0%
0.6%
0.2%
National Accounts, Budget Red Book , March 2015
* Conservative Party political broadcast, 24 Jan 2013
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Which deficit, which accounts ?
National Accounts
2013-14 2014-15
PSNB ex £97.3
£90.2
Net capital investment and QE effects -£24.3
-£33.2
Current deficit £73.0
£57.0 Down £16
Central gov't net cash requirement CGNCR
£78.4
£93.6
Up £15.2
Whole of Gov’t Accounts
Current deficit £73.0
Plus: Public sector pension net financing costs £49.0
Non-cash
Plus: Asset accounting (depreciation etc.) £17.0
Plus: Provisions £10.0
Accounting deficit for the year £149.0 WGA's "net expenditure"
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Public service pensions: WGA, 2013-14
£ billion
Current and past service costs
Net financing costs
Total WGA net expenditure
Actuarial movements used to value liabilities
Cash benefits paid as per National Accounts
Net contribution from employees
Transfers in / out (net)
Total net increase in liabilities
£39.0
£49.1
£88.1
£83.5
-£36.0
-£8.0
£2.4
£130.0
Non-cash
Non-cash
Non-cash
Cash
Cash
Cash
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Whole of Government Accounts (WGA)
Assets
Property, plant and equipment
Gold, cash, other financial assets
Trade receivables
Equity in public sector banks
Intangible assets
Other physical assets
Total assets
2013-14 2012-13 2011-12 2010-11
£763
£324
£149
£43
£32
£27
£1,338 £1,298
£1,270
£1,234
Liabilities
Public service pensions
Government borrowing
Financial liabilities
Trade payables
Provisions
Total liabilities
Net liability
% GDP
£1,302
£1,096
£491
£159
£142
£3,190
£1,172
£1,006
£961
£2,926
£2,618
£2,419
£1,852 £1,628
111% 100%
£1,348
83%
£1,185
75%
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Pensions
• The State Pension……..c £4,000 billion liability
HMT:
A benefit (i.e. “welfare”), not an obligation
Steve Webb:
It is yours by right, you have paid your NICs
• Triple lock?*
• Ancillary pensioner benefits?
* Guarantees that the State Pension is increased each year by the higher of CPI inflation, average
earnings or a minimum of 2.5%.
Tax receipts, reliefs & expenditures 2014-15
Income Tax
VAT
NICs
Corporation Tax
Council tax
Fuel duties
Business rates
The rest
Total
£ bn
£163
£111
£109
£42
£28
£27
£27
£95
£602
OBR forecast, Table C3 Budget 2015
Structural reliefs
Tax expenditures
Mixed
Total
Structural reliefs
Special cases
Targeted reliefs
Thresholds
International
Total
£ bn
£177
£110
£84
£371
563
380
131
62
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1,156
Proposals to arrest inter-gen. injustice
1. Office for Inter-generational Responsibility (OIR)
• Produce Inter-generational Impact Assessments
• Scrutinise all tax reliefs and exemptions
• Five year sunset clause?
•
Triennial Intergenerational Report?
2. Lobbyists
OIR
3. Departmental budgets: set net of tax reliefs
4. PM’s responsibilities doctrine: add inter-generational
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Conclusion: Gen Y under threat
• Debt and promise mountain, low growth risk
Debt + unfunded promises < GDP growth rate
• Risk: quality of later life < (baby boomer) parents’
“The central projection in each of our reports over the past
five years has pointed to an unsustainable fiscal position
over the long term.”
OBR Fiscal Sustainability Report, June 2015
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Who will care for Gen Y?
The baby boomers’ legacy
20 November 2015
Michael Johnson
Research Fellow, Centre for Policy Studies
www.cps.org.uk
Notes: hedging against the next recession
• We need higher economic growth….led by investment
• Low interest rates means low returns…..so people don’t invest
• Interest rates: the price for capital….low rates indicate excessive
savings
– Ageing populations postpone spending to enjoy retirement
– They save more…..so interest rates fall
• How to break out? > Raise retirement age
– More years earning…..then require less savings for retirement
– Higher consumption….higher demand….higher investment
• But distribution of savings….is with the old……Gen Y has smaller
savings
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