How to Improve Intergenerational Equity

Something for the young people

I started this blog almost one year ago to highlight the fact that the UK economy is in a mess and that young people in particular are getting a raw deal. We have already seen one lost decade with young people experiencing stagnant wages and living standards. What is more, they have experienced a huge amount of turmoil and in many cases given up some of the best years of their lives in order to protect older people through the Covid pandemic. Unfortunately, things don’t look set to improve. Last year almost 4 million people in the UK experienced destitution. The UK might narrowly avoid a recession over the next year but anaemic growth looks set to continue with another lost decade on the cards and more misery for young people.

Moreover, whereas in the past it was pensioners who were the worst off, this is generally no longer the case. Approximately one quarter of pensioners are millionaires and many more have significant savings and assets and so are far more comfortable than younger working people. The triple lock also means that pretty much whatever happens, their incomes are protected – something which working people could only dream of.

This is obviously problematic and has largely been ignored by the government as older people tend to vote (and there are more of them) so politicians have a tendency to prioritise the concerns of older people over younger workers. Such a situation leads to justifiable feelings of anger at the unfairness of it all and leads to calls by some commentators to blame the older generation and call for the abolition of the triple-lock or the State Pension entirely.

I am sympathetic towards this and I am no stranger to a bit of Boomer Bashing. However, I don’t want to do this in this post. Mainly because the State Pension is not that generous by international comparisons and we do still have a significant proportion of poor pensioners (I will probably write something on reforming the State Pension at a later date). As such, it’s wrong to lump all pensioners together. I also don’t think such divisive language is politically helpful, either. Younger people are unlikely to see policies which work for them implemented this way so it’s a bit of a waste.

Instead, here is what I propose: give everyone aged 21-35 and who is not in full-time education a tax-free stipend of £400 per month.

Why should we do this?

As discussed above, young people get a rough deal and many of them are really struggling to get by. They have experienced stagnant wage growth, have seen their lives disrupted, have very little prospect of owning a home of their own anytime soon, and have little disposable income or the ability to save. What is more, despite paying taxes themselves, they are unlikely to get much out of the system.

£400 per month is a very modest amount and is certainly not enough to live on (although it is around the same amount as a person on Universal Credit receives, excluding housing benefit). It’s also significantly lower than the State Pension. However, an extra £400 each month is nothing to be sniffed at and has the potential to dramatically improve the standard of living for young people.

In short, it is the right thing to do.

Why 21 - 35?

The lower end is fairly obvious as it tends to be when people either leave full-time education (if they go to university) and are starting to lead their lives as independent adults in the labour market. As for the higher end, 35 is the point where I think you can still get away with being considered ‘young(ish)’. I type this with tears in my eyes as I realise that I turn 35 in April and so wouldn’t benefit from the policy.

I do think there is a case for extending it by a few years in order to cover the people who entered the labour market in the immediate aftermath of the Global Financial Crisis and the height of the Great Recession who will now be pushing 40. Unfortunately, I think that would be a harder sell for the reasons stated above as for what counts as ‘young’. 

Essentially, anyone aged 21-35 will be entering a labour market which was scarred by the Great Recession and an economy which still has not fully recovered from it or the consequences plus the turmoil of Brexit and Covid. Average wages are £230 a week lower than their pre-financial crisis trend and so the £400 per month would go some way to making up for this.

Won’t it be expensive?

The initial cost certainly will be and I did consider whether or not to make it taxable so it could be clawed back but I decided this would be unfair as even high earning young people are not as wealthy as they otherwise would be. However, it is possible to make it affordable.

The £400 stipend will replace Universal Credit for people aged 21-35. This will reduce the costs associated with administering the payments and mean that young claimants are no longer forced to attend infantilising, pointless, and unproductive meetings with their ‘work coaches’ each month. This would give the DWP significant scope to cut costs by reducing workforce numbers and releasing these civil servants into the labour market to do something more productive with their time. Not only would this cut costs but these former civil servants now working in the private sector would potentially become net contributors to the public finances.

Moreover, many younger people have elderly or ill family members who they would like to take care of but currently can’t afford to do so as it would mean missing out on shifts at work. The stipend would mean that they could potentially choose to work fewer shifts and spend that time in a caring role which would again reduce the burden on the State.

There are also numerous ways for the government to raise extra revenue if the government is sensible and bold about it. As I have proposed before, the government should seek to significantly broaden the tax base by removing all exemptions for VAT which not only would reduce the complexity of the tax system but would also be a significant revenue raiser for the Treasury. 

Pensioners should also pay National Insurance Contributions. The fact that they currently don’t is absurd but is based on the notion that ‘they have paid in all their lives’. This is wrong and unhelpful as it peddles the myth that NICs are essentially a pot which pay into through your working life and which you draw from when you retire. This is nonsense. Today's pensions are paid for by working aged people today. Keeping up this charade helps to feed this entitlement culture among the older generation which rears its head whenever any suggestion of scrapping the triple-lock is mentioned.

Reforming the system so that pensioners start to pay NICs will help to finally kill this myth while also raising money to fund public services including the State Pension and the 21-35 Stipend. Perhaps just importantly it will help to bridge this generational divide if the majority of people who work are also paying into the system.

Not good enough

I’m obviously keen on the idea of a stipend for young people for all the reasons listed earlier. However, it is not enough. The key thing the government needs to do to help young people is to liberalise the planning system to ensure that housing supply outstrips demand each year. Otherwise we’ll still be condemning young people to another lost decade with stagnant productivity and living standards with the vast majority of their stipend (and the rest of their wages) being swallowed up in rent.

We also need to look into other ways of alleviating poverty for everyone and this includes both young people and pensioners, but that is for another blog post(s). Moreover, we need policies which help to solve the productivity puzzle and boost economic growth and living standards. I have dealt with that elsewhere in the blog but will involve tackling the deep seated structural issues in the UK economy by implementing supply side reforms.