How long will the young be willing to pay for the old?

'We accept redistribution between people. It is harder to accept redistribution between generations'
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The Independent Online

In your twenties and started work a couple of years ago? Here's some news for you. During your lifetime, you are likely to pay £120,000 more in tax than you are going to receive in state benefits. That is roughly £40 a week in extra taxation, year in, year out, for the next 60 years, for which you will, on average, receive... nothing.

In your twenties and started work a couple of years ago? Here's some news for you. During your lifetime, you are likely to pay £120,000 more in tax than you are going to receive in state benefits. That is roughly £40 a week in extra taxation, year in, year out, for the next 60 years, for which you will, on average, receive... nothing.

Shocked? Try another one. If you are aged 75, maybe struggling on what seems a none-too-generous pension, you nevertheless will have received during your lifetime £80,000 more than you paid in taxes.

Neither of these are messages that politicians like to put across. You don't hear Messrs Blair and Brown telling young people that they are going to get a lousy deal out of the state when they rattle on about "investing in public services", or when they defend the level of petrol tax. Nor do you get them telling pensioners that they have been getting a wonderful deal out of other taxpayers and should stop whingeing about only getting an extra 75p a week on their pensions.

Politicians do not find it easy to put these facts across because they are profoundly unpalatable: they strike at the very core of the implicit bargain we make with the state: that, by and large, we will get out in benefits roughly what we put in in taxes. True, those who earn a lot will expect to chip in rather more, and those who don't will expect to be net gainers. But most of us accept that sort of redistribution as fair, provided it is not taken to extremes. We find harder to accept, or even think about, redistribution between generations. Yet that form of redistribution is vastly greater.

The figures above come from a new paper, Generational Accounting in the UK, in the November Economic Journal. The authors, Roberto Cardarelli and James Sefton at the National Institute in London, and Laurence J Kotlikoff at Boston University, calculate for the first time inter-generational accounts for Britain. These are just projections because policy can and will change. But they give an indication of the transfer of wealth that will take place as a result of an ageing population. The number of people needing much more to be spent on health care and on pensions rises inexorably for the next 50 years; meanwhile, the number of people of working age shrinks. The result is that the smaller numbers of working people get a much worse deal than the larger numbers of retired.

This is a new problem because there has never been a situation where there are so many old people relative to the numbers of the young. In the past, people paying into pensions and social services received roughly the same amount in services as they paid in taxation. True, according to John Hills at the LSE, one group - people born between 1900 and 1920 - have done rather well because they were the first generation to receive pay-as-you-go pensions and they did not have to pay large pensions to an earlier generation of workers. But they had to live through, maybe fight in, at least one world war, so I don't think we should see them as particularly blessed. Arguably, the next generations have a greater debt to that generation than they could ever repay.

If this is a new problem, it is one common to all developed countries. In fact, Britain is fortunate in two ways.

First, our rate of ageing is slower than most developed countries, with the exception of the US. Germany, Italy and Spain, where family size has fallen even more, have a much graver problem. Italy faces a fall in population of nearly 30 per cent by 2050. Second, our fiscal position is more sustainable, in theory at least. Because we have relatively low pensions (they are still tied to prices rather than earnings) and because we have a relatively lean health-care system, we can afford our promises. Other countries can't.

For example, it has been calculated that in Germany, taxes will have to double, and in Japan (which becomes the oldest society on earth by 2020) and in Italy by even more. But I don't think we should crow too loudly because, though we are solvent, it is hard to see our present level of projected pensions or our level of spending on the National Health Service being politically sustainable. The present government is being much more responsible than its counterparts, but it has been forced to make concessions on pensions in the autumn pre-Budget statement. It is also clear that we will have to increase the proportion of national income spent on health care one way or another during the next 30 years. We can meet our promises; the problem is that they are not great promises.

By contrast, politicians in most continental European countries have made great promises to their people, but they cannot possibly hope to fulfil these. Pensions at present projected levels cannot possibly be paid, particularly in a Europe where labour is mobile. The nightmare scenario for Italy and, to some extent, Germany is that young people faced with taxation rates far higher than those of today (and they are pretty high now) will simply leave. The greater the numbers of working-age people who leave, the fewer there will be to pay the pensions of the retirees.

So what is to be done? Well, the first thing is to be honest. At the start of this column I criticised the failure of our government to explain these pressures on public finance. But it is only just to acknowledge that in what it is actually doing - building up surpluses and restraining expectations on pensions - it is being more responsible than any other government in the developed world. Governments usually trim their policies to fit the electoral cycle and care little about problems 30 or more years away. It would have been very easy for the Chancellor to have blown a bit more of his present windfall gains in tax revenues on increasing pensions still more. But that would have set up enormous problems in 10 or more years' time. To resist that deserves praise.

By being honest, we can then set about taking the various measures needed to ensure that we can indeed maintain adequate public services without putting an impossible burden on our young people. There are lots of things than can be done: nudging up the retirement age; increasing participation in the workforce; encouraging private provision of pensions; improving the health of older people; and so on. Whatever we do, the young will have a lousy deal out of the state. But it will be less lousy the earlier we start to adjust our social-security and health-care systems to cope.