The looming battle between the young and the old

THE NEW German chancellor, Gerhard Schroder, has hit on a bright idea to cut the German jobless: one of the central suggestions in his weekend speech outlining plans to cut unemployment was to force older workers to retire at 60. If the scheme goes ahead more than a million workers will get their pensions at 60 - instead of the present retirement age of 65 for men and 62 for women.

As an idea this is not at all new: during the Eighties early retirement was seen by many Continental European governments as the least painful solution to unemployment. But that the new, supposedly forward-looking chancellor of German should come up with this suggestion is enormously important, for he is taking one side in what will the central fissure in the political life of developed countries for the next half-century: the clash in the interests of young and old voters.

The old left/right distinction has gone; instead it'll be a young/old one.

To explain, oversimplifying a bit: for the last half-century the main political issue has been the extent to which government should take on additional activities that would have the broad aim of redistributing wealth from the rich to the poor. For many years the votes seemed to be in favour of government doing more, not less, and most political rhetoric is still on those lines. Look at the way that Gordon Brown's promise last week of more resources for the NHS was roundly welcomed by the Commons. When governments say they will spend money on something they almost always raise a cheer - the only exception I can think of is the Millennium Dome, where people do seem to have cottoned on to the fact that it is our money, not theirs, that is being spent.

But if the rhetoric is still in favour of more public spending and, implicitly, more redistribution, the reality is rather different. Hardly anywhere in the world is there a political majority in favour of higher income tax, partly because of a shift in what governments "ought" to do, but more practically because raising tax rates seems to bring in less money, not more. (The proportion of income tax paid by high earners in the UK has soared since rates were cut.) For all practical purposes the debate is dead.

In its place is a new one. To what extent do you take money from the young and give it to the old, from people in work to the retired?

Most people are unaware of the gigantic transfer of wealth that is talking place between generations at the moment as a result of the pay-as-you- go welfare state, where each generation of workers pays the pensions and the health care costs of the preceding generation. The numbers themselves vary from country to country, depending on the level of taxation and of state pensions, and the ratio between the number of workers and the number of dependants. But as a rule of thumb you can reckon that people retiring now, aged 60-65, will receive over their lifetime pounds 50,000 to pounds 100,000 more in benefits than they will have paid in contributions. By contrast, people entering the workforce now will pay a similar amount more in taxation than they will get in benefits.

The key reason for this inter-generational transfer of wealth is changing demography. In the Fifties, when the present European welfare systems were designed, there were roughly seven workers for every pensioner. Now there are around four. By the year 2025 there will be only two - and in some countries even fewer than that.

You can see why the welfare state was such a triumphant electoral success. Voters might complain about taxation, but in general they got much more out of the system than they put in. But now the arithmetic works the other way. The next generation of voters will get out much less than they put in. Faced with this disagreeable prospect, their support is much less assured.

But there will be more older voters. Under-18-year-olds don't vote. The age group between 18 and 50 will, in many European countries (though probably not in Britain), be smaller than the over-50s, the people already drawing pensions or in sight of that goal. So on the one hand there will be great political pressure to spend more on pensions, on health care for the elderly, and on earlier retirement. On the other hand, there will be great economic pressure for exactly the reverse.

The age of retirement is particularly sensitive. A couple more years of work and a couple fewer years of retirement make an enormous difference to the mathematics of pensions. Already Germany is projected to have a public sector deficit of 400 per cent of GDP (gross domestic product) by the year 2050 - a figure that could not be sustained and which the previous government sought to cut by modestly increasing the retirement age. Pushing the retirement age down instead of up makes the mathematics utterly impossible. The result will be that at some stage, perhaps not until another decade has past, the present German pension promises will have to be revoked.

Gerhard Schroder may, on the face of it, seem to be supporting the interests of the young by seeking to boost their job prospects by heaving out the elderly workers. But the effect of his proposal is to work against their interests, by increasing the tax burden that they will have to pay if and when they did get their jobs.

In any case the young may not get more jobs as a result. Germany's problem is partly of high unemployment, of course, but to an even greater extent it is one of low employment. Unemployment, at 4.1 million, is 450,000 higher than it was at the beginning of 1995. But employment is 1 million lower.

One of the effects of high social charges (which will be increased under this early-retirement plan) is to encourage jobs to migrate eastwards to lower-wage countries in eastern Europe.

The idea that the interests of the young should be radically different from those of the old is not a new one. Young people have always had different ideas about how a society should be organised and it would be strange, dreadful in fact, were the next generation of voters to have the same views as the present ones.

What is new is the idea that the interests of the young should run in favour of smaller role for government, while those of the old should be in favour of a larger role. I don't think Continental European politicians have begun to get their minds round this idea - indeed even here I don't think our politicians have honestly explained to young people the extent to which they will be taxed to pay for those services which they will never receive.

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