It’s easy to ignore some of the most important questions when we face policy dilemmas. Take intergenerational inequalities.
We can describe the issue. Home ownership rates among the young have plummeted, while the old have enjoyed an inexorable rise in the value of their homes. The young are forever locked out of generous final-salary pension schemes. Many over-60s continue to benefit from them.
We can propose solutions: change the tax system, build more houses, tax the old, give money to the young. But the other question we ought to ask is: why has this happened? Too often we treat problems as though they were an act of God. Yet we reap what we sow. We are where we are for a reason. And if we don’t understand that, we are fated to make the same mistakes.
Take those occupational pensions. Companies are putting well over tens of billions of pounds a year into them, to the almost exclusive benefit of present pensioners and older workers. The young don’t get a look in. These schemes have ended up being so expensive that they have been shut to new joiners.
That, of course, was never the idea. Pension promises were made absolute as regulation became tighter. They were framed in terms of annual payments as life expectancy rose far beyond anything predicted. The promises stretched far into the future as returns and discount rates fell. Most schemes are committed to increasing payments annually in line with the retail prices index, a measure of inflation that is now wholly discredited and is known to overstate inflation. The result is a big, unintended and legally protected redistribution to one demographic group from the rest of us. We reap what we sow.
Today men who reach 65 can expect to live nearly another 20 years. That’s half as long again as was the case in the 1970s. The state pension age for men has not changed at all in that period. In an entirely unplanned and unintended way, the portion of our lives spent on state pensions has risen dramatically.
The concentration of housing wealth in the older generation is equally unintended. The combination of monetary policy, planning regulation and financial regulation have placed all the power in the housing market in the hands of those who already have housing wealth. An utterly dysfunctional tax system has only made things worse. So “generation rent” are left to rent their homes from the lucky members of their parents’ generation who can afford not only a home to live in but also, in remarkable numbers, a second home to rent out.
Policymakers have not been adequately forward-looking. For decades they failed either to recognise or respond to increasing longevity. They assumed that occupational pensions would go on forever, despite the build-up of risks borne by employers. Not only did they fail to use fiscal policy to offset the effects of monetary policy, they exacerbated those effects — protecting the older and wealthier and hitting the young. They failed to see the consequences of planning regimes and lacked the courage to make the changes to housing tax that most knew were needed. And they have failed the older generation in egregious ways, protecting their free bus passes and free TV licences but utterly failing to sort out our social care system.
So we reap the consequences of failed policy. We should try to undo some of those consequences, but undoing things is difficult. What we also should do is identify where we might be making mistakes going forward. The future will not look like the past and the mistakes will be different.
So making policy robust to change and uncertainty is vital. That’s where we went wrong with occupational pensions. It’s why, going forward, linking state pension age to changes in longevity makes a lot of sense. But in other bits of the pension world we have exposed ourselves horribly to risk. With the demise of both final-salary pensions and state earnings-related pensions, all risk in pension saving is now devolved upon those least able to bear it — individuals. Ending compulsory annuitisation means yet more risk: not only will we face the risk of poor returns while saving, we will face the risks of poor and volatile returns, and of longevity, after retirement. This cannot be the right way to organise our pension system. If — when — those risks crystallise for individuals, or groups, or generations, they will reap what our politicians have sown.
We may also see new interactions between housing and pensions. Many will hit retirement age paying high levels of rent. Our pension system is not set up for that. Our housing benefit system will creak under the pressure. As tax relief on Isas has been extended and that on pensions reduced, we risk repeating the errors of housing taxation. The huge increases in the value of housing have been enjoyed tax-free by lucky owners and have provided little additional revenue for the Treasury. So will it be in the future, if returns to Isas are high, since, like housing, they are bought out of taxed income but no more tax is payable however great the returns. Pension taxation, in which savings are made out of pre-tax income but where withdrawals are taxed, makes more sense, shares more risk and means that tax revenue is paid when most needed: when there are more pensioners.
We can see other risks: to repayments of student loans, to the adequacy of the health and social care systems, to social mobility as inheritances become more important. Good policy manages such risks up front. It doesn’t wait for them to crystallise into obvious injustice.