There’s nothing fair about burdening future generations with unfunded spending on pensioners
18 January 2016
SUGGESTED
Labour Market
Tax and Fiscal Policy
External Authors
Words like “fairness” and “justice” are regularly thrown around with little thought to what they mean. Strangely, though, the politicians who use them seem to be unwilling to debate the pressing issue of intergenerational justice relating to the unsustainable government promises being made to future generations.
Nonsense, you might say. We often hear ministers and shadow ministers referring to not wanting to pass the burden of government debt from recent borrowing onto their children and grandchildren. Surely that shows we are having this debate already?
But accumulated debt is not really the issue at all. Yes, this has to be serviced through increased burdens on future taxpayers. But saying future taxpayers will pick up a larger bill is not the same as saying future generations are feeling the burden (after all, future taxpayers will merely be transferring money to bondholders – many of whom will be of the same generation).
The real issue relates to the implicit promises made by current politicians to a future, older generation in terms of health and pensions spending.
Since our state pension and NHS are “pay as you go”, not pre-funded, they entail vast amounts of spending on the elderly financed by the working population of the day through taxes. Demands on taxpayers are set to become more onerous too, as the proportion of the population aged 65 and over is forecast to jump from 17.6 per cent in 2014 to 27.1 per cent in 2064. Some people will work longer, particularly as the state retirement age rises, but the number of workers relative to dependents is going to fall substantially.
Due to demographics, future taxpayers face huge liabilities in terms of health and pensioner benefit spending for their elders. Worryingly, much of this spending looks to have been promised, or at least protected, for reasons of electoral calculation, with little regard to the impact on future workers.
How else can you explain the egregious continuation of the state pension triple-lock (a pledge to increase the state pension each year by the higher of inflation, wage growth or 2.5 per cent)? This locks in higher and higher pension spending at a time when the population is ageing. How else are we supposed to rationalise maintaining all fringe pensioner benefits? Even on health, at least part of the promise to increase spending within a largely unreformed system is due to political calculation, even though politicians are aware that continued low NHS productivity growth would lock the public finances into unsustainable territory.
Taken together, this amounts to the electorate grazing on a fiscal commons at the expense of future generations.
To appreciate the scale of the challenge, in Defusing the Debt Timebomb, Philip Booth and I outline how tax rises or spending cuts of between 6.5 per cent and 9.6 per cent of GDP would be needed now and forever to keep government debt low sustainably, given current promises and associated demographics. The latter is equivalent to cutting one quarter of all state spending today.
The obvious way to solve this conundrum would be to move towards more pre-funded health and pensions arrangements. This looks politically impossible. But it is heartening to see some politicians at least acknowledging the issue – with the Work and Pensions Select Committee set to investigate the intergenerational aspect of welfare to pensioners.
Hopefully, this investigation will shed light on the lack of economic rationale behind many promises to pensioners; how the positive decision to raise the state pension age and link it to longevity has been undermined by ending contracting out of the state pension and the triple-lock; and how (as the Centre for Policy Studies’ Michael Johnson and we have highlighted) the government should move towards systematic intergenerational accounting.
Optimists might hope that this will start a public conversation leading to a shift in attitudes. It is ultimately the electorate that holds a veto over controversial policy change. At the moment, we are in a bizarre situation in which much of the public aspires to leave inheritances to their children, but their political actions are leaving those same children with huge pension and healthcare debts. Is that really what they want?
Ryan Bourne is the IEA’s Head of Public Policy. This article first appeared in City AM.
Nonsense, you might say. We often hear ministers and shadow ministers referring to not wanting to pass the burden of government debt from recent borrowing onto their children and grandchildren. Surely that shows we are having this debate already?
But accumulated debt is not really the issue at all. Yes, this has to be serviced through increased burdens on future taxpayers. But saying future taxpayers will pick up a larger bill is not the same as saying future generations are feeling the burden (after all, future taxpayers will merely be transferring money to bondholders – many of whom will be of the same generation).
The real issue relates to the implicit promises made by current politicians to a future, older generation in terms of health and pensions spending.
Since our state pension and NHS are “pay as you go”, not pre-funded, they entail vast amounts of spending on the elderly financed by the working population of the day through taxes. Demands on taxpayers are set to become more onerous too, as the proportion of the population aged 65 and over is forecast to jump from 17.6 per cent in 2014 to 27.1 per cent in 2064. Some people will work longer, particularly as the state retirement age rises, but the number of workers relative to dependents is going to fall substantially.
Due to demographics, future taxpayers face huge liabilities in terms of health and pensioner benefit spending for their elders. Worryingly, much of this spending looks to have been promised, or at least protected, for reasons of electoral calculation, with little regard to the impact on future workers.
How else can you explain the egregious continuation of the state pension triple-lock (a pledge to increase the state pension each year by the higher of inflation, wage growth or 2.5 per cent)? This locks in higher and higher pension spending at a time when the population is ageing. How else are we supposed to rationalise maintaining all fringe pensioner benefits? Even on health, at least part of the promise to increase spending within a largely unreformed system is due to political calculation, even though politicians are aware that continued low NHS productivity growth would lock the public finances into unsustainable territory.
Taken together, this amounts to the electorate grazing on a fiscal commons at the expense of future generations.
To appreciate the scale of the challenge, in Defusing the Debt Timebomb, Philip Booth and I outline how tax rises or spending cuts of between 6.5 per cent and 9.6 per cent of GDP would be needed now and forever to keep government debt low sustainably, given current promises and associated demographics. The latter is equivalent to cutting one quarter of all state spending today.
The obvious way to solve this conundrum would be to move towards more pre-funded health and pensions arrangements. This looks politically impossible. But it is heartening to see some politicians at least acknowledging the issue – with the Work and Pensions Select Committee set to investigate the intergenerational aspect of welfare to pensioners.
Hopefully, this investigation will shed light on the lack of economic rationale behind many promises to pensioners; how the positive decision to raise the state pension age and link it to longevity has been undermined by ending contracting out of the state pension and the triple-lock; and how (as the Centre for Policy Studies’ Michael Johnson and we have highlighted) the government should move towards systematic intergenerational accounting.
Optimists might hope that this will start a public conversation leading to a shift in attitudes. It is ultimately the electorate that holds a veto over controversial policy change. At the moment, we are in a bizarre situation in which much of the public aspires to leave inheritances to their children, but their political actions are leaving those same children with huge pension and healthcare debts. Is that really what they want?
Ryan Bourne is the IEA’s Head of Public Policy. This article first appeared in City AM.
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