Thursday, 31 January 2013

More fighting talk

Along with the large amounts borrowed by governments, the younger generation are also set to be saddled with more debt which is not of their own making.

Talks of battles and fighting in the previous blog got Your Neighbourhood Economist thinking about a struggle so epic that it makes the currency wars seem like kids throwing toys in the playground (or, more literally, central bankers throwing money at the economy).  This fight pits a battle-hardened and organised army against a smaller force that increasingly has its back up against the wall.  So who is fighting over what?  It is a battle between old and young over pensions.  The money that government pay the elderly in their retirement adds a further weight to the mountain of debt already depressing the global economy but pensioners form a potent force in politics and loathe to give up what had been promised to them in the past.  Yet pensions that would have been tough to pay even in good times may be set to bankrupt a younger generation.

Pensions have traditionally been based on pay-as-you-go schemes where payments for pensioners come from the taxes paid by current workers.  This was an arrangement that was acceptable to workers to begin with because it was assumed that they would also be eligible for pensions after retirement.  This system relied on a growing population where the work force was expanding so that the burden of pensions was never too great.  This social contract has broken down due to the demographic accident of the baby boomers.  The surge in births following the end of the Second World War resulted in a bulge in the population due to the so-called baby boomers having fewer babies than previous generations.  The drop in child birth means that there will be fewer people in jobs paying taxes to fund the retirement of their parents’ generation.  Not only is the number of pensioners growing relative to the working age population, but the costs of pensions themselves are increasing as people live for longer.  The prolonged lives of the elderly will add bigger medical bills as well.  So something has to give – high taxes and less spending in other areas or a reduction in pay outs to the elderly.

As one would imagine, the baby boomers are not keen to give up what has been promised to them.  They believed that they paid their fair share of taxes, part of which funded the pensions of their parents’ generation, and now expect to receive the same treatment as they head into retirement.  Not only do baby boomers outnumber the younger generation but they also form a political force to be reckoned with.  The older generation have much higher voting turnout and are more politically active after experiencing dramatic changes during the post war years.  The young, on the other hand, are typically seen as being disillusioned with politics and can’t be bothered voting.

Politicians are aware of the potential shortfall in government finances with pension costs expected to balloon in the coming decades.  Baby boomers have added to the problem after years of voting for lower taxes.  There have been recent attempts to forge a solution through raising the retirement age but it is a political minefield (the new government in France even lowered the retirement age which was a reversal of the previous government).  Immigration would also help but voters in many countries can’t stomach the thought too many foreigners even if they are paying taxes.  So even though the elderly with their failing eye sight and walking canes may not seem to be able to wreck much havoc, they are set to demolish government finances. 

So it seems likely that young people will be left to foot the bill and they are already paying the consequences of a system that is geared toward their elders.  The older generation has benefited from rising property prices through their lifetime but now youngster struggle to buy their first home and end up stuck living with their parents.  The job market is also tough as unions protect the jobs of current workers who are typically older while the young miss out on work as no new jobs are being created due to economic stagnation.  And when people from the younger generation do find work, they have to pay taxes which go toward pensions as well as putting money into pension accounts to pay for their own retirement – paying for pensions for both themselves and for their parents.  This may be the first generation in centuries that will be worse off than their parents.  And you thought it was tough growing up!

1 comment:

  1. Ultimately, this is why I am a classical Libertarian, let nobody have anything, just have a low tax country, and let people take responsibility for their own affairs. And certainly public sector officials should never get pensions, just pay them what they're worth and let them take care of themselves. The general history of the West has generally involved replacing what worked, with what sounded good.